Sometimes things don’t work out the way you expect. Maybe you’re the trustee of a special needs trust, and you’re wondering: can I terminate the trust?
Our answer: a clear “maybe.” But we also want to ask our own question: even if you can terminate the trust, should you?
Some qualifications about our suggestions
Before we dive into the “can I terminate the trust” question, let’s lay out some basics. First, as always, we are writing about Arizona law. The law, and the state Medicaid rules, might be different in other states. So talk to a local lawyer.
Even if you are in Arizona, your facts might be different. Even small differences can make the answers wildly different. So talk to a local lawyer.
If you’re not the trustee but the beneficiary, or a remainder beneficiary, or the person who set up the trust — in each of those cases, you’re in a little different position than the trustee. We’re writing here to trustees, so maybe what we suggest won’t apply to you. And if a trustee can terminate the trust, but chooses not to, there might not be anything you can do about that. Though there might be something to be done. So consult a local lawyer.
And, finally, we’re mostly talking about third-party special needs trusts. Termination of self-settled special needs trusts raises different issues.
Is it possible to terminate the trust?
Assuming you are trustee of a third-party special needs trust, there might be several ways to terminate the trust:
- Look at the language of the trust. It might give you specific authority to terminate.
- Has the trust grown too small to make sense any longer? Arizona (like a number of other states) generally permits a trustee to terminate if it has grown too small to be worth managing. Such a trust is often called an uneconomic trust.
- Arizona law gives trustees a number of other options, as well. Perhaps the trust can be modified to no longer have “special needs” provisions. Maybe the original settlor of the trust (the person who signed the trust document and put in their own funds) is still available to ask for direction — though they may not have the authority to actually bless the termination of the trust.
- What makes the trust a “special needs trust,” anyway? Is it just because that phrase is in the trust document? Or because the beneficiary has a disability? Maybe it’s possible to simply ignore the special needs categorization and manage the trust for the benefit of the beneficiary without regard to their status.
- Can the trustee move money from the trust to an ABLE Act account? That might give the beneficiary more autonomy and reduce expenses — though it might take two or more years to accomplish the transfer.
And, of course, there are other choices about how to terminate the trust, depending on the individual facts in each case.
What happens if I do terminate the trust?
That’s a key question. Does it mean that the assets go to other family members? Or that they just get handed to the original beneficiary (disabled or not)?
This depends on the language of the trust, and the circumstances. But it most often would mean that the (disabled?) beneficiary receives the trust assets. And if they are receiving means-tested public benefits (like Supplemental Security Income, or Medicaid), they might lose those benefits. But if they are able to manage the funds, and the only benefits they get are Medicare and Social Security Disability coverage, maybe it makes more sense to terminate the trust.
Dare we suggest: consult a local lawyer?
Mostly, I’m just tired of dealing with the beneficiary
Or maybe the paperwork. Or the taxes. Maybe the rest of the family has you down.
Possibly you can step away without having to terminate the trust. Who is named as next trustee? Is there another choice everyone (you, successor trustees, even the beneficiary) could agree to name as trustee? Maybe it isn’t necessary to actually terminate the trust. Consult a local lawyer.
But if I can do this, should I?
It depends. Every trust and every beneficiary will be different. But we wouldn’t tell you to dismiss the idea out of hand.
If you can (and do) terminate the trust, will the beneficiary’s life be better? Are there other, simpler choices (like funding an ABLE Act account)? Can you simply rethink the way you manage the trust, or make distributions? Does it make sense to simply turn the whole project over to a professional trustee? If you are no longer trustee, will your relationship with the beneficiary return to its pre-trust status?
One choice might be to pose the question to a judge. That might give you the benefit of some legal wisdom AND the ability to insulate yourself from liability for making imprudent choices under your own, unreviewed, steam. Of course, this might be expensive — but it might be worth getting that professional review and protection. Consult a local lawyer.
Okay — how is this all different if the trust is a self-settled trust?
Arizona, like most (maybe all) states, treats termination of a special needs trust as if the beneficiary had died. In other words, if you terminate a self-settled special needs trust, you might need to send a hefty check to AHCCCS, the state Medicaid agency.
That payback requirement applies even if the beneficiary no longer receives any Medicaid benefits. It covers any benefits they’ve received from Medicaid in their entire life — not just since the special needs trust was established. And remember this point specific to Arizona: even if AHCCCS never paid for a single aspirin, the payback covers the AHCCCS premium payments made on the beneficiary’s behalf.
Does all this sound complicated? You might want to consult a local lawyer. Hate lawyers, and don’t want to spend the money on their advice? If you’re the trustee, you have an obligation to get solid, reliable advice. So consult a local lawyer.
