Pooled special-needs trusts have been touted as one of the best options for disabled beneficiaries to receive professional trustee services and fund management of settlements, inheritances and more. However, a recent class-action lawsuit uncovered a lack of regulation, protection and oversight on these types of vehicles.
In February of this year the Center for Special Needs Trust Administration (a nonprofit that administers special needs trusts and pooled trusts for individuals with special needs) filed for Chapter 11 bankruptcy. This recent filing came almost two years after the nonprofit discovered that its founder, Leo Govoni, allegedly took $105 million of assets held for beneficiaries in a pooled special needs trust. A class action lawsuit filed in the United States District Court Middle District of Florida details the happenings.
The lawsuit goes on to mention that more than 1,500 of the trusts that were part of the pool are now missing some or all of their assets. According to the lawsuit, Govoni took the funds over a period of 11 years, from 2009 to 2020, through a series of unauthorized loans to companies he owned or managed.
This theft of funds from the pooled trust raises many questions that advisors, attorneys, special needs families and disabled beneficiaries must consider. In brief:
- How did something like this happen, and why did it take so long to be discovered?
- What protections are needed to prevent something like this from happening again?
- Are pooled trusts the best vehicle for those receiving financial settlements for events that resulted in disability?
- What other options are available?
- How should advisors guide their clients about how to manage their money when a special- needs trust is needed, and no trustee is immediately available?
What Pooled Trusts Offer
Pooled special-needs trusts are managed by nonprofit organizations. The purpose of such trusts is to allow beneficiaries to maintain government benefits while still having additional resources to live on. A pooled trust can hold the funds of hundreds, if not thousands, of people in separate subaccounts (There is no regulation or limit to the number of accounts a pooled trust can manage.) According to the Special Needs Alliance, combining the resources of many beneficiaries can optimized investments be more cost-effective from an administrative standpoint.
Pooled trusts have been commonly used by attorneys and judges in settlement agreements. These trusts also enable disabled individuals to create first-party special-needs trust without having to go through the courts, a parent or a grandparent. According to the Special Needs Alliance, access to professional trustees is one of the most common reasons to use a pooled special-needs trust.
… and What They Often Lack
Yet, pooled special-needs trusts need more protections than the law currently provides. First and foremost, legislation must be passed that requires all pooled special-needs trusts to carry fiduciary insurance and directors-and-officers insurance that provides coverage in cases of fraud and theft. This should provide some peace of mind to families and disabled beneficiaries.
Additionally, better custody and reporting rules are needed to provide a clear way to monitor pooled trusts. Ideally, this would be similar to rules that states currently have in place that spell out reporting requirements for guardians overseeing money inherited by minor children. (In Virginia, for example, guardians must file annual reports to their local commissioner of accounts.)
Additional Reading: Tax Planning for Special-Needs Families
There is currently no clear reporting responsibility for pooled trusts because beneficiaries do not have direct access to the funds. This lack of guidance can blur the lines and result in situations where beneficiaries and their families are not consistently aware of or do not have access to the balances in their accounts. Oversight and reporting requirements for these accounts should be handled by a third-party entity with no direct ties to the nonprofit managing the pooled trust nor any of the nonprofit’s founders. The nonprofit also needs to have clear conflict-of-interest policies and methods of enforcement.
Finally, guidance and regulations must be put in place on a federal level to define what the requirements are for professional trustee services, how distribution decisions are made and the timeline for making distributions. (Typically, a volunteer board of directors at the nonprofits that run the pooled trusts makes the distribution decisions for these trusts.) Government oversight is also needed to ensure that pooled special-needs trusts follow these processes.
Other Limitations
Without these protections in place, a pooled special-needs trust may not be the best vehicle for your clients who are doing financial planning and getting their estate plans in order for their loved ones with special needs. Similarly, they might not be the best vehicle for individuals with disabilities who receive funds through a settlement or inheritance.
Even when these protections are in place, pooled trusts may restrict requests for distributions to certain times of the year, month, or quarter. Further, the distribution-request process can be onerous and difficult for beneficiaries and their advocates who are not always clear on what that process is and how to manage the request. For beneficiaries who do not have an advocate, or rely on a public benefits case manager, making the request may be difficult, or put to the wayside on the plate of an already overworked and overwhelmed case manager.
Pooled trusts may also be a poor choice for a special-needs beneficiary because they may limit what the funds can be used for, even if the distribution does not interfere with eligibility for government benefits (eg., Medicaid, Medicare waivers and Supplemental Security Income). Another concern: Nonprofits managing pooled trust often require unused funds to go to the trust at the beneficiary’s death rather than to a remainder beneficiary.
