SCARC Guardianship Services has a long history of serving as a trusted and accomplished Trustee for three Special Needs Trust Options
Special needs trusts (SNTs) have traditionally been used to accumulate resources without affecting eligibility for benefits. The source of funding determines the type of SNT to be established. There are three main types of Special Needs Trusts:
- First-Party Special Needs Trusts
- Third-Party Special Needs Trusts
- Pooled Trusts.
All three trust varieties are designed to manage resources for a person with special needs so that the beneficiary can still qualify for public benefits like Supplemental Security Income (SSI) and Medicaid. SCARC Guardianship Services, Inc. can manage all of these types of Trusts.
FIRST-PARTY SPECIAL NEEDS TRUSTS
First-Party Special Needs Trusts are set up using funds contributed by the beneficiary. This type of trust is also referred to as a “Self Settled Trust”. This type of trust must be established prior to the beneficiary turning 65 years old. A person with special needs might acquire property though a:
- personal injury award
- retirement plan
- divorce settlement
- life insurance policy, or
But if a person with special needs owns any significant amount of property outright, it will affect eligibility for government benefits. So instead of owning the property directly, the person with special needs puts the property into a first-party trust. If the trust is created properly, adhering to strict government rules, those assets can be used to benefit the person with special needs without jeopardizing eligibility for government benefits. It allows assets to be set aside for “supplemental” expenses not covered by SSI or other resources. For example, a trustee can distribute funds to pay for education expenses, a vacation or hobbies, but not for food or shelter, which are covered by SSI.
The characteristics of a First-Party Special Needs Trust are:
- The trust for a minor must be established by a parent, grandparent, guardian or the court.
- The trust must be “irrevocable,” that is, unchangeable.
- The beneficiary’s assets must be used to fund the trust.
- The beneficiary must be under age 65 at the time the trust is established.
- At the beneficiary’s death, the state Medicaid agency must be reimbursed.
Pooled Trusts are first-party special needs trusts established by a non-profit organization. While first-party and third party special needs trust are created by the beneficiary or a family member for the benefit of the beneficiary, a pooled trust is established by a non-profit organization, with individual beneficiaries creating accounts within the larger trust. In other words, the assets of many people with special needs are “pooled.” Because a pooled trust accepts contributions from many beneficiaries, the trust is able to make more stable investments and provide additional management services that a generic first or third-party special needs trust might not be able to afford. On top of these benefits, transfers into a pooled trust, like transfers into a first-party special needs trust, do not prevent a person with special needs from accessing government benefits.
Although the funds placed in a pooled trust are invested together, each beneficiary’s account remains his own. The trust is invested in such a way that tailors the fund to adequately plan for each individual beneficiaries lifestyle. As with an individual special needs trust, funds in a pooled trust are used to supplement a beneficiary’s government benefits, and the funds can be used to pay for reoccurring bills, clothes, and other expenses. Importantly, beneficiaries looking to spend down their assets in order to qualify for, or remain on, government benefits can transfer funds directly into a pooled trust account without having to rely on a family member’s help.
While a Pooled Trust is similar to a first-party trust because the donor cannot name beneficiaries for the Trust, some states (including New Jersey) allow the non-profit organization that established the pooled trust to retain the remainder of a deceased beneficiary’s account to support its mission and provide for the funding of services to others.
THIRD-PARTY SPECIAL NEEDS TRUSTS
Third-party special needs trusts are set up by a donor – the person who contributes the funds to the trust. These trusts are typically designed as part of the donor’s estate plan to receive gifts that can help a family member with special needs while the donor is still living and to manage an inheritance for the person with special needs when the donor dies. Third-party special needs trusts can be the beneficiaries of life insurance policies, can own real estate or investments and can even receive benefits from retirement accounts. There is no limit to the size of the trust fund and the funds can be used for almost anything a beneficiary needs to supplement her government benefits. Upon the beneficiary’s death, the assets in a third-party special needs trust can pass to the donor’s other relatives, a charity or anywhere else.
The key advantage of a Third-Party Special Needs Trust is the funds in the trust never belonged to the beneficiary, therefore the government is not entitled to reimbursement for Medicaid payments made on behalf of the beneficiary upon her death, unlike with a first-party trust. This allows a careful donor to benefit her family member with special needs while potentially saving funds for other people or charities upon the death of the beneficiary.
Whereas first-party trusts must be established for the benefit of someone who is younger than 65, third-party trusts don’t have age limits.
