What Are the Disadvantages of a Pooled Trust?

A pooled trust functions as a financial arrangement for individuals with disabilities, allowing them to safeguard assets while maintaining eligibility for public benefits such as Medicaid and Supplemental Security Income (SSI). These trusts are managed by non-profit organizations, which pool the assets of many beneficiaries for investment purposes while maintaining separate sub-accounts for each individual. While pooled trusts offer certain advantages, they also come with specific disadvantages that potential beneficiaries and their families should understand.

Limited Control Over Assets

One significant disadvantage of a pooled trust is the limited control beneficiaries or their families have over the assets. The non-profit organization acting as the trustee assumes full management of the funds, including investment decisions and the approval of disbursements. The trustee’s discretion extends to the process of requesting distributions. Beneficiaries must submit requests for funds, often accompanied by documentation, which the trustee then reviews to ensure they align with the trust’s terms and federal regulations. Funds cannot be paid directly to the beneficiary, as this could jeopardize their eligibility for government benefits. This process can lead to a loss of autonomy and direct financial management, as the ability to access funds rests entirely with the trustee.

Ongoing Administrative Costs

Pooled trusts, despite often being more cost-effective than individual special needs trusts, still incur various administrative costs that can reduce the trust’s principal over time. These expenses typically begin with an initial enrollment or setup fee, which can range from approximately $250 to over $1,000. Some trusts may also charge legal fees for preparing necessary documents. Beyond the initial fees, beneficiaries face ongoing annual administrative fees, commonly calculated as a percentage of the assets under management. These annual fees can range from about 0.5% to 3% of the trust’s value. Additionally, separate investment management fees, typically around 0.6% to 0.67% of assets under management, are often charged by the financial institution handling the investments. Other costs include tax preparation fees, which can vary from $30 to over $350 annually, and fees for specific services or account termination.

Restrictions on Disbursements

A notable limitation of pooled trusts involves the strict restrictions placed on how funds can be disbursed. Distributions are generally limited to “supplemental needs” that are not covered by government benefits like Medicaid or SSI. This means the trust cannot pay for basic living expenses such as food, shelter, or medical care that these government programs are designed to provide. Approved expenditures typically include items that enhance the beneficiary’s quality of life, such as certain therapies, entertainment, specialized equipment, transportation, or educational expenses. However, the trustee exercises discretion in approving requests, ensuring compliance with federal guidelines. For instance, while travel expenses for the beneficiary and a necessary assistant might be approved, a family reunion would likely not be covered. This can lead to frustration or delays if a beneficiary’s expectations for spending do not align with the trust’s specific rules or the trustee’s interpretation.

Medicaid Recoupment Provisions

A significant disadvantage, particularly for first-party funded pooled trusts, involves the Medicaid recoupment provisions. When a pooled trust is established with the beneficiary’s own assets, such as funds from a personal injury settlement or inheritance, federal law mandates a payback requirement. Upon the death of the beneficiary, any remaining funds in their individual sub-account may be subject to a claim by the state Medicaid agency. This “payback” provision allows the state to recover the costs of Medicaid benefits paid on behalf of the beneficiary during their lifetime. Medicaid’s claim typically has first priority over other potential creditors or heirs. This means that funds remaining in the trust after the beneficiary’s death may not be passed on to family members or other designated beneficiaries, which can be a significant concern for families engaged in estate planning.