Author: Joanne Marcus, MSW
Commonwealth Community Trust, Richmond, VA
According to the U.S. Census Bureau, nearly thirteen percent of the population has a disability. Estate planning, elder law and special needs planning attorneys often utilize inter vivos or testamentary special needs trusts (SNTs) when helping clients establish a plan to provide for current and future needs of an individual with special needs. Another, often overlooked option is the pooled SNT (PSNT). A PSNT can provide your client with objective administration of funds and protection of means-tested government benefits (Medicaid and SSI) with lower funding requirements and fees than traditional financial institutions.
A PSNT is administered by a nonprofit organization. The nonprofit organization may act as Trustee themselves or they may provide trust administration and contract with another entity to be the fiduciary. The pooled trust organization makes decisions on how funds from the trust are disbursed and who manages and invests the trust funds, as well as fulfills reporting requirements to government agencies. They also stay abreast of changing regulations such as the Social Security Administration’s Program Operations Manual Systems (POMS) and state Medicaid policies so that means-tested government benefits are not jeopardized for clients who receive SSI and Medicaid. Currently, an individual can have no more than $2,000 in countable assets in order to qualify for these benefits. Funds placed in a PSNT are not counted as income and do not affect eligibility.
Funds from each trust are “pooled” together to increase the principal for investment purposes and to reduce administrative fees. Individual sub-accounts are maintained for each beneficiary. All earnings based on a beneficiary’s share of the principal are allocated to each sub-account. For PSNTs, the enrollment costs, administration fees and funding requirements are typically lower than other professional trustee options. Management fees can be as low as one percent or slightly lower on an annual basis. Funding requirements are low given the nonprofit status of the pooled trust organization. For example, it is not unusual for a bank or financial services firm to require a minimum of $350,000 to $750,000 to fund a stand-alone SNT. PSNT funding requirements can be as low as $5,000. While the minimum amount required to fund the trust is small, pooled trust organizations have the expertise to provide trust services for both small and large accounts making it a viable option for more clients. Because fees and funding requirements vary, it is important to ask pooled trust organizations about these details.
Types of Pooled SNTs
Most pooled SNT organizations administer two types of trusts – first party and third party. A first party trust is funded with the beneficiary’s own money usually from a personal injury or workers’ compensation award, direct inheritance, the beneficiary’s own funds or Social Security back payment. A Medicaid payback provision is required. Once established, the trust is irrevocable. Since the beneficiary can be the grantor of a first party trust, a court order is not needed to establish the trust when the person with the disability has the capacity to establish his or her own trust. A parent(s), grandparent(s), court-appointed guardian, or the court may also establish a pooled trust account for the benefit of a person with a disability. There is no age limitation, but a transfer of assets penalty may apply if the Beneficiary is 65 years or older (varies by state). The first party PSNT is codified in the Omnibus Reconciliation Act of 1993 (OBRA ’93) at 42 U.S.C. §1396 (d)(4)(c).
A third party trust is established by someone other than the beneficiary, typically a parent or grandparent, and can be coordinated with a grantor’s estate plan, life insurance policy, investments, retirement accounts or other assets. There is no repayment provision and no age limitation. The trust is revocable until funded when it becomes irrevocable. A third-party PSNT provides a great alternative for families who don’t want to use other family members as the Trustee, for any number of reasons.
What happens to the remainder — the funds that remain in the trust upon the death of the beneficiary — varies greatly among pooled trust organizations. Some do not retain any of the remainder funds while others retain all or a portion of the funds. Given this disparity, it is important to ask what the remainder policy is when researching pooled trust organizations. For beneficiaries of the first party PSNT who receive Medicaid, some states have a provision to pay back Medicaid for medical claims paid on behalf of the beneficiary. Each state’s rules vary, so it is important to keep abreast of the rules governing Medicaid payback by state. In addition, the nonprofit organization may have its own policy on how the remainder funds are handled.
Setting up a Pooled SNT
Regardless of the type of PSNT, each Grantor joins the Master Trust Agreement by completing a Joinder Agreement. The Master Trust Agreement allows the nonprofit organization to administer the trusts under the umbrella of the “master.” Master pooled trust agreements, the joinder agreements, and other documents in support are drafted by attorneys with expertise in this area of the law.
It is critical that the trust administrator acts prudently when making disbursement decisions and is knowledgeable about the complicated and changing rules governing SSI and Medicaid to ensure that the disbursements from the trust do not jeopardize these benefits. As such, disbursements made from the trust can pay for important and often vital expenditures such as eye glasses, dental care, hearing aids, assistive devices and technology, caretaker costs, furniture, clothing, dental care, education, recreation, travel, and transportation.
Other Benefits to Consider
When presenting trust administration options to your clients, it may be helpful to explain the benefits of a PSNT:
- Staff are knowledgeable about the rules protecting SSI and Medicaid;
- Staff have experience working with people with disabilities and their family members;
- Greater investment opportunities as the funds are pooled for investment purposes;
- Low minimum and no maximum funding requirement;
- Disbursements are for the sole benefit of the beneficiary;
- Affordable services with low administrative fees;
- Long-term stability as a nonprofit organization; and
- Objectivity and professionalism when evaluating the financial needs of the beneficiary.
Planning for the future of a loved one with a disability requires special attention and considerations. Decisions should reflect concerns and hopes for the future as well as thoughtful planning for the resources that will be available to address a loved one’s needs. With its many benefits, your clients will appreciate learning about the PSNT option.
Joanne Marcus, MSW, is the Executive Director of Commonwealth Community Trust (CCT), a nonprofit organization that provides administration of pooled special needs trusts since 1990. CCT trust services are available nationwide to more than 1,300 clients.
For more information, call 804-740-6930 or visit commonwealthcommunitytrust.org