Basic Facts: Special Needs and Pooled Trusts

If you want to give money to a disabled family member receiving government benefits like SSI (Supplemental Security Income) and Medicaid, consider setting up a special needs trust and naming that person in your Will. Careful planning is required since disabled people can lose their eligibility to receive certain benefits if their net worth and assets increase.

Once you’ve created the proper type of trust account, your disabled family member will be in a better position to: (1) start receiving an added monthly stipend or inheritance from a family member; (2) accept a large sum of money after surviving a serious vehicle accident caused by another person’s negligence; or (3) receive funds from another unusual source.

Here’s additional information about creating SNTs – special needs trusts. You may want to set up a third-party or first-party SNT – and possibly even a pooled trust.

Here are some of the unique features offered by third-party SNTs (special needs trusts)

The American Bar Association says that this type of SNT, also referred to as a supplemental needs trust, can be used to help a disabled beneficiary receive a gift or inheritance from a third party such as a relative. However, it should never to be used for any assets or money that already belong to the beneficiary.

Based on the general terms you set forth in the trust, your trustee will then determine the exact way all funds will be used to help your beneficiary (or loved one). While many of these types of trusts are considered testamentary (part of someone’s estate), they can also be used for inter vivos transfers of gifts (those made while the person making the gift is still alive).

Like the third-party SNT described below, this first-party type should be set up so that the recipient’s government benefits remain their primary source of income — and these types of added funds are simply a supplemental source.

What are some of the unique attributes of a first-party SNT (special needs trust)?

While sometimes referred to as self-settled special needs trusts, these are mainly created to receive assets that are the beneficiary’s legal possessions. As is true of most SNTs, you’ll need the help of a highly experienced Houston business law attorney to help you create one since the multiple state and federal laws governing them can periodically change.

What’s most unique about this type of trust is that it must include a provision stating that when the beneficiary dies – depending on the exact amount of assets still contained in the SNT — Medicaid must be repaid for all funds that were ever spent on the beneficiary.

Those who most often benefit most from these types of first-party, special needs trusts usually fall into one of the two following categories.

  • They are under age 65 and want to receive funds worth more than $2000 (or more than the net worth amount currently allowed by law) – while remaining eligible for government benefits — or
  • They have received (or will receive) an unexpected financial windfall – possibly as the result of a personal injury lawsuit following a car accident.

Keep in mind that first-party SNTs can only be established by a parent, grandparent, legal guardian or court for a special needs person.

If you can’t afford a trust administered by a paid trustee – ask about “pooled” trusts

When funds are limited, you can ask your attorney to create what’s often referred to as a “pooled trust.” This type of account containing a disabled person’s money can be added to funds that have been deposited for other special needs individuals.

All of these accounts are then monitored and administered together by a non-profit board or agency. Among other tasks, your attorney may need to create a joinder agreement (or review one offered to you) as you start applying to various types of appropriate pooled trust groups.

Many disabled adults prefer this approach since they can personally help establish their own “pooled trust” with an organization set up to administer such accounts – without the help of other family members.

Whatever else you do, try to avoid simply giving extra funds to a family member so that person can later provide for all the disabled person’s needs. Given human nature, that money may never wind up being spent to benefit the person with special needs.

Please contact one of our Murray Lobb attorneys so we can use our lengthy experience creating special needs and other trusts to protect your disabled loved one’s financial interests — both now and in the future.

Common Reasons for Creating a Spendthrift Trust

Nearly all of us have relatives who need extra help managing their income and assets. When we can, we try to find ways to help them. In some instances, you might have a grandson or granddaughter who’s having trouble holding down a steady part-time job during college – or trying to make ends meet after battling a lengthy addiction. Your troubled relative might also be older and starting to struggle with handling all his monthly financial affairs.

Whatever the individual’s special needs may be, you can often help by making the person a beneficiary of a spendthrift trust.

How Should You Define This Type of Trust to the Beneficiary?

You may first want to simply say that, because you greatly care for this individual, you want to remove all or most of her current money management problems from her life. You can then say that you’ve named the person as a beneficiary of a special trust account that will be managed by a trustee. You should then quickly point out that you’ll be personally choosing the exact terms governing the trust so the trustee can properly meet specific needs of the beneficiary.

Should the beneficiary ask if she can personally manage the money, you must be ready to say that you have considered that alternative and prefer to disburse the funds over time. You might also note your desire to prevent the funds from being taken by untrustworthy creditors. (Of course, there are legal exceptions that do allow some creditors to reach these funds, and they’ll be briefly addressed below).

