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3 drawbacks of pooled special needs trusts

On Behalf of | Feb 10, 2024 | Estate Planning |

Creating a special needs trust for a vulnerable loved one can give people peace of mind. Parents and others invested in the life of someone unable to manage their own affairs generally want to ensure that person has support for the rest of their life.

A pooled special needs trust is one of many possible solutions for those hoping to meet the needs of a family member who cannot live a fully independent life. Pooled special needs trusts are different from other types of special needs trusts because they are under the control of not-for-profit or charitable organizations. This can make them useful in scenarios where aging caregivers know they cannot indefinitely serve as trustees. Unfortunately, there are drawbacks to pooled special needs trusts that families typically need to consider before they fund them.

They are a type of irrevocable trust

It is possible to alter the terms of certain types of revocable trusts even years after funding them. However, irrevocable trusts have unalterable terms attached to them. A pooled special needs trust is an irrevocable trust. The parties funding the trust for the support of a loved one cannot go back to change the terms set after transferring resources to the trust.

Distribution rules may be restrictive

Family members who administer a special needs trust can sometimes use more liberal approaches to interpreting trust language. The goal might be to allow a beneficiary to engage in enrichment activities or experience something special that may not be explicitly permissible according to the language of the trust. Pooled special needs trusts typically have very strict limits on what a beneficiary can do with trust resources. Someone may not be able to access funds for much beyond basic cost-of-living expenses, healthcare needs and educational costs, for example.

The assets remain in the trust after the beneficiary dies

The organization administering the trust retains control over all the resources used to fund the trust even when a specific beneficiary dies. Other beneficiaries of the same pooled trust can then access funds initially contributed for the benefit of one party. Families cannot name someone to receive the residuary amount in the trust after the primary beneficiary dies, as is possible with certain other types of trusts. If the beneficiary lives an unexpectedly short amount of time, the resources contributed to the pooled special needs trust may far exceed whatever distributions they ever requested from it.

Those who are aware of the drawbacks of pooled special needs trusts can potentially make more informed decisions about how they arrange for the financial support of a vulnerable loved one. Seeking legal guidance is a good way to get started.