Following the introduction to special needs trusts in the first part of this article which was featured last Sunday, I will now review the two main types of trusts that parents of a disabled child may consider setting up - the lifetime family special needs trust and the pooled special needs trust.

Lifetime family special needs trust

The most commonly used special needs trust is a family-type trust, which parents set up for the benefit of their special needs child. The parents provide the money for the trust often throughout their lifetime, and by means of their will upon their death, and sometimes also by purchasing life insurance payable to the trust.

The sole function of the lifetime (intervivos) family special needs trust is to look after the future of the person with the disability. With this type of trust, there is no need to wait for the parents to die. The trust becomes effective immediately, while the parents are still alive. Besides, the parents need not wait until their son or daughter is 18 years old to establish this type of trust; they can establish it now.

The advantages of establishing this lifetime trust is that families can place funds into the trust every month and use these funds to cover the normal expenses of the person with the disability, as well as to save for the future.

This is a good idea for families that have aunts, uncles, and grandparents who might want to leave money for the trust. Anyone can give money to the trust, either during their lifetime by means of cheque payments, or after their death through bequests in their will.

Besides, if the parents of the disabled child should suddenly pass away or have to go into a nursing home due to ill-health, the trust, which is a private arrangement, continues to function without any interruption whatsoever. Thus, assistance to the person with the disability would continue without interruptions.

This type of trust has two very unique features: firstly it is separate from the family's main estate and wealth (thus, ring-fenced from the family's creditors and the creditors of the person with the disability) and secondly the trust is managed by an independent trustee. Therefore, such a trust definitely creates a much more secure scenario for the person with the disability.

Pooled special needs trust

In lieu of establishing an individual family trust for a disabled son or daughter, families may consider to "pool" resources with other families in one special needs trust.

The organisation appointed as the fiduciary of this trust would manage and invest the trust assets as a single fund (thereby increasing the amount of principal for investments) for the benefit of all the designated beneficiaries (members) under the trust. The beneficiaries of the pooled trust would receive earnings based on their share of the principal.

This type of trust is definitely more attractive to families with smaller estates and it could provide a more economical way to have funds administered collectively.

Besides, the costs of managing and administering the trust would be shared among all the participants. Although the funds are pooled, each beneficiary still has his or her own sub-account based on what was placed in trust, and the trustee will maintain separate records for each sub-account.

The trustee for this type of pooled trust would usually be a bank (or financial institution) and a non-profit organisation acting together, and the parents may also designate a family member as an advisor to provide continuing personal involvement.

The trustee will be the primary decision maker (particularly with regard to the investment decisions), but will look to the designated family member for direction on how to administer the trust, including the needs of the beneficiary and when and how disbursements should be made to such beneficiary.

Any money left in the trust after the beneficiary dies may either stay in the trust to benefit the other members of the trust or may be paid to surviving family members (such as siblings) or direct heirs.

Another option would be to leave a fixed sum to benefit the other members in the trust with the remaining balance going to the family.

To be concluded

Dr Chetcuti Ganado is legal advisor at Bank of Valletta plc's Trustee Services Unit. BoV is licensed to provide trustee services by the Malta Financial Services Authority.