A special needs trust (SNT) is a useful resource to provide for the long-term care of someone who is disabled or has special needs throughout their life. An SNT can be funded to provide for things like long-term medical care, rehabilitative care, daily dietary needs, and nourishment.
Jump ahead to these sections:
- What Happens to a Special Needs Trust When the Trustee Dies?
- What Happens to a Special Needs Trust When the Beneficiary Dies?
SNTs are unique because they can provide financial assistance for a special needs beneficiary for life without jeopardizing their eligibility for needs-based government programs, like Social Security and Medicaid.
With the care that an SNT provides, special needs beneficiaries often live a long life. Sometimes they may even outlive the trustee of the SNT. Sadly, some special needs beneficiaries pass away sooner than expected, leaving excess funds in the trust upon their death. What happens to those excess funds may depend on the type of trust that is created and how the trust was funded.
What Happens to a Special Needs Trust When the Trustee Dies?
When talking about special needs trusts, it is important to know about the three different kinds, which differ based on how they are funded.
- First-party SNTs. First-party SNTs are funded by the person with special needs.
- Third-party SNTs. Third-party SNTs are funded by someone other than the person with special needs — usually a relative or caretaker — who wishes to provide financial security to their loved one and possibly continue that care after the provider of the funds passes away and is no longer able to care for the person with special needs.
- Pooled SNTs. This kind of trust is managed by a non-profit organization that pools the funds that are provided from multiple special needs trust accounts and manages the pooled funds for the benefit of all of the beneficiaries of the trusts.
A trustee of an SNT is the person responsible for administering the trust and authorizing distributions according to the terms of the trust. Because the purpose of an SNT is to provide for the needs of the beneficiary, the trust does not terminate because the trustee passes away. Instead, a successor trustee will immediately take over the role of the deceased trustee.
A successor trustee may assume the role of trustee in several ways. All depends on how the trust is drafted. Here are several possibilities for how a deceased trustee can be replaced without interrupting the purpose of the trust or the care of the special needs beneficiary.
The trust names a successor trustee
One possibility when a trustee dies is that the trust already names a successor trustee, should a trustee die or become incapacitated. This can help eliminate any issue if the trustee is unable to fulfill their fiduciary responsibilities.
There may be no need for the successor trustee to take any action or assume any fiduciary responsibilities unless or until the original trustee is unable to serve. When they do, the subsequent trustee is ready, willing, and able to step-in and carry out the purpose of the trust.
The trust names co-trustees
It is not unusual for a special needs trust to name co-trustees, each of whom might be equally responsible for all decisions involving the trust. They may also have different responsibilities in administering the trust.
For example, the creator of an SNT might want to name both a commercial trust company and a close relative as co-trustees, making them each responsible for specific duties under the trust. The creator may authorize the trust company to handle the financial responsibilities because of their expertise.
By the same token, the creator makes their close relative responsible for making personal and medical decisions regarding the care of the beneficiary. The relative knows the beneficiary best but they may know very little about finances and the investment of funds. As co-trustees, each would be responsible for their own fiduciary duties under the trust.
Of course, if the co-trustees share complete responsibility for the trust, then when one of the co-trustees dies, the surviving co-trustee may continue to administer the trust.
The court appoints a trustee
If a trustee dies and the trust does not name a successor, then the court will appoint a successor trustee to administer the trust. The court will make sure that the successor trustee maintains the terms of the trust and that the special needs beneficiary is properly cared for.
Upon any of these circumstances, neither the trust nor the care of the beneficiary will terminate for lack of a trustee.
What Happens to a Special Needs Trust When the Beneficiary Dies?
If the special needs beneficiary dies, either the trust terminates or any residual beneficiaries may continue to benefit under the trust. Often when the beneficiary dies, the trust has remaining funds that haven’t been used for the care of the special needs beneficiary.
What happens to the remaining funds depends on whether the trust was a first-party, third-party, or pooled SNT.
First-party special needs trusts
If a special needs beneficiary dies with funds remaining in a first-party SNT, the trustee must first satisfy any Medicaid or government-funded liens. These liens may have helped to cover the cost of services and care that was provided to the special needs beneficiary, which ultimately must be dealt with before making any distributions to residual beneficiaries.
Creating a first-party SNT to provide for your own financial security and long-term care ultimately means that you have to make sure that you allocate appropriately for any needs-based government benefits or services you may receive. When you die, any funds remaining in the SNT will be used to compensate the government for the services and care it provided, such as Social Security Insurance or Medicaid. If this consumes all of the remaining funds in the trust, no residual beneficiaries will receive any funds upon the death of the special needs beneficiary.
Third-party special needs trusts
If a beneficiary of a third-party SNT dies with unused funds remaining, the trustee does not have to compensate the government for any services or care provided to the beneficiary.
Instead, the remaining funds may be distributed to any residual beneficiaries. These are usually named in the trust when the trust is originally created, in anticipation of the death of the special needs beneficiary.
Pooled special needs trusts
Most pooled SNTs require that any excess funds left in individual accounts upon the death of the beneficiary must be retained by the umbrella trust to pay for the cost of the administration of the trust.
The Disposition of Unused Funds When a Special Needs Beneficiary Dies
As a relative or loved one of someone with special needs creating an SNT to provide financial security to your loved one, you should anticipate that your loved one may pass before all of the funds in the SNT are used. In case this happens, you should name a residual beneficiary to receive those funds when the special needs beneficiary dies.
Because the funds you contributed to the SNT did not belong to the person with special needs, the government cannot include those funds as accessible for compensation for any benefits provided to the special needs beneficiary during life.