The Administration of Special Needs Trusts is typically far more difficult than the administration of a normal trust. If you are the Trustee of a Special Needs Trust, you must be aware that assets must typically be invested in a different manner, payouts are limited by the terms of the trust, special filings and tax returns must be prepared, and you may have obligations to meet with the beneficiary and care for the beneficiary in a way most trustees do not. The most challenging aspect of the Administration of Special Needs Trust is to determine what you can spend money on and what you cannot spend money on. This can vary dramatically based upon whether you are administering a Third Party Special Needs Trust or a First Party Special Needs Trust.
Administration of Special Needs Trusts can be very complex because those trusts are limited in what they can pay for by statute. Special Needs Trusts can generally not pay for food, shelter, electricity, gas or water. Additionally, Special Needs Trusts should not pay for anything that can be converted into food, shelter, electricity, gas or water. Moreover, cash should almost never be distributed to a beneficiary from the trust.
The Administration of First Party Special Needs Trusts is More Complex Than the Administration of a Third Party Special Needs Trust
The administration of a First Party Special Needs Trust is typically much more onerous than the administration of a Third Party Special Needs Trust. Other concerns a Trustee must deal with when administering a First Party Special Needs Trust include:
- Ensuring that expenditures only benefit the special needs person. Payments out of the First Party Special Needs Trust that indirectly benefit a third person can ruin a person’s eligibility for SSI and Medicaid. For example, if a special needs person wants to travel somewhere, can the trust pay for a travel companion? Local rules vary on this.
- Large expenditures must be pre-approved by the Social Security Administration and annual accounts prepared for their review.
- There are limits on how much can be spent on the funeral of a special needs person.
- There are detailed rules about a Special Needs Trust owning a home.
The Trustee of any Special Needs Trust must become familiar with the eligibility requirements for Medicaid and Supplemental Security Income (SSI). The worst thing a Trustee can do is make payments to a beneficiary in a way that causes him or her to lose government benefits. On the bright side, Trustees are allowed to hire advisors to assist them. Many Trustees hire attorneys, accountants, financial advisors, and government benefits advisors. The Trustee of a Special Needs Trust can also hire caregivers, geriatric care managers, and other specialists.
Tax Planning for Special Needs Trusts
The Trustee of Special Needs Trust should consult with a tax professional. Trusts are taxed differently than individuals, so the Trustee will want to work with someone who has experience filing income tax returns for trusts. Moreover, a First Party Special Needs Trust is not taxed the same way that a Third Party Special Needs Trust is taxed. Typically, a First Party Special Needs Trust is taxed as a Grantor Trust. This can cause problems when applying for government benefits.
Please contact us if you have any questions about the Administration of Special Needs Trusts. Kevin Pollock is the estate planning law attorney in charge of the firm’s Special Needs Planning Department. Attorney Pollock has focused on Wills, Trusts & Estates since 2000 when he received his master’s degree in taxation.
For more information on Special Needs Planning, please visit my blog: Kevin A. Pollock BLAWG