Why a Special Needs Trust Can't Automatically Terminate When the Beneficiary Gets Better

Not all disabilities are necessarily permanent. One question that typically comes up when an attorney is drafting a special needs trust for a beneficiary whose disability may end at some point is whether the attorney can write a clause into the special needs trust stating that the trust will dissolve if the beneficiary's disability ends. The answer is almost always "no."

Special needs planners, like other attorneys and counselors, don't like to say no to their clients unless they have a good reason, and in this case, the reason that most special needs trusts can't contain an "if the beneficiary gets better" clause is because such a clause would run afoul of the Social Security Administration (SSA) and Medicaid rules governing special needs trusts. Those complicated rules boil down to a fairly simple concept: if the trust contains language forcing the trustee to distribute funds to a beneficiary when some event takes place (for example, the beneficiary reaching a certain age or getting better), then the trust assets will be considered the beneficiary's when it comes time to determine his eligibility for government assistance.

Because of this restriction, almost all special needs trusts are completely discretionary trusts, meaning that the trustee has total discretion to make distributions as long as they are in accordance with the priorities expressed by the donors who created the trust. Since special needs trusts, in order to be effective, have to contain this element of trustee discretion, it would defeat the purpose of the trustfor it to contain a provision authorizing early termination if a beneficiary's condition improves. SSA and Medicaid would view the assets in the trust as countable in making their eligibility determinations.

There are other good reasons for leaving assets in a special needs trust even if the beneficiary is no longer disabled. For example, a trust beneficiary's creditors typically can't reach funds placed in a purely discretionary trust by a third party. Once those funds come out of the trust, creditors can pounce on them. Likewise, a trust beneficiary who doesn't have a disability anymore may still be completely incapable of handling large sums of money on her own, which is why many families draft trusts that are very similar to special needs trusts for healthy children who have shown that they aren't good with money.

Of course, since most special needs trusts are completely discretionary, the trustee could, in very limited circumstances, choose to distribute all of the trust funds directly to the trust beneficiary. But before doing this, the trustee would need to have a very long conversation with her special needs planner about the ramifications of collapsing the trust.

Article Last Modified: 01/29/2013

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