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What Are the Legal Implications of Mismanaging a Special Needs Trust in Arizona?

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What is a Special Needs Trust?

If you have members of your family with special needs, you may have heard of using a “Special Needs Trust” to ensure their continued high-quality care. A trust, in itself, is a legal arrangement that allows designated assets to be managed and distributed according to the creator’s intentions. A “Special Needs Trust” or SNT is a trust designed to manage assets and use them to maintain the care and quality of life of a special needs person without endangering their rights to government assistance.

How is a Special Needs Trust Formed?

The process of trust formation is covered in detail under Title 14 of the Arizona Revised Statutes. To have a basic knowledge of how a special needs trust is formed requires the understanding of a few key terms:

  • Trust: A legal arrangement for the management and distribution of assets.
  • Special Needs Trust: A trust formed to provide financial assistance to a special needs person without jeopardizing their eligibility for government assistance.
  • Grantor: The creator of a trust. The grantor funds the trust with assets.
  • Trustee: The individual chosen by the grantor to manage a trust.
  • Beneficiary: The person named to receive financial assistance from the trust.
  • Compensation: Money provided to the trustee for their continued management of the trust. Unless stated otherwise and agreed to in the trust document, trustees are entitled to compensation.
  • Accounting: A detailed record of the trust’s assets and how they were used or distributed, created by the trustee, and provided to the grantor at regular intervals.
  • Irrevocable: A trust that cannot be altered or changed. If the person with special needs is the grantor as well as the beneficiary, they must set up an irrevocable SNT to maintain their eligibility for government aid.
  • Revocable: A trust that can be changed or revoked at any time by the grantor. When a family member or someone other than the disabled individual creates a special needs trust, it can be revocable or irrevocable.
  • Testamentary: A testamentary trust is formed only after the grantor passes away as a function of their last will and testament.

Once the basic terms are understood, the broad steps you need to take to form a special needs trust are relatively straightforward:

  1. Choose a beneficiary to receive assistance from the trust.
  2. Choose a trustee to manage the trust.
  3. Decide on compensation for the trustee.
  4. Finalize the trust documents with a qualified attorney.
  5. Fund the trust and allow it to fulfill its purpose.

What Can Happen if a Special Needs Trust is Mismanaged?

Mismanaging a special needs trust in Arizona can have serious legal and financial consequences. Here are some possible issues to consider.

  • Court intervention. If a trust is misused, for example, to wrongfully enrich a trustee, oversight entities may discover the situation and file a suit to demand adherence to applicable laws.
  • Tax implications. A special needs trust can provide tax advantages if operated as intended. If a special needs trust is misused, the beneficiary or grantor could face unexpected tax burdens.
  • Reduced eligibility for or loss of public assistance. If an SNT is not managed according to the law and trust regulations, the beneficiary could be at risk of losing access to Medicaid, Social Security Income, or other government assistance programs for which they are currently eligible.

Is There Anything I Can Do to Prevent Special Needs Trust Mismanagement?

If you are concerned about mismanagement of your special needs trust, there are a few things you can do to prevent this:

  • Hire a good attorney. Having a lawyer skilled in trust creation can help ensure nothing is missed.
  • Ensuring the trust language is clear. By working with an experienced trust attorney and taking care that your wishes are communicated precisely, you can help eliminate loopholes or the granting of unintended powers to a trustee.
  • Appointing someone you trust as the trustee. In Arizona, a trustee does not require any special training, so you have a wide selection of individuals from which to choose.
  • Hiring someone experienced in trust management. You also have the option of hiring a professional trustee or trust officer. Some banks and financial institutions also offer trust management services.
  • Consider adding a trust protector to your trust language. Additional language can be added to establish special safeguards for your trust.

What is a Trust Protector and How Can They Help My Special Needs Trust?

A trust protector is a neutral third-party individual or entity that is appointed by the trust document to oversee the trustee’s management of the trust. A trust protector can provide an additional layer of oversight to ensure that the grantor’s intentions are carried out in the best interests of the beneficiary. A trust protector’s powers may include the ability to do the following per Arizona Revised Statute § 14-10818:

  • Remove and appoint a trustee.
  • Modify the power of the trustee originally granted by the trust.
  • Increase, decrease, modify, or restrict the interests of any beneficiary of the trust.
  • Modify or amend the trust for any valid purpose or reason, for example, to respond to changes in the Internal Revenue Code or state law.
  • Change the applicable law governing the trust, meaning they can choose which jurisdiction a trust will be governed under to provide the best outcome for the beneficiary.

Unless specifically covered in the trust document, the trust protector may not newly grant benefits to an individual or group, and all beneficiaries must be previously named in the trust.

Ensure a Lifetime of Care with The Turner Law Firm PLLC

Establishing a special needs trust is an act of love and commitment. Whatever your concerns The Turner Law Firm PLLC will provide compassionate and skilled support in forming a comprehensive trust to fit your needs. When you are seeking peace of mind, we deliver. Call us at (480) 618-1221 today to schedule a personal consultation.

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