Updated January 5, 2022
Trust Distributions
The key planning point to remember is that distributions from the trust should not be paid directly to the beneficiary because this will likely jeopardize their eligibility for government benefits. With that in mind, the following guidelines may help you effectively manage distributions from SNTs.
With a first-party SNT, once the child has reached the age of majority, consider paying a stipend for the caregiving parent. Make sure to provide a caregiver agreement for the trustee. The distribution for the stipend would be taxable income paid to the caregiver. Any taxable income paid to the caregiving parent can be offset by making contributions to their own retirement plan. Speak with your financial planner, who can work with your CPA to determine whether you as the caregiver can use the distribution to fund a deductible IRA, SEP-IRA, or Roth IRA.
Planning Story: The Brown Family
Sally and Frank Brown’s son Jeffrey received a significant settlement when he was 8 years old. Due to his injuries, Jeffrey required assistance with all activities of daily living. Fortunately, Jeffrey’s school district was very accommodating. As a result, Sally and Frank decided to keep Jeffrey at home rather than have him attend a residential school. Although Sally and Frank did receive funding for nursing support, it was very difficult to find consistent help. They adjusted their lives around meeting Jeffrey’s needs. Because this required one parent to stop working, it did have some impact on their ability to save for their own future. When Jeffrey turned 18, they met with their estate planning attorney, who specialized in special needs planning. As Sally and Frank described how they provided a significant portion of Jeffrey’s care, the attorney suggested that they document the time they spent providing direct care. In addition, he told them to add up the time they spent coordinating all the professional services that Jeffrey required. Although they knew that providing for Jeffrey’s needs did require time on their part, they were shocked to see the total number of hours they spent providing for Jeffrey.
When Sally and Frank returned to meet with the lawyer, they updated their legal documents to accommodate some of the changes they wanted to make to their estate plans. In addition, they discussed their documentation of the time and supports that they provide to Jeffrey and created a plan for them to use the money in the trust to reimburse them for the time that was required of them to care for Jeffrey. They left that meeting feeling that they did not want to get paid to care for Jeffrey because their love for him was immeasurable, and it was in no way a job. In addition, they were concerned that if they took money from the trust, they could possibly jeopardize his security in the long run. They discussed the lawyer’s recommendation with their financial planner, who also very knowledgeable in special needs planning. Their advisor agreed with their lawyer on the plan, and they both emphasized that there were more than adequate resources in the trust. In addition, it was discussed that the purpose of the money in the trust is to provide for Jeffrey, regardless of who provided the services.
Upon meeting with the lawyer to sign the documents, Sally and Frank also had the attorney create a caregiver agreement in which they would receive a monthly stipend for the services they provide to Jeffrey. The payments that they received for their services would be taxable income to them. Because they were behind on funding a retirement plan for Sally, they funded a SEP-IRA with a portion of the money. In addition, they created a separate TOD account. After funding their SEP-IRA, they put their remaining money into their TOD account. The TOD beneficiary was a third-party SNT that they established for Jeffrey. That gave them the peace of mind that in the event that neither one of them needed this money, at their death it would go directly into Jeffrey’s SNT.
Sally and Frank’s story is an example of when legal, financial, and emotional factors all play a role in developing a plan for a special needs family.
Because distributions from the trust should not be paid directly to the beneficiary, make sure that all checks are paid to the service providers directly. Even money for haircuts and personal care should not be distributed to the beneficiary to use; instead, pay the bill from the trust directly. For everyday spending, consider providing a specialized credit card for the beneficiary. These prepaid cards can be used by the beneficiary or others to make purchases that the trustee allows and that are within the SSA guidelines. Make sure to use one that is approved.
Income distributions paid to the beneficiary of the SNT are likely to be taxed at a lower tax rate on their personal tax return. Have your advisors help you determine the best planning strategies to reduce the high tax rates paid by trusts..
Finally, you can make annual contributions to an ABLE account. The money in the ABLE account grows tax-free, and you can use the account funds to pay for housing expenses, utilities, rent, etc.
Charging a trustee fee
Even if the trust does not contain any specific language about fees, the trustee has a right to be paid. The trustee fee is a tax deduction for the trust and is taxable income to the trustee. The following are some factors to consider in determining an appropriate fee:
- the amount of assets in the trust
- the complexity of the investments
- the beneficiary’s needs
- the services being performed
There are two considerations used in determining a fee; the first is the number of hours worked, the second is the type of service provided. Activities such as paying bills and balancing the checkbook will be charged at one rate. More complicated tasks such as working on legal, investment, and tax matters would probably command a higher figure. This is especially important if the trustee has a financial or legal background.
Time and billing records
The trustee should keep a written record of all the time spent on trust activities. Some trustees maintain a log book in which they write down the date, time spent, and nature of each service. If any personal funds are used for the trust, the trustee should keep receipts for reimbursement from the trust assets. Reimbursements should be made promptly. Plan to keep these records at least until the beneficiaries have approved your account. Click below to view an example of a trustee log and to download a blank log.
