The Trust Is Funded, Now What?
Rob Wrubel CFP®, AIF®
We get the call more than a few times per year. There is always a note of panic in the voice. There is also a note of concern and a strong desire to do the right thing. The call frequently begins like this, “I have been named the trustee of a special needs trust. What do I do?”
Special needs trusts are designed to preserve available government benefits for a person with a qualifying disability by holding countable resources in a way that can be used for future needs without losing government benefits. For most people the word Trust, with a capital T, meaning money held in a trust account, seems foreign and incomprehensible. Most of us think trust and think of the richest in society – the Rockefellers, Buffets, Morgans and Gates. We do not think of our sons and daughters, brothers and sisters or parents.
Special needs families need to understand trusts and the potential a properly structured and funded trust can make for our loved ones. Money in a special needs trust makes a big difference for an adult with developmental disabilities in being able to live a high-quality, fun, enriching and complete life.
Money from programs like Supplemental Security Income and Medicaid pay for a basic level of life, like food, shelter, access to medical benefits and some other supports. These programs often do not pay for those parts of life we think as important, like vacations, baseball games or movies, trips to the mall, cable TV and everything else we do every day other than eat and sleep.
So what does a trustee need to do once there is money available?
The trustee needs to understand the role and job. He is to act in the best interests of the beneficiary. She must cause the taxes to be paid and a tax return to be filed. She must manage the money in a way that best suits the needs of the beneficiary.
Any money available does not belong to the trustee. The trustee cannot just use the money to pay for his own expenses. Any assets in the trust are to be used for the named beneficiary – in this case the special needs person.
A trustee needs to set up an account or multiple accounts. A trust itself is nothing more than words on a page. The trust may spell out certain items that have to happen – like spend a certain amount of money or be used for specific purposes like buying new clothes each year. Most special needs trusts do not include specific items like this and give the trustee broad powers to spend and invest the money as he sees fit.
So often, trustees think the money must sit in a bank account even if it earns little to no interest. There are times where this makes sense and times where it does not. The reality is that the trustee can invest the money as he sees fit – in bank accounts, invested in stocks and bonds or use the money to buy other assets such as a home. The trustee is liable for these decisions and all actions must be done with the best interests of the special needs person in mind.
Trustees should commit to a written financial plan as a way to document the reasons behind their investment decisions and spending decisions. It also helps to have this plan in place in the case of a successor trustee taking over.
Financial plans lay out a timeline for how and when money will be spent. The timeline might include buying a van, significant medical expenses, moving from one living situation to another and additional quality of life expenses.
There are cases where the life expectancy of the special needs person is short – due to age or medical issues. In these cases, the financial plan might show spending all the money in one, two or five years to best improve those years. There are other cases where life expectancy might be decades and the use of funds will occur over time. In these cases, capital preservation and income generation over time will likely be more important than a short spending period.
Usually, a trustee is not needed to do anything until the trust has been funded. Most of the time, this money comes from a settlement or inheritance. Once the trust has a funding mechanism ready and waiting the trustee must be prepared to act and one of the first actions a trustee will take is to open an account at an investment firm or bank.
This is often the first action and should not be the last. Usually, my recommendation to a trustee who needs to quickly handle funds is to get an account open but not do anything with the money until a reasonable plan is in place.
Take the time to understand your new part-time job – trustee. Build a team that can help you navigate new issues and understand your role. You will likely need a financial planner/investment advisor, a CPA and an attorney. It will help for you to work with the guardian to understand the life and social issues which the trust will address. Then, take the steps to put your trust to work in a way that seeks to best help your special needs family member.
Rob Wrubel CFP®, AIF®, is a Senior Vice President – Investments with Cascade Investment Group, member FINRA & SIPC. Rob is also a father of a daughter with Down syndrome. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.719-632-0818