Explore All Opportunities
I strongly suggest that you also look at other vehicles and/or methods for establishing legal protections so a special-needs beneficiary can maintain eligibility for government benefits. Here are a few options. Feasibility will vary based on the circumstances of a family and the individual with special needs.
ABLE accounts
These accounts may be a good option for smaller amounts (up to $18,000 can be input at one time). They give individuals the ability to control their own funds over the $2,000 resource limit without interfering with government benefits. No legal authorization is required to establish such an account and the fees to create and manage them are typically lower than those that require creation by an attorney and/or management by a professional trustee. The federal Achieving a Better Life Experience Act allows states to enact ABLE programs. While maximum ABLE limits vary state to state, it is important to know that balances above $100,000 will remove eligibility for supplemental security income.
First-party or third-party special needs trust
A first-party trust is funded by the beneficiary’s own assets (such as funds received in a settlement). It can be established by a parent, grandparent and/or the court. A third-party trust is funded with assets from a parent or other individual.
According to a guide from the Association of Special Needs Planners, family members willing to serve as trustee but nervous about the responsibility need not act alone or without support. They can have provisions written into the trust that allow them to seek professional guidance, establish a trust protector and trust advisory committee, hire professionals to protect public-benefits eligibility, establish a care manager and advocate, and much more.
A family can put instructions in a trust to establish parameters on how often distribution requests can be made and how they are requested. A trustee has a fiduciary responsibility, and a trust protector can help ensure that fiduciary responsibility is followed.
Corporate trustees are another option with first-party and third-party trusts. Many corporate-trust companies have well established guidelines and experience in managing special-needs trusts. They may also be subject to federal and state oversight, depending on how they were established. And many now offer lower balance requirements than what’s been available in the past. Some corporate trustees even allow the family to choose their financial advisor rather than requiring the money to be managed by them.
Cumberland Trust and Hope Trust are two examples of trust companies that act as direct trustees. Direct-trustee arrangements can allow you as the financial advisor to have a multigenerational role helping and guiding the family. This enables you to ensure the future investment needs are met for their special needs beneficiary and other family members.
No Stone Unturned
There are many ways to provide a disabled beneficiary with funds to support their lifestyle while protecting their eligibility for government benefits. As a financial advisor, make sure that you are asking additional questions and looking for protections with all options you and your clients explore.
If you and your clients decide that a pooled trust is the best option for their loved one with special needs, help the client do due diligence of the pooled trusts available. The National Pooled Trusts Standard Committee published guidelines on September 27, 2023, that offer best practices for pooled trusts. While I believe all pooled trusts should strive to follow the guidelines they provide, here are a few that I believe are most important.
- Custody is handled by an organization outside the pooled trust and reviewed by that entity’s board of directors. Custody should never be the responsibility of an entity with ownership in the pooled trust or that entity’s founder or board of directors. The custodian should be widely known, and custodial fees in-line with the market for custody of accounts. Account balances should be calculated daily and available at any time.
- Balances are reported and monitored, with balances and positions available to be monitored at-will.
- A professional serving as a trustee (whether a pooled trust, a trust company, a professional fiduciary, or attorney) has fiduciary insurance and directors-and-officers coverage that covers theft.
- When an individual serves as the trustee, protections are in place requiring them to report balances, investment performance and distribution requests versus those approved.
Pooled trusts should also have established investment policy statements and guidelines indicating how funds must be managed and invested. The trusts should also hire third-party companies to provide annual audits. The fees of a pooled trust should also be in line with what other pooled trust companies charge.
Final Thoughts
Not all pooled trusts are bad. For example, the Developmental Disabilities Endowment Trust Fund was created by the Washington State legislature and managed by the ARC of Washington. For a time, beneficiaries received matching funds to their contributions. The trust’s current annual management fees max out at $750 (plus any applicable administrative costs). However, only Washington state residents may participate.
Finding the right pooled trust option, especially since there is often little oversight or transparency, makes the process more onerous and abuse more difficult to ascertain.
As a financial advisor, you can help families understand the protections they should be looking for. Make sure you have a relationship with an elder law attorney. If you don’t already, look for members of the Special Needs Alliance and/or the Association of Special Needs Planners. And let’s advocate for regulatory action to protect disabled beneficiaries from falling victim to situations like the one discussed at the start of this article.
Kristin Carleton, CEO of All Needs Planning, provides special needs planning by addressing the funding supports, legal strategies and clinical supports necessary for every member of the family. Her son Eli was born with a congenital brain disorder, which ignited her passion for planning for her son and daughter. Kristin’s life mission is to provide special needs planning to all who need and want it. She can be reached at 919-433-7713 or kristin@allneedsplanning.com. All Needs Planning offers investment advisor services through Sound Income Strategies, LLC, an SEC-registered investment advisor; the firms are not associated entities.
