Common Special Needs Trust Mistakes

special needs trust alabama
Setting up a special needs trust is important, whether it’s for a child, a disabled adult, or an elderly parent. But how do you know if you’ve done it right?
Many people worry that a mistake in their trust fund won’t be discovered until after their death, at which point the trust becomes “live” for the beneficiary. Fortunately, there are ways to ensure that your trust will function as you want for the beneficiary. Let’s take a look at some of the most common mistakes people make when setting up a special needs trust and how to avoid them.

Don’t Allow Funds to Co-Mingle

There are two kinds of special needs trusts: first-party (in which the assets come from the beneficiary) and third-party (in which the assets come from someone else, like a parent or friend).
If a third-party trust allows the beneficiary to contribute their own funds to the trust, then it has essentially become a first-party trust and will require payback provisions (meaning that after the beneficiary’s death, the trustee must use any remaining trust assets to pay back Medicaid for benefits received by the beneficiary). A relative of the beneficiary may leave hundreds of thousands of dollars to the special needs trust — but if the beneficiary contributes even a tiny sum to the fund, the entire thing will be subject to payback.

Don’t Use the Wrong Distribution Standard

Many trusts contain an ascertainable standard in the distribution clause. HEMS (health, education, maintenance, and support) is the most common, but there are others, too. This is typically used as a way to keep trustees from refusing to distribute assets for reasonable things like clothing, food, and housing.
However, this kind of standard can also allow the beneficiary to compel distributions from a special needs trust, which should never be the case. If the trustee does not have complete control over distributions from a special needs trust, the funds will be considered available assets to the beneficiary which will result in the loss of government benefits.  
Luckily, there are professional trust drafters who can put protections in place for your special needs trust so that the trustee must act appropriately and distribute funds as they should.

Ready to Set Up Your Special Needs Trust in Alabama? Alabama Family Trust is Here to Help!

If you’re ready to talk to professionals about setting up a special needs trust, contact Alabama Family Trust today. We are here for you every step of the way!

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