What are Disability Trustees and Trusts?
Some people for whom we do LifeCycle Planning, for a variety of reasons, cannot or should not be left in control of their own money.
Sometimes, some people are just irresponsible spendthrifts or have other bad habits or addictions. Other times, people suffer from a disability that prevents them from managing their own affairs. Oftentimes, these people are getting needs-based governmental benefits for which they would be ineligible if they had control over their own money.
Regardless of the reason, the solution to these LifeCycle financial challenges almost always involves using a trust and wherever you have a trust you have to have a trustee and, oftentimes, trustees charge a lot of money for being a trustee. Disabled people receiving government benefits, however, cannot usually afford most expensive trusts and trustees.
There are alternatives to having a customized trust drafted and using personal professional trustees. Some non-profit trust companies do well at filling this crucial need. One of the least expensive Maryland disability trust companies we know of is First Maryland Disability Trust (“FMDT”) (http://www.firstmdtrust.org).
What is the First Maryland Disability Trust?
FMDT was set up by many lawyers and other people helping applicants and recipients of needs-based disability benefits receive and manage supplemental money without losing their benefits. Their website provides a lot of information about disability trustees and trusts.
What are the Different Types of Disability Trusts?
First party trusts, which are often called Supplemental (or Special) Needs Trusts (“SNT’s”), that are funded with assets owned by the disabled person. These first party trusts include:
- Payback Trusts for disabled people under age 65.
- First Party Pooled Asset Trusts for disabled people of all ages who need “stock” trust agreements and pooled assets to keep their setup and asset management costs low.
Third party trusts, which are funded with assets owned by anyone other than the disabled person needing them. Third party trusts include:
- Testamentary supplemental or special needs trusts created within a person’s Last Will and Testament.
- Third party pooled asset trusts, which are created by family and friends of a disabled public benefit recipient who want to use the simple documents and conservative asset management of a pooled asset trust, like the ones used at FMDT.
What’s the Big Difference Between First-Party and Third-Party Trusts?
The big difference between First-Party SNT’s and Third-Party SNT’s is what happens to unspent money in each trust after the Beneficiary dies. In order to allow a disability recipient to set aside some of their own money to supplement their government benefits, the Grantor of the trust must agree that the trust will pay the government back for any benefits the government provided to the beneficiary. If there is money left in the trust after the payback payment, then the excess gets paid to whatever person or entity the Grantor designated in the Joinder Agreement (discussed below) that was used to add money to the trust.
In order to keep a disabled person eligible for government benefits, any trust using the disabled person’s own money must be approved for the person’s state’s Department of Medicaid, which in some states are called by different names. In Maryland, approvals are granted by Maryland’s Department of Mental Health & Hygiene.
How Can People Learn More About Using Disability Trusts?
First, talk to a lawyer; preferably a LifeCycle Lawyer.
Second, read through some trust agreements and study what they do and how they do it.
People considering using trusts, in general, and considering FMDT’s SNT’s, specifically, can learn a lot about how these types of SNTs work by reading the trust agreements FMDT uses to create them. Here’s the one for FMDT’s First Party Payback Trust. And, here’s the one from FMDT’s Third Party Trust.
As the Trust Agreements state, someone wanting to create a trust will complete and sign a Trust Joinder Agreement in order to set up a subaccount of the FMDT Trust. Here’s a copy of FMDT’s First Party Joinder Agreement. And here’s a copy of FMDT’s Third Party Joinder Agreement.
How Do Disability Trustees and Pooled Disability Trusts Work?
If you’ve read through the trust agreements and joinder agreements pointed out above, then you are well ahead of most other people to understanding disability trusts and trustees.
A third-party trust is the placement, by a Grantor, of money or other assets, with a second person called the Trustee, so that it can be used for the benefit of a third person called the Beneficiary. A first party trust is the placement, by a Grantor, of money or other assets, with a Trustee, so that it can be used for the benefit of a Grantor, who is also the beneficiary.
