Retirement plans often make up a significant portion of the assets of parents of children with special needs, or of individuals who have become disabled as adults. In such cases, the question arises as to whether the retirement plan can be put into a special needs trust. The answer, as with many legal questions, is "it depends." Also, the answer has changed significantly since passage of the SECURE Act at the end of 2019.
There are three different questions that need to be answered:
Can You Transfer Your Own IRA or 401(k) into a Special Needs Trust?
This question normally comes up for people who become disabled, whether due to injury or illness, after they have worked and accumulated retirement savings. The answer is a clear no. A disabled person cannot transfer a retirement plan into a special needs trust without first liquidating it and paying taxes on the realized income. If paying the taxes owed is necessary in order to shield the funds in a special needs trust and receive important public benefits, it may well be worth the cost. In fact, the tax cost may not be as high as it seems at first depending on the size of the retirement plan, the individual's other income, and whether medical expense or other deductions are available.
Should You Name a Special Needs Trust as Beneficiary of Your Retirement Plan?
More often, parents would like to leave all or part of a retirement plan to a trust for the benefit of their child with special needs. This can be done, but it's a bit complicated. Before passage of the SECURE Act, special needs planners would advise clients to avoid doing so, if possible, to keep the trust simpler. In order to be the beneficiary of a retirement plan and spread the plan withdrawals out over the beneficiary's lifetime, the trust must qualify as a so-called "accumulation" trust, which presents certain challenges. To avoid this, clients might name their non-disabled children as beneficiaries of their retirement plans and name the special needs trust as beneficiary of other assets.
However, the SECURE Act made it more difficult to stretch out retirement plan withdrawals for the lifetime of most beneficiaries, limiting the withdrawal period to the 10 years following the death of the primary owner. One of the exceptions is beneficiaries who qualify as disabled. So now, in many cases, planners give the opposite advice. If possible, the retirement plan should be payable to the special needs trust so withdrawals and the payment of taxes can be spread out over the disabled beneficiary's lifetime. In each case, the special needs planner and the client must balance the potential tax savings with the added complication of creating and managing an accumulation trust.
Can You Transfer an Inherited IRA to a Special Needs Trust?
Perhaps you have a special needs trust and have inherited an IRA. Can the IRA be transferred to your trust without having to be liquidated first? Here the answer is less definite. There's no regulation that directly answers this, but there are IRS rulings that have permitted such a transfer without having to liquidate the IRA first in individual cases. Absent a regulation that directly addresses this, the challenge may be less the law and more the willingness of the bank or investment firm where the account is located to permit such a transfer to the trust. They may well first require that the account owner obtain a ruling from the IRS that is specific to the account in question. The cost of obtaining such a private “revenue ruling” in most cases would outweigh the potential benefit of making the transfer to the trust.
As you can see, the subject of retirement plans and special needs trusts is a complicated one. If you want to know how a retirement plan can fit with your or a loved one’s special needs trust, talk to your special needs planner.
Katie Clancy was honored to be a part of this panel discussion about how to plan legally and financially for children and adults with disabilities, sponsored by PediaTrust
Trustees of special needs trusts generally have wide discretion in determining whether to distribute funds to trust beneficiaries. But if the person with disabilities receives Supplemental Security Income (SSI), careful precautions should be taken before any trust funds are used to pay for housing costs.
For the year 2018, federal guidelines set the maximum monthly SSI benefit at $750 for individuals, $1,125 for eligible individuals with an eligible spouse, and $376 for an “essential person,” such as a child. Certain states add a supplement on top of the federal maximum.
The most critical factor in determining whether SSI recipients are eligible for the maximum benefit is their housing arrangement.
People living alone who pay their full rental expenses, including utilities, are eligible for the maximum monthly SSI benefit, assuming they would otherwise be eligible for the maximum. Likewise, where the SSI recipient lives with another person or persons but pays their proportionate share of the rent, the recipient is eligible for the maximum SSI benefit.
However, where a third party pays the rent—be it a parent or a special needs trust—the Social Security Administration (SSA) will cut the maximum federal SSI benefit by one-third, plus $20. For example, if a person receives $750 from SSI, but his special needs trust covers his monthly rental expenses, his benefit will be reduced to $520.
Spouses of SSI beneficiaries and parents of minor children who are SSI beneficiaries are not considered third parties under the applicable SSA rules, and thus shelter payments by them will have no bearing on the SSI recipient’s monthly benefit. However, SSA income rules apply to parents of minor children and spouses and would likely disqualify a person from SSI for that reason.
The rules are identical for other types of housing arrangements, such as where instead of a special needs trust or other third party paying for rent, it covers the SSI recipient’s monthly mortgage payments, co-op fees or, homeowner fees. The same rules apply for monthly utilities payments, such as electricity, gas or water expenses.
Generally, people who are temporarily institutionalized, such as in a hospital, nursing home or assisted living facility, are not eligible for SSI, with some exceptions. A permanent address, however, is not a requirement for continued SSI eligibility. SSI benefits will generally continue where the person is homeless or living in a shelter.
Finally, for SSI recipients who travel, third parties may pay for hotel and food expenses during travel without causing a reduction in the recipient’s benefit.
Payments from special needs trusts can affect a beneficiary's eligibility for Section 8 housing assistance as well. For more information on distributions from special needs trusts and how they will affect a beneficiary’s eligibility for SSI and other government benefits, please contact us.
