“What do I need to know about setting up a family trust?”
“How long does it take to set up a trust?”
“How are funds managed and invested?”
These questions and more are routinely asked about special needs disability trusts for people of all ages. Trusts can be complicated subjects, and Alabama Family Trust’s goal is to supply you with the guidance and support you need to make an informed decision about the continued care of your loved one.
Browse through these frequently-asked questions for setting up a family trust, or check out one of the pages dedicated to disability trusts, trusts for children, and elderly trusts for more information.
What types of trusts does Alabama Family Trust administer?
We administer two types of special needs trust:
- Third-party special needs trust: A trust established by a third party, usually a parent, grandparent, or relative for the benefit of a loved one with a disability.
- First-party special needs trust: A trust established by the person with a disability (the “Beneficiary”), guardian, conservator or court with the beneficiary’s own funds.
We administer both types of special needs trust in Alabama in the same manner.
How are trust funds managed and invested?
Each beneficiary’s trust fund is placed in a sub-account in order to facilitate combining the assets for each sub-account. Only cash deposits are accepted. The cash assets from all sub-accounts are “pooled” together and are invested and managed by Warren Averett Asset Management group. Pooling the funds reduces administrative fees and increases the principal for investment purposes. Beneficiaries of the trust receive earnings based on their share of the principal.
A financial record is maintained for each sub-account that reflects all activity in the account. Quarterly financial statements are sent to the co-trustee or advocate or can be accessed through the internet.
The beneficiary’s Co-Trustee determines how the funds are invested from the many investment options offered.
What is a “D(4)(C)” trust?
Created under Federal Law enacted in 1993 (42U.S.C. 1396p), the term “d(4)(C)” stems from the subsection of the law which exempts certain special needs trusts established for the sole benefit of a disabled individual so the assets are not counted as resources of the beneficiary under Medicaid and Supplemental Security Income programs. The trustee has the discretion to pay out the trust income and principal for the benefit of the beneficiary to meet those needs not otherwise provided by public benefits.
The statute requires that the “d(4)(C)” trust be a pooled trust established and maintained by nonprofit association. The Alabama Family Trust is an qualified 501 (c)(3) nonprofit organization recognized as tax-exempt by the IRS.
As required by federal law, if the person with a disability created the trust, upon the beneficiary’s death, any remaining trust assets less closing expenses by the Alabama Family Trust are payable to the State Medicaid to the extent of medical assistance paid on behalf of the beneficiary. If funds remain after reimbursing Medicaid, those funds are distributed to the family or the person(s) specified at the time the trust was established.
If someone other than the person with a disability (parents, grandparents, siblings, etc) created the trust, upon the beneficiary’s death, any remaining trust assets less closing expenses by the Alabama Family Trust are payable to the family or the person(s) specified at the time the trust was established.
What are disbursements?
Disbursements distributions from the trust account are made for items not provided by government support or a private health plan that enhance the individual’s life, health, and welfare. Examples of distributions are:
- Pre-need burial
- Dental, medical, and pharmaceutical expenses not covered by Medicaid or other insurance
- Therapy or rehabilitation services
- Wheelchairs and other special equipment not covered by Medicaid or other insurance
- Psychological or counseling services
What can a special needs trust be used for?
It’s important for the grantor, trustee, and if possible, the disabled individual to understand what a beneficiary can use the fund for when setting up a trust.
Here are several examples of the most common uses:
- Pre-need burial
- Phone, cable, and Internet services
- Tuition, books, and tutoring
- Travel and entertainment
- Household furnishings and furniture
- Household modifications
- Durable medical equipment
- Care management
- Therapy and medications
Will a special needs trust put government entitlements at risk?
No. Trusts are specifically set up to supplement – not replace – basic government support for the individual’s needs. The trustee is restricted from making distributions that might jeopardize public benefits.
How long does it take to set up a special needs trust?
Setting up a family trust through Alabama Family Trust can be established in a matter of days, as long as the account meets our criteria.
Are special needs trusts taxable?
Yes. For third-party (complex) and first-party (grantor) trusts, the Trustee prepares a Federal and State return under an EIN number that is assigned to each trust. The Trustee also prepares and supplies a K-1 report on earnings of the trust to the beneficiary. Please keep in mind, the Trustee has the same filing deadlines as an individual filer and may cause an amended filing for qualified beneficiaries.
What are the costs for setting up a family trust?
In addition to a trustee fee, there are charges to the trust for the investment administrative fees and tax return preparation costs. In all instances, the Alabama Family Trust, a nonprofit organization, works to keep fees and costs at a very reasonable and comparable rate. The current minimum initial contribution required to establish an individual trust is $1,500 which includes a $750 set up fee.
Important Information about Government Benefits and Special Needs Trusts
Assets exceeding $2,000 can prevent individuals from receiving Supplemental Security Income (SSI), a monthly federal income benefit for individuals with disabilities, and Medicaid, the source of health insurance for individuals receiving SSI or residing in a nursing home facility for long-term care. A special needs trust seeks to keep these two key benefits intact for a beneficiary.
Some individuals receive forms of Medicaid called:
- Qualified Medicare Beneficiary (QMB)
- Specific Low-Income Medicare Beneficiary (SLMB)
- Qualified Individual (QI) Medicaid benefits.
In the State of Alabama, Medicaid only considers the beneficiary’s income to determine eligibility for these programs and does not consider other assets. Additionally, Alabama Medicaid does not normally pursue estate recovery to recoup the QMB, SLMB, or QI benefits at the beneficiary’s death. However, Alabama Medicaid will seek to recover any benefits that have been paid for the beneficiary from a special needs trust account at the time of death. In some cases, the benefits of using a special needs trust may outweigh the possibility that Medicaid can collect for past QMB, SLMB, or QI benefits. We recommend that you speak with your attorney to determine if a special needs trust will benefit you if you receive QMB, SLMB, or QI benefits.
We do not recommend using a Special Needs Trust if the only form of government benefits the beneficiary receives is QMB, SLMB, or QI Medicaid benefits. In the State of Alabama, Medicaid only considers the beneficiary’s income to determine eligibility for these programs and does not consider other assets. Additionally, Alabama Medicaid does not normally pursue estate recovery to recoup the QMB, SLMB, or QI benefits at the beneficiary’s death. However, Alabama Medicaid will seek to recover any benefits that have been paid for the beneficiary from a special needs trust account at the time of death. In some cases, the benefits of using a special needs trust may outweigh the possibility that Medicaid could collect for past QMB, SLMB, or QI benefits.
We recommend that you speak with your attorney to determine if a special needs trust will benefit you if you receive QMB, SLMB, or QI benefits.
Have other special needs trust questions?
If you have any questions about special needs trusts or Alabama Family Trust, please fill out the contact form below.