Creating an effective trust for your family member with special needs

Caring for someone with emotional, intellectual, or physical challenges can be a roller coaster experience – alternating between exhilaration for small steps forward and exhaustion from the extra worry, work, and stress it entails. 

It can also be a source of financial stress especially if your loved one is older but not capable of making rational decisions about money and spending. It’s not unusual for someone with poor judgment to quickly exhaust his or her own financial resources – and wreak havoc on the family’s finances too.  

A Special Needs Trust can help you assure the financial well-being of your loved one by:

  • protecting his or her assets within the trust
  • ensuring that he or she is able to continue to take advantage of available public benefits
  • putting the decisions about saving, investing, and spending those assets into the hands of a capable trustee

A regular trust – with a key twist

Like other trusts designed to meet the financial needs of their beneficiaries, a Special Needs Trust is created according to the trust grantor’s wishes. The grantor also names a trustee and successor trustee, and funds the trust with appropriate assets such as investments or real estate. 

But what makes the Special Needs Trust different is the language in the trust document that directs the trustee to manage assets so they enhance the beneficiary’s quality of life without unnecessarily diminishing eligibility for federal Supplemental Security Income (SSI) and Medicaid.  

These programs typically have restrictions on (1) the value of assets that can be held by the beneficiary, and (2) the amount and way third parties may spend money on behalf of the beneficiary.  For instance, SSI requires the beneficiary pay for his or her own food and housing from the SSI funds received.  If a third party supplies these needs, the public benefits may be reduced.

The importance of a “Discretionary Standard”

In the past, many Special Needs Trusts were created with a Supplemental Distribution Standard. As a result, the language in the trust document specified that the trustee must not spend trust assets on anything that would diminish the beneficiary’s eligibility for his or her public benefits, explains Stephen Ink, Vice President & Trust Officer of SVB Private. “As a result, the trustee was prohibited from supplementing the SSI food and housing allowance with additional money from the trust,” he says.

Most trust attorneys and administrators consider that language much too restrictive for today’s world, where the housing and food allowance for public programs (between $735 and $900/annually for SSI) is usually far from adequate. “When working with  clients and their trust and estate counsel, we almost always suggest that they consider establishing a special needs trusts with a pure discretionary standard for distributions i because it gives the trustee the discretion to distribute trust assets for the beneficiary’s well-being and comfort – even if that means making payments that will result in a reduction of benefits if it is determined that that is what is in the best interests of the beneficiary given the totality of the circumstances.” says Katherine Sheehan, Director and Senior Trust Officer.  As long as the payments are in the beneficiary’s best interest, this discretionary approach gives the trustee far more flexibility to meet the needs of the beneficiary. 

The Trustee can pay for just about anything for or on behalf of the beneficiary as long as the payments are made in a manner that does not violate the public benefit rules.   It is important the Trustee is well versed in these rules before making a distribution to or for the benefit of the beneficiary.

It’s also important to remember that eligibility for any state benefits varies widely from state to state. So it’s best to check with your trust attorney or advisor about the rules that might apply to your situation. 

The challenge of serving the best interests of the beneficiary 

Clearly, the Trustee for a Special Needs Trust must stay informed and up to date about what the trust can and can’t pay for without affecting the beneficiary’s eligibility for government program payments. But there are other equally challenging aspects to managing these trusts, particularly when it comes to interacting with beneficiaries and other family members. 

In fact, the most difficult part of administering a Special Needs Trust may not be the technical issues, but accommodating the personality and temperament of the beneficiary. That could mean protecting beneficiaries from financial predators who can take advantage of their diminished capacity or protecting them from themselves and their own poor judgment.  

SVB Private has considerable experience working with Special Needs Trust and beneficiaries who may have a limited capacity to manage their own finances and often don’t grasp the financial complexities of their situation. 

“For example, we’ve seen instances where a beneficiary vacillates between demanding full control of the money left in trust and threatening to sue a former trustee for allowing him or her to completely spend down all the assets in a prior trust.” 

A corporate trustee can be the “bad guy” and preserve family ties 

In situations such as the one referenced above, a corporate trustee would be the best solution, because, a corporate trustee, like SVB Private, can be objective and say ‘no’ when appropriate. A corporate trustee can also diffuse tension among family members. For example, when the beneficiary starts disagreeing with the family member who is the trustee, because the trustee won’t give the beneficiary everything he or she wants, that’s where a corporate trustee can step in. Having a representative outside of the family circle that the beneficiary can speak to so the family dynamic is not damaged by the interactions is a key benefit. The fact that a corporate trustee can provide this objectivity, and bring expertise and continuity to the challenging task of managing the financial needs of a family member with special needs, can be a big relief to concerned parents who worry about how their child will be protected and provided for in the future.

We can provide assurances that, as the trustee for a Special Needs Trust, we have a responsibility to serve the best interests of the trust beneficiary. That means we’re going to be there watching out for the beneficiary. We’re going to make sure he or she has the financial resources to live a decent life in a safe place. In short, we’re going to be there for your loved one.

If you have any questions or want to discuss setting up a Special Needs Trust, please do not hesitate to contact your SVB Private representative.

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of Silicon Valley Bank, a division of First-Citizens Bank and First Citizens BancShares, Inc. The materials on this website are for informational purposes only, are subject to change and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.