Traps for a Trustee
To effectively enhance a beneficiary’s life while protecting his eligibility for public benefits, a special needs trust must be drafted correctly by an attorney and also administered properly by the trustee. Often, families select a corporate trustee that has expertise in public benefits law and prior experience in administering the special needs trust because the rules that the trustee must follow can be overwhelming. Individuals who are appointed as trustee of a special needs trust need to familiarize themselves with the traps to avoid to protect the beneficiary.
The first mistake that is commonly made by a trustee is not understanding the public benefits that the beneficiary receives. Some benefit programs, such as Supplemental Security Income (SSI), administered by the Social Security Administration, or Medicaid, administered by the Center for Medicare and Medicaid Services, are based on financial need. Therefore, if the special needs trust is administered incorrectly, it is possible that eligibility for these types of benefits can be jeopardized. Other benefits such as Medicare or social security disability income are not based on financial need. Even if a beneficiary is not currently receiving needs-based benefits, however, the trustee is best advised to follow the trust instructions carefully to avoid compromising the beneficiary’s future eligibility for benefits.
It is also critical for the trustee to understand the difference between a special needs trust that is funded with the beneficiary’s own assets and a special needs trust that is funded with assets of a third party. The rules are actually quite different for the two types of special needs trusts. Trusts funded with the beneficiary’s own assets (such as from a lawsuit settlement or inheritance) are subject to much stricter requirements than trusts funded with the assets of a third party (such as a parent).
Therefore, it is extremely important that the trustee does not combine assets that are received directly by the beneficiary (such as a refund) with a trust fund created by third party for that beneficiary.The trustee should confirm whether is a requirement to secure a bond. The trustee also should be aware of any requirements to prepare an accounting. The trustee should also understand when it would be appropriate to terminate the trust. If the trust is terminated, who would get the assets? Again, the rules are very different depending on whether the trust is funded with assets of the individual beneficiary or assets of the third-party for the benefit of the individual with special needs
The trustee must understand the distribution rules that can impact a beneficiary’s eligibility for needs-based benefits. If the beneficiary of the trustee distributes cash directly to the beneficiary, the cash will reduce the beneficiaries eligibility for needs space benefits dollar for dollar (after the first $20). This could be catastrophic if the mistake results in a loss of Medicaid benefits, which can cover long-term care expenses. Therefore, the trustee should avoid giving the beneficiary cash, particularly if the amount is over $20.
If, on the other hand, the trustee pays directly for items that are considered to be food or shelter by the Social Security Administration, then the beneficiary will lose up to one-third of the cash benefit received each month. Items that are considered to be shelter would include payments for rent, a mortgage, property taxes, heating fuel, gas, electricity, water, sewage, or garbage payments. Occasional meals out are regarded as acceptable. If the beneficiary goes on vacation, it is acceptable to pay for the vacation.
However, extended periods of absence will be problematic. Whether the trustee is allowed to pay to use trust funds to pay for a companion for the special needs beneficiary can depend on whether the trust is a first party or third-party fund trust and the facts surrounding the beneficiary’s condition as well as the companion’s skill and services to be rendered.The trustee also should not give gift cards to the beneficiary. Any credit cards should have low credit limits.
Examples of items that the trustee may pay for without impacting financial needs-based benefits include: care management and therapies, necessary medical equipment, alternative therapies, trustee or guardianship fees, dental work and transportation costs. Other items that are not considered to be food, shelter or such items or services as may be required to be paid under a parental duty of support are also permissible trust distributions.
For a beneficiary who is on SSI or Medicaid, the trustee must comply with periodic reporting requirements. The trustee would have to report a changes that include: a change of address, changes in the number of people living in the household of the beneficiary, or changes in the financial status of certain members of the beneficiary’s family whose income or resources may be deemed to the beneficiary. Generally the trustee will also be required to report large distributions from the trust as well as payments for food or shelter.
While this is a daunting list for any trustee, other traps in administering special needs trusts exist. Individuals should carefully consider their choice of trustee when establishing these trusts, and those who are appointed to serve are best advised to find professional guidance on administering a special needs trust.