(Note: For a footnoted version of this article, please download the pdf issue of BIFOCAL Vol. 34, Issue 5.)
Estate planning to protect assets for the benefit of children, a spouse or partner, or other family members is important. For those with loved ones who have special needs, this planning is even more vital, as improper planning could leave the individual vulnerable to predators or impact eligibility for means-tested public benefits such as SSI or Medicaid. Understanding what planning options are available and soliciting the advice of an experienced special needs attorney are essential steps in the process of creating a good plan. However, this type of planning can be a real challenge for a family of modest means.
The Biggest Planning Mistake? Not Having a Legal Plan
Families who are unsure of how to plan, or intimidated by the complexity or expense of special needs planning, may decide to disinherit a loved one with disabilities, leaving that inheritance to a sibling or other family member who is asked to “do the right thing” and provide for the disabled individual. While this is an inexpensive approach, it provides no protection for the loved one with special needs—this is why we label it the number-one special needs planning mistake. The informally designated responsible family member may disregard the long standing plan of care, or run into personal problems that include divorce or credit issues, or may decide to use the money on a spouse or children. Or, the informal designee may die, prompting the assets go to an in-law or other person with no interest in the loved one with special needs. Without a written legal plan, funds that are set aside in a non-legally binding way may never be used to assist the loved one with disabilities.
A Standard Approach: Third-Party Special Needs Trust
In order to protect loved ones with special needs, attorneys typically suggest a custom-drafted stand-alone individual third-party special needs trust as part of a comprehensive estate plan. A third-party special needs trust allows funds to be left to a person with a disability without jeopardizing his or her public benefits, and can include legally binding instructions on how assets will be used. An additional benefit of a third-party trust is that other family members can fund it as well. It is common practice in our offices to provide a letter to parents of children with special needs that they can send to their families instructing them on the proper way to leave assets to the trust.
However, not all families are of sufficient means to warrant the cost of creating an individual third-party special needs trust. They may also find it too complex for them to manage. Complexity and expense contribute to the reluctance of many people to create a comprehensive estate plan for themselves. What alternative is there for families of modest means who want to protect loved ones with special needs? A solution is the use of pooled special needs trust.
An Alternative Approach: Pooled Special Needs Trusts
A pooled special needs trust is established and administered by a nonprofit entity to manage and protect the assets of individuals with disabilities who are dependent on government benefits to meet their basic needs. Joining an already-established trust is ideal for those with modest means because no new trust needs to be drafted. To become a member of a pooled trust, all the beneficiary, his or her parents, grandparents, or the court needs to do is sign a Joinder Agreement—a document that dictates the trust’s membership terms. Then, as assets are funded to the pooled trust, a separate account is established for each individual member. Because assets are pooled together, the trust is able to maximize the return on investment and at the same time reduce the cost of administration and management.
Which Pooled Trust is the Right Fit?
The administration of a pooled special needs trust is generally the same as individual special needs trusts. However, all pooled trusts are not the same--they vary in culture, fee schedule, asset management, and administrative style. Some pooled special needs trusts only accept those with developmental disabilities, while others specialize in managing proceeds from litigation recoveries. There are pooled trusts that are regional and some that are national. Thus, it is important that the attorney assist the client in reviewing the different pooled trust options.
When reviewing the pooled trusts available in the client’s state, it is important to consider several factors: (a) the reputation of the nonprofit and trust within the locality of the client being served, (b) the cost of membership such as initial set-up, perpetual, disbursement, and extraordinary fees (which vary greatly), (c) the longevity of the pooled trust, (d) the reputation and experience of the counsel and administrators, (e) the ease and method of requesting distributions, (f) the performance of the investments and oversight of same, (g) the availability of advocacy on behalf of the beneficiary, and (h) the retention policy of the trustee. A good resource list of pooled special needs trusts throughout the country is located on the Academy of Special Needs Planners website. A trust selection should not be based on costs alone, but on a review of all of the factors listed above.
The Difference Between First-Party and Third-Party Pooled Trusts
During evaluation of pooled special needs trusts, it is important to make a distinction between first-party pooled trusts (those used only to hold the public benefits recipients funds) and third-party pooled trusts (those used to hold anyone else’s money other than the public benefit recipient’s funds). Some pooled trusts do not have a trust set up to accept third-party funds, while many others have developed third-party Joinder Agreements to allow anyone (such as parents or other family members) to make living or testamentary distributions as part of an estate plan. The distinction is important because on the death of the loved one with special needs with a first-party pooled trust, the remaining assets are often retained by the non-profit organization, while third-party funds in a third-party pooled trust can go directly to heirs without having to pay the government anything at all.
