By their very nature, special needs trusts are usually designed to terminate, or at least radically change, when the trust’s primary beneficiary dies. But terminating a special needs trust is not as simple as merely writing a check to the remainder beneficiaries and calling it a day; winding down a trust can take a lot of work.
Last month we discussed some initial things that every trustee of a special needs trust should do upon learning that the primary beneficiary has passed away. Now, we’ll explore additional steps to consider when closing out the trust.
Don’t Forget About Taxes and Final Accounts
The time following the beneficiary’s death can be overwhelming, especially when the beneficiary is the trustee’s close friend or family member.
In many cases, a trustee will be responsible for taking care of a beneficiary’s funeral, helping the beneficiary’s family put affairs in order, or simply dealing with her own grief, and she may not be thinking ahead to the next year’s tax season.
However, it is vitally important that a trustee not forget to file the trust’s final tax return and other related tax documents. Sometimes the trust will owe taxes, and the trustee must marshal the funds to pay the government, typically before paying the trust’s remainder beneficiaries.
If the trust is supervised by a court, the trustee will have to prepare a final account for the court’s approval, which can be even more onerous if the trustee has not kept up-to-date records. In all of these cases, it is best to enlist the help of a qualified accountant and an attorney as soon as possible after the beneficiary’s death so that the trustee can begin to assemble the required records.
Determine Remainder Beneficiaries and Assess Their Needs
Most third-party special needs trusts do not contain Medicaid payback provisions, which means that there will probably be trust assets left to distribute to the remainder beneficiaries when the primary beneficiary is gone.
In some cases, first-party and pooled trusts will also have funds left after the state has been reimbursed, and when this happens, those funds will also pass to the remainder beneficiaries. A trustee needs to determine who the remainder beneficiaries are and whether they have any individual needs that should be addressed.
Although many trusts specifically name the remainder beneficiaries (i.e., “25 percent of the trust shall go to Jane, 75 percent shall go to Mary), in other cases the trust names only a class of beneficiaries (“the Donor’s grandchildren will share the remainder of the trust funds equally”). It is up to the trustee to determine the identities of any unnamed remainder beneficiaries, contact all of the beneficiaries, and make arrangements to distribute the trust funds to them.
If any of the remainder beneficiaries are young or have special needs of their own, then the trust may allow the trustee to retain the trust funds for the benefit of those particular beneficiaries under terms that may be quite similar to those found in the original trust.
Once the trustee has taken care of taxes, final expenses, state Medicaid reimbursement and a final accounting, they will be able to consolidate and close down the trust’s accounts and distribute the funds to the remainder beneficiaries. This process can take a long time, especially if the trust owns non-liquid assets like real property that must be sold off prior to a final distribution.
When this happens, the trustee will sometimes have to deal with demanding beneficiaries who cannot understand why they can’t get “their” money immediately. Trustees in this situation often refer the difficult beneficiaries to an attorney, who can handle the demands without straining relations between the beneficiaries and the trustee.
The pointers described here are literally the tip of the iceberg when it comes to closing down a special needs trust. Since every trust is different, it pays to talk with a qualified attorney before attempting to terminate a supplement needs trust on your own.