It’s also useful to tell the beneficiary that the funds or property that you’ll be placing in the trust as its creator (grantor) are generally referred to as the trust principal.

What Basic Terms and Provisions Are Normally Included in a Spendthrift Trust?

As your Houston estate planning lawyer will tell you, specific language must be included in the trust document, making it clear that you’re creating a spendthrift trust, in keeping with Texas law. This enabling language is designed to fully protect all the property and funds that you’re placing in the trust from others who might try to illegally reach them. All of this is clearly explained in the Texas Property Code, Title 9, entitled “Trusts.”

Your spendthrift trust language will clearly state that since the beneficiary has no right to directly reach and control the funds – neither can most creditors. Most grantors also include some specific language indicating that they are trying to provide for the beneficiary’s general needs.

As the grantor/settlor you must also clearly state all the trustee’s rights, duties and obligations while administering the trust. The trustee’s job can be a very difficult one, especially if the beneficiary decides to legally challenge the trustee by demanding large sums of money for serious medical, educational or basic living expenses not expressly referenced in the trust.

When Can Creditors & Other Parties Successfully Obtain Funds from a Spendthrift Trust?

The laws in most states allow creditors that can prove that a beneficiary owes them money for basic “necessities” (like shelter or food) to win judgments and collect funds from these types of trusts. Other legal obligations that can be paid out of spendthrift trust funds (once legal action has been taken) include child support, alimony or support of a past (or current) spouse and certain government claims.

When funds are periodically released to a beneficiary, creditors can also try to obtain them based on judgments they’ve obtained. 

Please feel free to contact one of our Murray Lobb attorneys to learn more about the various types of trusts and other estate planning tools that we can draft to meet all your needs, including a spendthrift trust.

A Basic Understanding of Trust Documents

A Basic Understanding of Trust Documents

Although many people still request Wills from their attorneys, it’s now often best for tax purposes to have the bulk of your estate transfer to others through one or more trusts. To better understand how trusts work, you first need to understand that there are living trusts and testamentary trusts.

Living trusts, also known as “inter vivos” trusts, are created during the grantor’s (or requesting party’s) own lifetime. By contrast, a testamentary trust is created within a Will and doesn’t become legally enforceable until after the grantor has died. As your estate planning attorney will tell you, there are two types of living trusts – those that are revocable and those that are irrevocable.

Revocable trusts let you maintain control over the trust assets, allowing you to revoke or change the trust’s terms whenever you believe it’s necessary. Should you instead create an irrevocable trust, the law no longer views the assets in the trust as yours – therefore, you normally cannot make any changes to the trust without the trust beneficiary’s consent.

While there are many different types of trusts and ways to set them up, the following ones are among those commonly requested by clients.

Frequently Requested Trusts

The Charitable Lead Trust. This type of trust can be created during the grantor’s own lifetime or upon that individual’s death. It provides for a type of annuity to be given to a charity for life or for a specific term of years. If there are any remaining trust assets, they are passed on to non-charitable beneficiaries when the trust terminates.

The Credit Shelter Trust. Many married couples with children often choose this type of trust because the surviving spouse can maintain full rights to the trust assets until his or her death. At that time, the trust benefits can then pass to the children. This trust is also commonly used because it allows the creator to escape estate taxes when passing the trust assets on to heirs.

The Irrevocable Life Insurance Trust. When you move your life insurance out of your estate by having this type of trust created, it’s no longer part of your taxable estate. The funds are then readily available to help pay for any possible estate costs or for other immediate cash needs of your beneficiaries.

Generation-Skipping (or Dynasty) Trusts. Grandparents often like to set these up because they’re designed to allow grantors to give tax-free money to beneficiaries who are two or more generations their junior.

The Qualified Terminable Interest Property (Q-TIP) Trust. If you’re in a second or third marriage and you and your current spouse had children during earlier marriages, you’ll want to learn more about this trust. It helps you not only leave your surviving spouse with income, it also lets you leave specific assets to your various children.

The Qualified Personal Residence Trust. You can use this to remove the value of either your main residence (or a vacation home) from your estate. It’s especially wise to create this type of trust regarding a property that’s very likely to increase in value over time.

The Special Needs Trust.  Many families have at least one member who suffers from some type of serious physical or mental disability. When you set up this type of trust, its terms can be restricted regarding how the assets can be used – thereby still allowing your loved one to qualify for certain types of government benefits.

As this article indicates, there are many different types of trusts that offer distinct advantages and disadvantages. Please feel free to contact our firm with any questions you may have about the specific types of trusts that may best suit your goals and preferences.