When planning for a special needs individual, there is no one-size-fits-all plan. While a first-party or third-party special needs trust is the solution for some families, a pooled trust has some distinctive benefits that might make it a better fit for some families. An article from the Special Needs Alliance, an excellent resource for families with a special needs individual, looks at what a pooled trust is and when it might be your best planning option.
What makes a pooled trust unique? Well, as the name would suggest, a pooled trust pools the resources of numerous special needs individuals to maximize investment options and minimize the costs of administering the trust. These trusts are managed by nonprofit organizations who specialize in special needs planning and are knowledgeable about all relevant laws and rules, and may also help connect special needs individuals with local services.
Each special needs individual has a sub-account within the trust and receive a share of the trust earnings proportional to their investment. Just like a standalone trust, these sub-accounts can be “self-settled” (first-party) or third-party. While first-party sub-accounts must be initially funded by assets owned by the special needs individual, third-party sub-accounts can only be funded by assets never owned by the special needs individual.
When deciding whether to open a first- or third-party sub-account, you should consider the Medicaid payback rules. In Massachusetts, any assets remaining in a first-party sub-account after the special needs individual’s death not retained by the trust to cover administrative costs go to the Commonwealth to reimburse any expenses covered by Medicaid. Any assets still held in the trust after paying back Medicaid can go to designated beneficiaries.
While third-party sub-accounts will also need to cover any administrative costs, there is no Medicaid payback requirement. There is also no restriction on the age of the special needs individual when creating a third-party sub-account.
Why use a pooled trust? For some families, the complexities of administrating a special needs trust is too much, but hiring a professional trustee could be cost-prohibitive. A pooled trust gives families access to professional trustees without overly burdensome administrative costs. Most pooled trusts accept sub-accounts of any size, but still provide excellent investment options and diversification because they pool the resources of so many participants. You can also review the performance history of the trusts before making a final decision.
It’s important to note, however, that this is just a brief overview and each family’s situation is unique. Before making a decision on a first-party, third-party or pooled trust, speak with an experienced special needs and estate planning attorney. They can help you determine the best option for your family and your needs.
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