March 26, 2009 Concerned about a disabled child or parent? Considering a Special Needs Trust (SNT)? These can be powerful tools if drafted carefully. They can also be restrictive monsters if created by attorneys who work from pre-made templates or without thought to all contingencies. Special Needs Trusts are often prepared for disabled adults with disabling conditions, such as: autism; paraplegia or quadriplegia; Alzheimer’s disease; mental illness; even chronic chemical dependency. The function of the SNT is to provide a pool of funds from which a trustee can distribute to the disabled person only so much money that they don’t imperil their ability to obtain government benefits such as SSDI (Social Security) or Medicare (Medical, here in California). A few notes for practitioners: (1) Many template-drafted SNTs restrict the ability to revoke, amend, or terminate. Revocation is one thing – by all means make the trust irrevocable. But the ability to amend or terminate are important tools for the trustee, and necessary flexibility every attorney should provide in the SNT. What if the beneficiary comes into a flood of income? They may no longer want some funds tied up by the SNT. What if the law changes, as it recently did to enable trustees to pay for clothing? If the SNT restricts the ability to pay for clothing, then the trustee can amend the trust to deal with the change in the law. (2) It’s important to distinguish between third-party trusts and first-party trusts. A first-party trust is funded by the disabled person themselves, and should be a grantor trust. A third-party trust is funded by someone else, usually a parent or child, and remains revocable throughout the grantor’s lifetime. The rules are different regarding each, and so some investigation must take place to ensure that the source of funds really is that third party and not the beneficiary themselves. What if the client says: “My mother gave me this money, and it’s mine to do with as I please. But I feel obligated to put some of it into this trust – she wanted me to be able to care for her.” Arguably, the mother in this example transferred the money to her daughter in order to fund the trust! (3) It’s usually a good idea to draft the Special Needs Trust as a stand-alone trust, rather than as as part of a larger AB or other living revocable trust. It’s a common mistake by estate planning attorneys who don’t deal often with special needs situations, and it may seem more efficient to have the SNT kick in only on the death of the surviving settlor. But there’s good reason to consider drafting it as a separate trust. You can designate different trustees and successor trustees. You can give the grantors important insight as to how the trust will/must be managed by having them manage it during their lifetimes, while they can still modify or revoke it. Also, it’s likely you’ll be designating different residuary beneficiaries in the SNT than in the AB-Trust. Just some things to think about. The most important advice, as always: consult an attorney with experience not just in drafting trusts but in advising successor trustees! Good luck, and good planning!