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Terminating a Special Needs Trust – What Happens to Assets?

By their very nature, special needs trusts (SNTs) 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. There are several key considerations and requirements to keep in mind. 

What happens to the money when the trust is terminated?

The trustee is responsible for terminating the special needs trust and fulfilling the instructions laid out in the trust document. These include filing the trust’s final tax return and paying any income taxes due. (Learn more about paying taxes when a special needs trust is terminated.) There may be other expenses, too, such as funeral and burial costs.

If the trust is a first-party trust – a trust funded with the person with special needs’ own assets — it will owe money to the state if the person with special needs received Medicaid benefits during her lifetime. In what is known as a pay-back provision, the first-party trust must reimburse the state, dollar-for-dollar, for all Medicaid expenses incurred throughout the beneficiary’s life on the death of the beneficiary. 

What happens to any remaining assets after the trust is terminated?

If the trust has designated secondary, or remainder, beneficiaries, the assets would pass to them once taxes and expenses have been paid, according to the language of the trust. Although many trusts specifically name the remainder beneficiaries (i.e., “25 percent of the trust shall go to Jane, 75 percent to Mary”), in other cases the trust names only a class of beneficiaries (“the donor’s grandchildren will share the remainder of the trust funds equally”). It is up to the trustee to determine the identities of any unnamed remainder beneficiaries when terminating the special needs trust, contact all the beneficiaries, and make arrangements to distribute the trust funds to them. If any of the remainder beneficiaries are young or have special needs of their own, when terminating the special needs trust it may allow the trustee to retain the trust funds for the benefit of those particular beneficiaries under terms that may be quite similar to those found in the original trust.

Is it possible to change secondary beneficiaries?

This depends on the wording and terms of the trust. When terminating the special needs trust, the trust may have an “amendment provision,” which gives the trustee some flexibility to make changes to the trust. This could include changing the remainder beneficiaries through a provision known as “power of appointment.” If the trustee (or perhaps even the beneficiary himself, depending on the trust language) has power of appointment, he can create a document to change who will receive the assets in the special needs trust on the death of the primary beneficiary. A variation is the limited power of appointment, which, though more restricted, would still allow the trustee or beneficiary to make changes. 

What if secondary beneficiaries are not fit to inherit the trust’s assets?

The secondary beneficiary may be a minor, a person with disabilities, or struggling with drug or alcohol addiction. Depending on the terms of the trust, the trustee may have some authority to change the distribution of funds to such remainder beneficiaries. The trustee may, for example, hold the assets in a special account, under a rule known as a “flexible distribution provision.” In this way, the trustee has discretion to act in the interests of the secondary beneficiary while safeguarding the assets within the trust itself. 

Special needs trusts are designed to provide funds over a long period of time, to care for the primary beneficiary for the entirety of her life. Many things can change over this period, so it is vitally important that the trust is carefully constructed to take all this into account. Likewise, the trustee must understand the terms and provisions of the trust thoroughly, during the beneficiary’s lifetime and at the time of terminating the special needs trust. 

For more detailed information pertaining to your circumstances, it is very important to partner with a law firm that specializes in the area of special needs planning and understands the nuances associated with it.  Founded in June 2010, by Stephen Elville, J.D., LL.M., Elville and Associates is an estate planning, elder law, and special needs planning practice.  It is the firm’s mission to provide practical solutions to its clients’ needs through counseling, education, and the use of superior legal-technical knowledge.  As it relates to special needs planning, the firm works collaboratively with individuals and families and their professional advisors to counsel, educate, and create a comprehensive plan for the family and their special needs loved one.  This includes, among other planning considerations:

  • establishing proper estate planning for the family, including the use of special needs trusts
  • leveraging means tested public benefits
  • selecting the proper team to provide lifetime management
  • planning for appropriate housing and an ongoing system for advocacy
  • providing financial security
  • planning for caregiving needs
  • coordinating the entire extended family’s planning
  • protect the beneficiary from predators and preserving assets for other heirs

Should you have any questions about Elville and Associates and its services, please contact Steve Elville at steve@elvilleassociates.com, or by phone at 443-393-7696 x108.  Community Relations Director Jeff Stauffer may also be reached at jeff@elvilleassociates.com, or at 443-393-7696 x117.