Trustees of special needs trusts are increasingly relying on “administrator-managed prepaid debit cards,” such as True Link cards, when disbursing funds to beneficiaries. These cards offer trust beneficiaries greater independence and the ability to get what they need more quickly. But such cards existed in a regulatory gray area as far as the Social Security Administration (SSA) was concerned. That is no longer the case.
Special needs trusts are created to protect the assets of people with disabilities. When properly maintained, special needs trusts preserve the individual’s eligibility for public benefit programs, such as Supplemental Security Income and Medicaid.
However, special needs trusts must abide by strict rules, overseen by the SSA, concerning what trust assets can be used for. For example, special needs trust funds can almost never be used for food and shelter expenses, medical expenses that would otherwise be covered by Medicaid, and items that can be traded for cash.
To ensure that trust distributions comply with these rules, trustees are increasingly relying on administrator-managed prepaid debit cards, the most commonly used being a reloadable Visa card known as the True Link card. These cards allow trustees to maintain oversight of card transactions while providing people with disabilities -- the cardholders -- the ability to make purchases quickly and independently.
Since the cards can be managed online, trustees are able to link the trust funds to checking and similar accounts and quickly transfer funds to beneficiaries for their use. Along with ongoing monitoring and the ability to print off regular reports, the cards allow trustees to block purchases that my run afoul of SSA’s rules, and thus jeopardize the beneficiary’s continued eligibility for public benefits. Each True Link card, for example, can be customized to block transactions that might negatively affect benefits, such as purchases at grocery stores, restaurants, and bars. Administrators can also set up the card to work only at specific, authorized merchants -- and nowhere else.
On May 14, the SSA published a new section regarding True Link and similar type cards in its Program Operations Manual System (POMS), the SSA’s internal guidance system that is used by field workers who handle benefits eligibility questions. This marks the first time the SSA has recognized these cards as a legitimate way for trustees to manage funds in a special needs trust.
Among the rules set forth in the POMS, the SSA specifies that to protect the beneficiary and the trust from making inappropriate disbursements, the trust must be the account owner and administrator. If the card is used to withdraw cash, such as from an ATM, then the funds will be counted as cash income and thus can affect the person’s eligibility for public benefit programs, If the beneficiary uses the card to pay for food or shelter, the disbursements will likely reduce SSI payments.
To learn more about how an administrator-managed debit card can be used in conjunction with a special needs trust, contact us.
Choosing the right person to serve as trustee of a special needs trust is one of the most important and difficult 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.
The law isn't very strict about who may serve as trustee, as long as the person is over 18 years of age and is capable of managing his or her own affairs. A trustee can be the child’s parent or other relative, a trusted friend, or a professional such as a lawyer, accountant, trust company, bank or private professional fiduciary. Here are five considerations to help in the choice of who should serve.
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. The trustee of a special needs trust must know these rules well, or, at the very least, work closely with a special needs planner who can explain the ramifications of his actions as trustee.
Does the trustee have time to do the job? Serving as the trustee of an active special needs trust can seem like a full-time job. Depending on a beneficiary's needs, the trustee could 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. If a trustee finds that she can't perform all of these tasks when needed, or if she is sacrificing her family life or other professional obligations in order to work as a trustee, then it may be time to look for a professional trustee.
Consider a professional trustee. This could be an attorney, accountant, trust company, investment firm, bank or private professional fiduciary. A professional allows you to take advantage of that individual’s or institution's 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.
How comfortable are you giving trust control to an outsider? For those who are uncomfortable with the idea of an outsider managing a loved one's trust, it is possible to appoint a family member and an independent trustee 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. Another option is to simultaneously appoint a trust "protector," who has the powers to review accounts and to hire and fire trustees, and a trust "advisor," who instructs the trustee on the beneficiary's needs.
Is a pooled trust an option? A pooled trust, which is administered by a non-profit corporation, may be a good option for some families. Such trusts pool the resources of many beneficiaries, and those resources are managed by a non-profit association. Pooling trust resources can reduce administrative fees, increase the total funds available for investment, and permit access to better investment opportunities. 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 conventional special needs trust might not be able to afford. If the trust is modest in size, it may benefit from the low costs of a pooled trust. Others appreciate the fact that their funds will be used to help others with special needs.
Make sure that whomever you choose as trustee is financially savvy, well-organized, and, most important, ethical. We can help you make the best choice - contact us.
Most special needs trusts give their trustee wide authority, often appropriately so, to respond to unforeseen circumstances. But for those concerned about placing some checks and balances on the trustee’s authority, one possible option is a care committee.
Special needs trusts are trusts designed to protect the assets of a person with disabilities. The trustee is the person tasked with managing and distributing the trust’s assets on the beneficiaries’ behalf.
As previously discussed here, in addition to the trustee, many trusts create a separate care committee, either explicitly in the trust or through a separate memorandum of intent. Care committees, also commonly known as “trust advisory committees,” are typically granted the right to review accountings, to examine records, and to remove and replace the trustee. To use an analogy from the corporate world, the trustee is the CEO and the care committee is the board of directors. The care committee may also be given the authority to amend the trust, veto certain distributions or participate in other decisions.
A downside to the creation of a care committee is that it can slow down the decision making process, at the expense of the beneficiary. Likewise, a care committee can deny the trustee the appropriate flexibility to act in the person with disability’s best interests.
To see if a care committee is right for your special needs trust, contact us.