The special needs trust is used to improve the quality of life of a person with disabilities. The trust helps protect family or personal assets that would otherwise be spent before the person with disabilities could have access to current government benefits, like Supplemental Security Income (SSI) and Medicaid.
Sometimes the trust is funded by a person’s own money, such as assets received by inheritance where no planning was done, settlement due to accident or injury or from earnings and savings. Other times the money comes to the trust from a third party. A mother or father, spouse, aunt or uncle can leave money directly to the special needs trust to benefit the disabled family member. I am often asked, “What happens once the money is in a special needs trust?” and other questions regarding how the money can be accessed, what it can be used for, what investments or assets can it own and what happens to any leftover money.
We recommend families take an institutional approach to handling money inside a special needs trust and in making disbursement related decisions. The first step is to identify the key people to be involved in making these decisions. Most of the time, an individual family member is named primary trustee of the trust. This person is charged with several duties including managing assets, tax reporting and using the assets in the best interests of the beneficiary (the person with special needs). A personal trustee will likely need to build a team of professionals to assist. The professionals will help with taxes, asset management, financial planning and legal issues.
The trustee should include other people who know and care for the special needs person to help map out the best strategy. The person with special needs may or may not be involved. Ideally, this person is included in making choices about their present circumstances and future plans. Technically, that person does not have the right to demand money from the trust but he or she should be included in the life planning process. The guardian should be involved in the planning process. The guardian typically knows the person with special needs best. The guardian is responsible for the well-being of the person with special needs and should know that person’s abilities, desires, interests and health and other issues important to living a rich and fulfilling life. In many instances, it is best if the guardian does not know the full assets of the trust.
The person with special needs may also have family friends, clergy, educators, mentors or other people who could be key people involved in the trust committee. Ultimately, the trustee has final authority and legal responsibility over the management and disbursement of assets. Building a team of involved and caring associates helps makes decisions that are in the best interests of the person with disabilities. This team can assist in building a plan that takes into account the short, mid and long term goals of the special needs person and work with the financial planner to build the a framework for cash management and investing.
The trustee and trust committee next draft a spending policy. The purpose here is to take some of the emotion out of the decisions to take money from the trust. The policy helps keep the trustee on track for the most important and best use of trust assets. It can be difficult to decide whether to use money today versus having it available for later. Keeping assets in the trust increases the likelihood of those assets growing and having greater purchasing power down the road but it might come at the cost of reduced quality of life today.
Spending policies can be as unique and different as the beneficiary.Many spending policies include an amount that can be used each year. A person with a long life expectancy might have a policy that says 3% or 4% of the value of the trust can be used each year. Someone with a shorter time of need might use 15% or more each year. The policy must also account for future significant potential needs. A house will require regular maintenance. A beneficiary who drives will need to spend capital on a car in future years. Education expenses might be expected. Money must be kept available for these planned expenses.For many of my clients, we keep one to two years of assets in highly liquid instruments, like money market funds or CDs. The two years of expected income shelters the overall portfolio from the potential volatility and price reductions of the investment portfolio. It also helps provides for a window of time if illiquid assets – like real estate, commodities or collectibles – need to be sold.
Special needs trusts can be used for a wide range of expenses to benefit the special needs person. You can maximize the intent of the trust by building a strong team to help make good decisions and creating a thoughtful approach to spending decisions.
Rob Wrubel, CFP® is a Senior Investment Consultant with Cascade Investment Group, member FINRA & SIPC. Contact Rob at 719-632-0818 for more information. 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.