Considerations in Choosing a Special Needs Trustee
Choosing the right person to serve as trustee of a special needs trust is one of the most important issues in creating the trust. A trustee typically manages the day-to-day operations of the trust, often making distributions to the trust’s beneficiary, investing the trust’s assets, and paying the trust’s bills – all while maintaining the beneficiary’s eligibility for public benefits programs.
Here are a few reasons why SCARC Guardianship Services excels at serving as a Trustee:
Familiarity with public benefit programs. To ensure that your beneficiary’s eligibility is never compromised, a trustee’s knowledge of public benefit programs is crucial. Many government benefits like Medicaid, Supplemental Security Income (SSI) and Section 8 housing have very complicated and contradictory rules governing special needs trusts. Our Staff knows these rules well and we work closely with professionals who are well-versed specifically in the area of special needs trusts.
Does the trustee have time to do the job? Serving as the trustee of an active special needs trust takes daily time and attention. Depending on a beneficiary’s needs, the trustee will spend a good deal of time paying bills, monitoring government benefits, helping to secure housing, paying for medical care and serving as a link between the beneficiary and a variety of service providers.
Considering a professional trustee. SCARC Guardianship Services serves as a Professional Trustee which allows our clients to take advantage of our experience with public benefits, investments, money management and tax planning. Another advantage is emotional distance. Sometimes, the strains of a beneficiary’s demands for trust distributions can cause significant problems for family members. These intra-family complications can be avoided through the use of a professional trustee.
Ability to serve as Co-Trustee. How comfortable are you giving trust control to a Professional Trustee? For those who are uncomfortable with the idea of a Professional Trustee managing a loved one’s trust, it is possible to appoint a family member and SCARC Guardianship as co-trustees. By doing so, you can rest assured that there is a person who is familiar with the beneficiary and has her best interests at heart and that the public benefit programs’ requirements are being met.
The trustee of a special needs trust (SNT) has all of the duties of any trustee, plus specific added responsibilities due to the special needs of the beneficiary. All trustees are responsible for:
- Appropriate investment of trust property
- Bookkeeping and accounting of trust activities
- Communication with trust beneficiaries
- Tax reporting for the trust
- Appropriate distribution of trust property to the beneficiary or beneficiaries, taking into account both current and future needs.
On top of these responsibilities, the trustee of an SNT must also:
- Inquire into the needs and welfare of the trust beneficiary
- Make certain that the beneficiary maintains her eligibility for public benefits programs
- Report to the agency or agencies administering such programs, and
- Work with the family members, teachers, social workers or others providing support for the trust beneficiary.
Due to these demands, many families find that SCARC Guardianship is better prepared to act as trustee or as co-trustee with a family member. We are equipped to handle details like establishing accounts for the management of trust assets, handling trust recordkeeping, hiring and overseeing the activities of any service providers (such as tax reporting), making distribution decisions and investing trust assets.
With regard to taxes, the trustee is responsible for notifying the IRS that the SNT has been signed and requesting an employee identification number (EIN) that will be used on tax returns. The trustee also must prepare and file annual federal and state fiduciary income tax returns, reporting any income the trust earns, whether in the form of interest, dividends or capital gains. Since tax rules vary by state and type of SNT, it is critical for the trustee to know when potential tax reductions may warrant making distributions to or for the beneficiary.
The trustee also has sole responsibility for distribution decisions. To avoid compromising public benefits eligibility, distributions generally should be made directly to providers of goods or services, rather than to the beneficiary. When the beneficiary receives an amount above the allowable monthly limit, it is considered unearned income and SSI benefits are reduced on a dollar-for-dollar basis. Similarly, distributions made for items covered by SSI (i.e., food and shelter) are considered “in-kind” income and reduce monthly SSI benefits. The trustee must fully understand and follow SSI’s distribution guidelines, which vary by state. He or she also must adhere to any distribution guidelines the Grantor outlined in the trust.
Finally, the trustee has fiduciary responsibility for the management of trust assets, even if he or she chooses to hire professional investment managers to make day-to-day investment decisions. While the appropriate investment strategy depends, in part, on the beneficiary’s age and needs and the amount of assets that can be invested, the trustee generally must comply with the “Prudent Investor Act,” which requires that investment decisions be made responsibly and impartially. When the trust outlines specific investment guidelines, however, those take precedence over Prudent Investor Rules.