Joining a Pooled Trust
Typically, the pooled trust has a standard Joinder Agreement which contains provisions that are filled out by family or their attorney. An important part of the agreement is filling out where the remaining assets are distributed upon the death of the beneficiary.
In order to implement the pooled trust, the client’s lawyer can draft a simple provision that will protect the loved one with special needs. In a traditional estate plan where a Will or Revocable Living Trust is appropriate, counsel can reference the pooled trust as beneficiary on behalf of the heir or devisee with disabilities, and attach an executed Joinder Agreement.
This method allows the Will or Trust to serve as a conduit for funding the special needs trust for the individual with special needs, thus creating a simple, cost-effective estate plan that adequately protects the child with disabilities. Parents or family members may also fund the third-party pooled special needs trust by naming the Trustee of the pooled special needs trust as beneficiary of life insurance or other beneficiary-designated accounts directly.
The Benefit of Flexible Planning
Another benefit of the pooled trust is the flexibility in using it when the family is not sure a special needs trust is required. Each family is unique, sometimes a parent is unsure of whether a child will have benefits that need protection, or if the child will need financial management assistance in the future. In order to address this situation, counsel can incorporate trigger language that allows the trustee of the parent’s revocable trust agreement to convert the inheritance for the child to a special needs trust. To utilize the pooled trust, counsel can attach an executed third-party Joinder Agreement to the Grantor’s revocable trust agreement as an exhibit and indicate that the child’s inheritance will be distributed into the pooled trust if certain conditions are met, for example, if the child is eligible for, or is receiving, means-tested public benefits.
Using a pooled trust for third-party funds may also offer a unique opportunity for the grantor and beneficiary to experience the pooled trust administration during the lifetime of the parent or other family member. If a parent is unsure that the pooled trust is the right option, the parent can establish the pooled trust account by completing the Joinder Agreement and funding the pooled trust account with some amount of money. Many pooled trusts will allow this type of arrangement. By funding a relatively small amount, the parent, prospective caregivers, and beneficiary can form a relationship with the pooled trust administrators before the parents have died. Forming a lifetime bond and creating an additional support for the beneficiary during the life of his or her parent may result in a smoother transition and less stress after the parent(s) have died. Any issues with administration and additional supports can be worked out ahead of time, while the parents are available for guidance. This arrangement also gives the opportunity for any nominated successor advocate or guardian to test out their role by working with the beneficiary and the trustee
The Benefits of a Professional Trustee
Third-party pooled trusts also help eliminate choice of trustee issues. Pooled trusts are administered by the nonprofits that created the trust, and typically do so with the assistance of highly experienced counsel or other professional trustees. This is of great benefit to families that do not have people who can serve as trustee. Choosing the wrong trustee is a common mistake parents make when completing their estate plan. Parents typically place their adult children (the beneficiary’s siblings) as the natural choice for trustee of the third party special needs trust. However, administration of these trusts is more complicated than wrapping up the affairs of a deceased parent’s trust. A special needs trust will often last the entire life of the adult children. These children will have their own lives and own families to manage and may resent the time it takes to properly administer a special needs trust. Many of them would rather be a brother or sister to their sibling with special needs and not their accountant, bill payor, or advocate.
Special needs trust administration is also complex because the trustee must not only comply with all the fiduciary duties required of all trustees but also must be aware of changing public benefit program policies, have a working knowledge of community and governmental resources for persons with disabilities, anticipate the impact of distributions on public benefit eligibility, and be able to advocate for the beneficiary. There is also a natural conflict of interest if the sibling is the remainder beneficiary and the trustee because every dollar spent on their siblings needs is one dollar less that they will eventually receive. The use of a pooled trust and its professional administrators and their counsel helps eliminate these issues. Further, many pooled trusts provide the type of professional administration that would otherwise be unavailable for a trust of modest size. This can be a great benefit and comfort to families of modest means.
Utilizing a pooled trust for third-party special needs can be a flexible tool for counsel to meet the unique needs of clients, particularly those with modest means. It provides a cost-effective estate plan which addresses the current or potential needs of a special needs beneficiary. Experience with pooled trusts will allow counsel to make confident recommendations to the client, eliminate some of the hazards associated with family trustees, and provide an additional planning choice to the traditional third-party special needs trust.
This information is provided as a public service and is not intended as legal advice. Such advice should be obtained from a qualified Elder Law attorney. Find an Elder or Special Needs Law attorney in your area. ■