Terminating a Special Needs Trust
There are several circumstances where it is appropriate to terminate a third party Special Needs Trust. A third party trust is a trust that is comprised of assets that were either gifted or bequeathed from someone other than the trust beneficiary. Most commonly, a termination will occur at the beneficiary’s death. In this situation, the Special Needs Trust most likely directs where the remaining assets will be distributed. This could be other siblings or family members or charities.
Another reason why a Special Needs Trust will terminate is because the Trust is out of funds. This might happen if the Special Needs Trust was not adequately funded in the first place, if the beneficiary’s financial needs were greater than anticipated, or if the beneficiary outlived his or her life expectancy. Even if the Special Needs Trust still has some small amount of assets, the Trustee may decide that the costs of administering the Trust exceed the remaining assets and therefore, it does not make financial sense to continue to maintain the Special Needs Trust.
A third reason for terminating a Special Needs Trust is if the beneficiary is either no longer eligible for government benefits and will likely never be eligible for benefits or if a beneficiary no longer needs government benefits. In this type of circumstance, after all taxes and other expenses are paid, a properly drafted Special Needs Trust would direct the Trustee to either continue to hold the funds for the benefit of the beneficiary in a non-Special Needs Trust (that could be used for any reason for the benefit of the beneficiary) or it would direct the Trustee to distribute the assets directly to the beneficiary, outright.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.