Let’s look at a FMDT’s First-Party Pooled Payback Trust first. A trust is created by a written Trust Agreement. Instead of just having one account for one individual or one specific group of beneficiaries, a Pooled Trust has a series of subaccounts for each of many specific individuals, but it manages all the combined money in one major account called the pooled account. Each beneficiary’s trust is created by depositing assets into the subaccount using a joinder agreement.
Great! Now the money is in the trust. How does it get taken back out and used?
First, until the beneficiary dies, the subaccount can only be used for the Beneficiary (Article II – Section 2.2) and Trustee has sole and absolute over the subaccount. But, the Joinder Agreement (Article II – Section 2.3). The money can be used in accordance with a Supplemental Needs Plan and Budget worked out with the Beneficiary’s case manager or care provider action for any non-support items (those items not provided for shelter, food, or clothing using governmental benefits) that are required for maintaining or enhancing the health, safety, and welfare of the beneficiary (Article II – Section 2.4). But the Trustee can and should also give heed to the expressed wishes, plans, and goals of the Grantor who put the money into the Trustee’s hands to use for the Beneficiary.
Planned supplemental needs are easier to manage than unplanned ones. Nonetheless, FMDT is easy to work with for less-planned case-by-case needs as they arise.
When supplemental funds are needed, all a beneficiary or beneficiary’s representative needs to do is complete and submit a Distribution Request Form. If the request is within the law and the limitations expressed by the Grantor and the funds in the Beneficiary’s subaccount for the Beneficiary’s present and expected future needs are available, then FNDT will get the funds to the Beneficiary via a check or prepaid debit card (which is the easiest way to get a distribution).
Once the Beneficiary dies, the Trustee pays all the taxes and administrative expenses related to the subaccount (Article III – Section 3.1) and then does one of three things:
- First, if the Grantor allowed it when creating the subaccount, the non-profit trust company can retain any remaining assets.
- Second, if the Grantor wants to direct the remaining money to another person or entity, the Trust must see is the state Medicaid program wants to be reimbursed for services provided to the Beneficiary, and if so, pay off as much of the state’s claim as possible.
- Third, if money is left over after the state gets paid, then the trustee distributes the money as directed by the Grantor in the Joinder Agreement.
The Trustee gets paid fees in accordance with the trustee’s fee schedule both monthly and annually as time goes on. In return for these fees, the Trustee manages the investments of the trust and handles the distributions and makes at least annual accountings to the Grantors who put money into the subaccounts.
A Third-Party Trust runs pretty much the same way, except the State Medicaid provider has no claim on third-party trust assets after the Beneficiary’s death.
How Much Does It Cost to Set Up and Maintain a Trust Subaccount at FMDT?
FMDT charges $1,000 to set up a subaccount. In addition, once the Trust subaccount gets funded (by a deposit made by a Grantor or Personal Representative named in a Will), FMDT charges an annual fee of the greater of $300 or 1% of the trust balance per year. For a $20,000 trust, FMDT would get paid their $300 minimum annual account fee.
FMDT uses BB&T as its investment advisors. The investment advisors of BB&T get paid 65 basis points (.0065 or 0.65%) of the balance per year to manage the investment of each subaccount in one pooled investment trust account. For a $20,000 trust, BB&T would be paid $130 per year.
Simply put, a $21,000 trust costs $1,000 to set up and $430 per year to maintain. $430 per year is about 2.15% per year for that $20,000. That may still seem a little steep for trust management, but it is not. For that small amount of money, the beneficiary gets to make a reasonable number of supplemental distributions.
Using pooled trusts makes a lot of sense. Both grantors and beneficiaries get good benefits from doing so. The grantor knows their trust assets are securely invested and maintained and their beneficiaries are well cared for. The trustees are experienced when it comes to working with disabled beneficiaries. They can assure that the supplemental payments meet legal requirements that will keep the beneficiaries from losing their government benefits. The money is easily available for the right reasons and protected against requests for the wrong reason. And it’s good for disabled people or people with small trusts people to be working with professionals instead of well-meaning but not really trusty or trustworthy trustees.
To learn more about disability trusts, call a LifeCycle Lawyer.