Should a Special Needs Trust End If Beneficiary Recovers?

  • January 26th, 2024

Physical therapist assists patient with disability in learning to walk after traumatic brain injury.Not all disabilities are necessarily permanent. Take, for example, Talonda Mulgrew, who sustained a traumatic brain injury at age 16.

Her loved ones assumed that her resulting disabilities would persist for the rest of her life. Talonda's family established a special needs trust on her behalf to help protect her financially into the future. Yet by the time Talonda had turned 34, she had completed college, gotten a job, and married.

Creating Special Needs Trusts

When drafting a special needs trust, you may wonder whether the trust should dissolve if the disabled individual recovers. You might ask your attorney if there should be a clause in the trust for this situation; the answer, however, is almost always "no."

Local Special Needs Planners in Your City

Planner name

Firm Name
City, State

Planner name

Firm Name
City, State

Planner name

Firm Name
City, State

Of course, special needs planners, like other attorneys and counselors, don't like to say no to their clients unless they have a good reason. But most special needs trusts cannot contain an "if the beneficiary gets better" clause. This is because it would run afoul of Social Security Administration and Medicaid rules. These complicated rules boil down to a fairly simple concept.

Why Leave Your Funds in a Special Needs Trust?

Let's say that the trust contains language forcing the trustee to pass the trust funds to the beneficiary when a specific event takes place. (For example, the language may stipulate that the beneficiary must reach a certain age or get better.)

If the beneficiary improves and this scenario transpires, the trust assets will then belong to the beneficiary. This could become a problem when it comes time to evaluate whether the beneficiary is eligible for government assistance. For example, an individual seeking Supplemental Security Income (SSI) must have extremely limited resources to qualify for this program. With trust funds now at their disposal, they may no longer be eligible for certain public benefits.

Because of this restriction, almost all special needs trusts are completely discretionary trusts. This means that the trustee has total discretion to make distributions. They just must be in accordance with the priorities that the creators of the trust had outlined.

To be effective, special needs trusts have to contain this element of trustee discretion. It would defeat the purpose of the trust if a provision allowed early termination when the condition of the beneficiary improved. The Social Security Administration and Medicaid would consider the trust assets countable when deciding whether the individual is eligible for benefits.

Even if the beneficiary no longer has a disability, leaving assets in a special needs trust may be advisable for other reasons. For example, their creditors typically can't reach funds that a third party has placed in a purely discretionary trust. Once those funds come out of the trust, creditors can pounce.

A trust beneficiary who no longer has a disability may still be incapable of handling large sums of money on their own. This is why many families draft trusts 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 certain circumstances, choose to distribute all the trust funds directly to the trust beneficiary. But before doing this, the trustee would need to have an in-depth conversation with their special needs planner about the consequences of collapsing the trust. In fact, in the case of Talonda, she had a court approve her decision to terminate her own special needs trust.

Consult With a Special Needs Planning Attorney

If you are interested in setting up a special needs trust or have questions about yours, speak with a qualified special needs planning attorney. The rules regarding special needs trusts can get complex quickly and also can vary by state. An attorney with expertise in this field will have the know-how to draft a special needs plan that works for your unique situation. Search for a qualified special needs planner near you today.

You may also want to read more about special needs trusts and how they work. Check out the following informative articles:


Created date: 01/29/2013

Topics

View All Special Needs Topics Questions & Answers Directory of Pooled Trusts Directory of ABLE Accounts