Debunking Special Needs Trust Myths
Creating and funding a special needs trust is simultaneously a personal and emotional experience – and too often a search for the truth about special needs trusts.
To help, let’s debunk one of the most prevalent myths about special needs trusts, which incorrectly muddies types of trusts and their business structure, and states that some are best suited to certain size account balances.
The Facts:
- There are two (2) types of special needs trusts, with slightly different trust rules:
- There is a First-Party Trust, for people who are putting their own funds into the trust for their own benefit.
- There is a Third-Party Trust, for people who are putting their funds into the trust to benefit another person.
- There are two (2) business structures for special needs trusts, and both business structures can offer First and Third Party trusts. These structures are:
- Individual trusts, which are established for just one person, and which include an individual trust document custom drafted by an attorney, and an individually named trustee, bank, and investment advisor.
- Pooled trusts, which use a master trust document and individual account applications instead of individual trust documents. This is the same approach that company 401(k) plans use, where there is one plan, and each person who wants an account fills out an application. The trust is overseen by a professional manager and trustee who must be an IRS-registered nonprofit company. The trustee retains investment managers, a bank who is the trust’s custodian and provides banking services, and other professional services firms who provide trust administration, accounting, and other services.
The Bottom line:
- There are two types of special needs trusts, First and Third Party
- There are two business structures for trusts, individual trusts, and individual trust accounts
- Individual pooled trust accounts are not specifically for certain account balances; in fact, there is no limit on maximum account size for either business structure.
- Because of scale and efficiency, the pooled trust business model can offer best-in-class technology, governance, services, and solutions at reasonable fees.
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