Weighing the Benefits and Drawbacks of a Pooled Special Needs Trust

One of the most common ways that families can help ensure financial stability for loved ones with disabilities is through the creation of a pooled income trust, legally known as a (d)(4)(C) pooled trust. A pooled special needs trust is established and run by a non-profit organization, the trustee. Its purpose is to protect the assets of individuals with disabilities who are dependent on government benefits, while maintaining their eligibility for programs such as Supplemental Security Income (SSI) and Medicaid. A pooled trust is maintained in separate accounts for different beneficiaries, but all are pooled together to maximize the return on investment and reduce the cost of administration. It’s a method of managing assets for all people with disabilities and using the balance when the beneficiary passes away. Many non-profit organizations provide guidance to families with incapacitated and/or mentally-ill children.

Benefits

  1. Although opening a trust can be a costly process, pooled income trusts tend to be the most affordable option for people looking to support loved ones after they pass, especially if they don’t have significant assets with which to fund the trust.
  2. Creating a pool income trust significantly reduces or eliminates concerns of hiring an ill-intended trustee since the trust will be managed by a nonprofit organization.
  3. Pooled income trusts are always managed by experts, giving families relief when it comes to the distribution of their assets among various investments.
  4. In the case that families do not have significant assets to pass on to their disabled children, creating a pooled trust will still give them the benefit of remaining eligible for government programs while receiving additional payments for necessary expenses.

 

Drawbacks

  1. While it is generally regarded as the most affordable kind of special needs trusts, there are some significant fees associated with opening a pooled income trust for a disabled child. Opening the trust can run you up several hundreds of dollars if not a few thousand, and an annual fee, a percentage of the total of all assets in the trust, can significantly deplete the entire trust if not managed carefully.
  2. A pooled trust is a large “master trust,” which consists of several sub-trusts, meaning your assets aren’t the only assets in the hands of the managers. Therefore, some of the ways in which your assets are invested may not coincide with the unique needs of your beneficiaries.
  3. A significant drawback of opening a pooled income trust is that any assets placed in the trust that remain after the death of the beneficiary are not distributed to other relatives, but rather paid to the state in reimbursement for any services provided to the beneficiary through Medicaid or other government benefits.
  4. While pooled income trusts are managed by professional asset managers, returns on investments are not guaranteed, and are often directly tied to the competence and financial literacy of the manager. In short, a bad manager can do some damage to your assets.
  5. There are set rules regarding pooled income trusts that allow for the distribution of assets only at certain times in a month, which may be problematic for beneficiaries who need distributions more frequently.
  6. Pooled income trusts are not flexible. Once assets are added to the trust, it is close to impossible to move the assets to a different trust, which is especially troublesome for beneficiaries who are stuck with trustees who don’t do a good job of efficiently managing their assets.

 

As with any financial decision, opening a pooled income trust requires careful consideration by a family looking to leave disabled loved ones with financial security. In the process, individuals should weigh the benefits and drawbacks listed above as well as consult with a licensed estate planning attorney to make a decision that will benefit their family in the long-run.