What to Do When It's Time to Terminate a Special Needs Trust: Part I

By their very nature, special needs trusts are usually designed to terminate, or at least radically change, when the trust's primary beneficiary dies. But terminating a special needs trust is not as simple as merely writing a check to the remainder beneficiaries and calling it a day; winding down a trust can take a lot of work. Here are some initial things that every trustee of a special needs trust should do upon learning that the primary beneficiary has passed away. Next month, we'll explore additional issues to consider when closing out the trust.

Read the Trust Carefully

Properly drafted special needs trusts will always contain very specific instructions for a trustee to follow when a trust beneficiary passes away, and a trustee has a fiduciary duty to carry out these instructions whenever possible. Therefore, when the trust's primary beneficiary dies, a trustee should immediately look to the trust document itself for direction. However, trust language can be very dense and confusing, and words that may seem inconsequential can have an enormous impact in the long run. Trustees should almost always ask a qualified attorney to review the trust document with them in order to avoid any misinterpretations or false steps.

Does The Trust Contain A Payback Provision?

There are three main types of special needs trusts - first-party trusts that are funded with a beneficiary's own funds, third-party trusts that hold funds donated by others, and pooled trusts that manage funds for many beneficiaries at once. In most cases, first-party trusts and pooled trusts (and a small minority of third-party trusts) contain "payback" provisions that require a trustee to reimburse the state for any Medicaid benefits that a trust beneficiary received while she was living. If a trust beneficiary was on Medicaid for a long time, the trust could end up distributing all of the trust's assets directly to the state as reimbursement, leaving nothing for the other remainder beneficiaries. A trust will usually explicitly state that this reimbursement must take place, but in some cases a trustee will have to do additional research to see if reimbursement is required by law. And because some states allow trustees to pay taxes and other expenses from trust funds prior to reimbursing the state for Medicaid costs, trustees should always speak with an attorney before giving any money to the state to make sure that they haven't missed a step.

If a trust contains a payback provision, a trustee must obtain a statement from the state Medicaid agency detailing Medicaid expenditures that were made on behalf of the trust's beneficiary. (If a beneficiary received Medicaid in several states, the trustee must track down this information from each state.) After carefully reviewing the statement for accuracy, the trustee will usually need to follow a detailed procedure to submit the funds to the state.

Next: Paying taxes and distributing to remainder beneficiaries.

Article Last Modified: 10/04/2010

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