Vice might be nice, as the old saying goes, but can things like cigarettes, alcohol, and adult movies be paid for out of a special needs trust (SNT)?
The answer is . . . it depends. Obviously, if such activities are specifically ruled out in a third-party trust, then no cigar. If, for instance, the person who funded and established the trust stipulated in the terms that it not be used to purchase alcohol or cigarettes, then it is the trustee’s duty to enforce those prohibitions. But many trusts do not address such activities, so what’s a trustee to do when a beneficiary wants to light up, pour a drink, and settle down to an adult pay-per-view movie on the trust’s dime?
The government, for one doesn’t have a problem, at least when it comes to tobacco and adult movies. Things are slightly less clear regarding alcohol — the Social Security Administration (SSA) stipulates that SNTs cannot be used for food or shelter, because the purpose of these trusts is to provide benefits over and above what government programs offer. But the SSA doesn’t define food. Does liquor count as food? The answer, according to one source: don’t overthink it.
“[E]ven if alcohol or coffee were considered food, paying for them would be treated as SSI in-kind support and maintenance (ISM) and valued at no more than the presumed maximum value (PMV), meaning that the SSI check would only be reduced by [$300.33 per month in 2022] or the value of the purchase, whichever is less,” write Kevin Urbatsch and Michele Fuller, in their book Administering the California Special Needs Trust. “Thus, in general, if the beneficiary seeks payment for these items, it should not be a problem.”
But even if the government is OK with it, what if the trustee isn’t? Trustees are charged with administering trusts in the best interests of beneficiaries, and are given considerable discretion in this. But where to draw the line in defining “best interests”? Experts are divided over what course to take when it comes to such pastimes as drinking, smoking, and adult movies. Some warn trustees against imposing their own views and tastes on such issues, at least when it comes to beneficiaries with physical, rather than psychological, disabilities. Why should people with special needs trusts be dictated to on such matters any more than anyone else, after all? But even allowing for that, trustees still have other best interests to consider, such as their fiscal responsibility to ensure that the trust isn’t drained by these or any other pursuits.
Balancing these issues can be tricky, and trustees are advised to seek counsel The best course of action is to work with an experienced special needs planner who understands the beneficiary’s situation and who will be able to provide guidance to you, as the trustee, about trust distributions and other more beneficial alternatives that may exist.
One beneficial alternative trustees might wish to suggest is marriage. Trusts may be used to pay for dating services, movie tickets, wedding rings, wedding ceremonies and honeymoons. Just be sure they aren’t spent on dinner; as noted above, the government has decidedly unromantic views on that matter.
This information is not intended to be a substitute for specific individualized tax, legal or estate planning advice as individual situations will vary. Neither Royal Alliance Associates, Inc., nor its registered representatives or employees, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.
Securities and investment advisory services offered through Royal Alliance Associates, Inc. member FINRA/SIPC. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Royal Alliance Associates, Inc. Special needs consulting services are not offered through Royal Alliance Associates, Inc.
Content provided by the Academy of Special Needs Planners, Copyright 2022