The Connecticut Estate Planning Blog

Special Needs Trusts and "Regular" Distributions

Special Needs Trustees beware!  It's vitally important for you to become familiar with the type of government benefit(s) your special needs beneficiary is receiving, particularly if they are the types of programs that have income limitations, such as Supplemental Security Income (SSI) and subsidized housing.

The income generated by the special needs trust may be taxable, but it is not considered as "countable" income for the special needs beneficiary.  But if you start making "regular" distributions to the beneficiary then you will have an income problem that will reduce government benefits or eliminate them altogether if the distributions are large enough.

The word, "regular" income, in the world of government benefits, is defined as distributions that are received on a periodic basis, at least two or more times per quarter or in consecutive months.  In contrast, "irregular" distributions are not periodic or predictable and should not cause a problem with benefits.

This type of income would reduce the SSI benefits dollar-for-dollar, less the $20 disregard (a topic for another post).  There would also be a problem if the special need beneficiary is living in federally subsidized housing since those programs have income limits.

The $100,000 Question in Special Needs Trust Planning...

There are obviously many important considerations to ponder when designing an estate plan for a beneficiary who has special needs. But the most important issue in the planning process is picking the person or persons who will be in charge of managing the special needs trust. This person is known as the "trustee" and he/she has the biggest impact on whether or not the purposes of the trust are actually carried out after you pass away. Pick the wrong person and the whole plan can come crashing down, to the severe detriment of your disabled loved one.

Ideally, you want to have a trustee that is relatively stable and financially savvy since that person may be in charge of investing a great deal of money for your loved one. The trustee should also have a good relationship with the disabled beneficiary. If the trustee interacts with the beneficiary on a regular basis then he/she will have a better understanding of the beneficiary's disability and therefore better able to make appropriate distributions from the trust funds.

A sibling of the beneficiary is often appointed as the trustee in most cases (in the event that the parents are unable to act). This arrangement is usually entirely appropriate. But you should keep in mind that most special needs trusts will indicate that any remaining trust funds will go to the beneficiary's siblings upon the death of the beneficiary. In other words, less scrupulous siblings who have been made the trustee of their sibling's trust may be motivated to withold neccesary distributions to the beneficiary since doing so would water down their future inheritance. This issue is not unprecedented, so it needs to be considered before a sibling is appointed as the trustee.

Finally, you need to have a trustee that is prudent enough to strictly follow the instructions and limitations outlined in the trust language. If the State catches wind of improper distributions from the trust (such as distributions that pays for things that the State is already covering) then there is a risk that the benefits will be cut off.  Although this is a self-serving statement, you need a trustee who is wise enough to seek specialized legal guidance if the propriety of a particular distribution is questionable.

In short, you need to give long and serious thought as to who you will name as trustee of your special needs trust. The decision can make or break all of the careful special needs planning you have done.