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  • By Andrew Komarow
  • Posted August 25, 2022

What Type of Special Needs Trust Do I Need?

Disclaimer: This article focuses on the different types of third-party special needs trusts. For more information about other types of trusts, including first-party special needs trusts, pooled trusts, and the difference between directed and delegated trusts, please explore the Planning Across the Spectrum website, including our Service Expertise pages, and blog.

In the process of trying to figure out if a special needs trust is right for you or your loved one, you may be familiar with the concept of a special needs trust, as well as a general understanding that there are different kinds of trusts to consider, including a first-party, third-party, and pooled trust. But did you know that there are multiple types of third-party trusts? We at Planning Across the Spectrum are here to help! Below you will find an overview and explanation of testamentary and standalone trusts that may help you in determining what type of trust may meet your needs.

The two types of third-party trusts are testamentary and standalone trusts. Testamentary trusts are created from a Will; in other words, the trust is established after you pass away, so it does not exist prior to that event. In this process, the probate court is heavily involved; it is responsible for setting up the trust, maintaining oversight, and requires regular accounting. A standalone trust is independent of your Will, meaning it can be established during your lifetime without the need for overreliance on the probate court for oversight.

A testamentary trust almost never makes sense. From the outset of estate planning, it is less expensive to leave the instructions in the Will. But in estate planning, like everything else, you get what you pay for. Although, in theory, a testamentary trust will be created with your wishes in mind, there is a possibility that the trust will not be set up as you initially intended, and you will not be able to correct it. This is why it is incredibly important that you make sure it is done correctly. Since a testamentary trust goes through probate, you have less control over it; so, why would anyone want a testamentary trust?

There are a few reasons why a testamentary trust may be preferred by an individual. For starters, it appears to be an easier route to take. It is much easier to say “I’ll do it later” than to actually get started on a tedious project. The same theory applies in setting up a testamentary trust because you are not actually setting up the trust when you create your Will and estate plan. Instead, the trust will be established in the future by someone else on your behalf.

In addition to the ease of setting up a testamentary trust, it is also more beneficial to some in terms of financial costs. Testamentary trusts are cheaper initially because you are not fully setting up the trust at the immediate moment. However, going through probate is very expensive.

Establishing a trust in probate court alone can cost up to 3% of your final estate in attorney fees, which is a common rate charged by many attorneys. While it is inexpensive now to prepare a testamentary trust, if your loved one needs the trust in the future, it will be more expensive throughout the life of the trust. For example, if you leave $1 million, and an attorney charges 3% to handle the probate, then that is $30,000. This would greatly diminish how much money you are leaving the trust; and, since you are setting up the trust with the intent to leave assets to someone you care about, you want to leave them the largest amount possible.

Furthermore, once the probate court has opened the supplemental needs trust, they will never be as lenient as your selected trustee in what is, and is not, needed for them. Learn why you want a financial advisor to discuss corporate trustee options for special needs families.

They will keep oversite of the trust for as long as it is open. There will be mandatory reporting to the probate court where your selected trustee will have to appear before the court and report on all the transactions that occurred within the trust, at least every 3 years. Each visit requires a court filing fee. If your loved one does not need the trust, your trustee will have to fight the court to close it. This process can be frustrating and time-consuming, as your trustee’s first requests may be denied.

Additionally, testamentary trusts can be problematic if there are multiple people intending to leave the special needs beneficiary money in a trust. If anyone else leaves money to your loved one, they will need to establish another trust, which means more expenses and additional complications with trust management.

A standalone trust alleviates this burden because you can ask that other individuals name the one standalone trust in their Wills instead of creating their own testamentary trusts. This also allows for more flexibility in trust contributions from friends and family members and reduces the complexity of financial planning. For example, creating one standalone trust that grandparents, aunts, uncles, and others can contribute to at any time is far more streamlined and easier to manage than if four grandparents each created their own testamentary trust, which would result in additional reporting to the probate court, greater taxes, and overall, a greater amount of work.

This factor alone demonstrates how standalone trusts provide a lot more flexibility and control over your intentions for the future. Overall, they are less expensive, especially considering how costly probate can be. While it is more work and additional expenses upfront, it is usually worthwhile to set up a standalone trust in which you have more direct control than waiting until after you are gone to start planning for your loved one’s financial future.

If you have a special needs trust or are considering creating one, our trusted advisors at Planning Across the Spectrum are dedicated to evaluating your plans and helping to make decisions that are in your best interest.

Contact Planning Across the Spectrum for certified financial planning services for special needs individuals and families that will start you or your loved one on the right path to success!