How Much Can You Distribute from a Special Needs Trust Each Year?
Do you know of a good resource to give SNT trustees more information/education about safe withdrawal rates? Being a trustee of a friend’s trust is a very, very difficult job, especially when the trust is only about $200,000 and the beneficiary lives in Seattle, one of the most costly areas of the country.
Any trustee must balance the current and future needs of the trust beneficiary. Often, they must also balance the needs of various beneficiaries, both current and future. Fortunately, most special needs trust provide that the trustee must only pay attention to the needs of the disabled beneficiary and not those who would take the trust property upon the current beneficiary’s death. However, the needs of a beneficiary with special needs can be complicated both because they are likely to be more dependent on the trust and because distributions might affect their continuing eligibility for public benefits.
In terms of how much you can safely spend from the trust, I usually use a 3 percent per year rule of thumb. Here’s how I come to that result: Over time, trusts can produce investment returns of approximately 7 percent per year, though it may produce less in some years, even losing money, and more in others. Assuming trust expenses in terms of trustee, legal and accounting fees are about 1 percent per year (though they can be higher for a smaller trust such as yours), that leaves 6 percent. If you disburse 3 percent, the remaining 3 percent left in the trust will allow it to grow sufficiently to keep up with inflation, assuming an average of 3 percent inflation over time.
Following this 3-percent rule, you could safely distribute $6,000 a year or $500 a month. You would adjust this each year depending on the performance of the trust investments. If, for example, the trust lost value, as many did in 2022, so that at the beginning of the year it only held $175,000, then you would only budget distributing $5,250 the following year ($175,000 x .03 = $5,250). If the trust grew in value over time to $250,000, you could then distribute $7,500 a year ($250,000 x .03 = $7,500).
The difficulty is often that immediate “one-time” needs call for greater distributions. If you make these, you and the beneficiary must recognize that this can mean smaller distributions in future years. Sometimes these greater distributions can be justified as investments. For instance, it may make sense to pay more for education so that the beneficiary can earn more in future years. Or if the beneficiary is a child, it may make sense to make payments to stabilize their home situation even though these may exceed the 3-percent rule or seem not to be directly for the child’s benefit.
Turning to the issue of public benefits, the Medicaid, Supplemental Security Income (SSI), and subsidized housing rules often mean that you cannot make distributions directly to the beneficiary. Usually, distributions made on the beneficiary’s behalf rather than to them directly do not present a problem. However, under the SSI rules, payments for housing and food are considered income and can cause a one-third reduction in their monthly SSI benefit. If they became disabled before age 26 (age 46 beginning in 2026), you can avoid this problem by making payments to an ABLE account that then in turn pays for the rent or food. Since the beneficiary can manage the ABLE account themselves, this is also a way to make distributions directly to them without running up against the eligibility rules of any of the public benefits programs, but be aware that ABLE accounts may only receive up to $17,000 (in 2023) a year.
In terms of resources, both the Academy of Special Needs Planners and the Special Needs Alliance provide extensive resources about managing special needs trusts. Here are their websites: