Choosing a Trustee for Your Child’s Special Needs Trust
by Diana Armatage Johnston
As seen in Exceptional Parent Magazine: The Family and Professional Journal for the Specials Needs Alliance
Vol 38, Issue 04, April 2008
When parents and their legal counsel have determined that a special needs trust is the best way to preserve means-tested government benefits like Supplemental Security Income (SSI) and Medicaid for their child, they still have some important matters to decide: Who should administer the trust as trustee? Who should monitor the trustee’s performance? Who should advise the trustee about their child’s special needs? There is no single right answer to these questions because the best choices depend on a wide variety of factors and the realities of each family’s situation. This article will attempt to help parents make the best choices for their child. Because a special needs trust must be carefully drafted and administered with great skill, one person or institution rarely has all the skills needed to do the job. Choosing a team to administer a special needs trust may often be the best approach.
There Are a Variety of Special Needs Trust Jobs that Need Filling.
Trustee. Who should be trustee with complete discretion to make distributions that do not jeopardize means-tested government benefits, while improving the beneficiary’s quality of life? Should the trustee be a financial institution like a bank or trust company, an attorney or accountant, a parent, sibling or other individual, or a non-profit pooled trust? Should there be co-trustees? If individuals are named, who will serve as successor or substitute trustee if the original trustee is unable to serve?
Trust Protector. Special needs trusts sometimes name a “trust protector” to monitor the chosen trustee’s performance, appoint a new trustee if necessary, and have the authority to ask a court to modify the trust to comply with changes in the law. If a trust protector will be used, who should be named? Should it be the attorney, the family accountant, a parent or sibling of the beneficiary? If that person can no longer act, who should serve as successor trust protector?
Trust Advisor or Advisory Committee. Special needs trusts may also name a “trust advisor” or an “advisory committee” to advise the trustee about the disabled beneficiary’s special needs. This position could be filled by the beneficiary’s parents, other family members, longtime caregivers, the manager of a group home where the beneficiary resides, a member of the local ARC or NAMI chapter, a case manager, or the beneficiary’s guardian. Who should serve fifty years down the line when the child is a senior citizen? There are many factors to consider.
Factors to Weigh When Making Choices.
1. The Beneficiary’s Age, Circumstances, and Prognosis. This is information that parents know best. What is the nature of the child’s disability? What is the child’s current living arrangement and what may be the child’s future living plans? Does the child have the mental capacity to monitor trust accountings in the long run or must others be assigned to that role? What is the child’s estimated life expectancy? What government benefits is the child currently receiving? What benefits might the child be eligible for in the future and what is the relative importance of those programs to the child’s well being? These factors can influence the choice of trustee, trust protector, or trust advisor.
For example, if a child requires 24/7 care and lives at home, the care-giver parents may simply not have the time or energy to effectively serve as lead trustee. The parents could also have a conflict of interest regarding trust distributions — for instance, it can sometimes be difficult to distinguish between those home improvements and services that are solely for the benefit of the disabled beneficiary and those that also benefit the parents or the disabled child’s siblings. By contrast, if an adult child with a disability is firmly situated in a group home and the parent’s main role is supervisory, the parent may well be the best person to serve as initial trustee, perhaps with younger family members as successor trustees, so long as all individual trustees are clearly authorized to pay for any needed professional assistance regarding trust taxes, government benefits, or investment matters.
2. The Amount, Source and Timing of Funding for the Special Needs Trust. The investment expertise needed to handle a $5 million personal injury settlement is clearly different from the expertise needed to handle a $50,000 inheritance from a child’s grandmother. In the first case, a professional trustee may be advisable with the parent serving as co-trustee or advisory committee member or trust protector. In the second case, a parent or other family member who will not charge a commission could be a better choice of trustee. For such smaller trusts, a professional trustee may not even be an option because they often will not agree to serve as trustee of trusts below a certain amount.
Trusts funded at a parent’s death by bequests in a will, life insurance proceeds, or other death benefits raise more difficult trustee team issues because the parent is not available to serve in any capacity. It is in these circumstances that the existence of a detailed care plan prepared by parents is extremely important to assist the family members or professionals the parents have chosen to look after their child’s special needs.
3. The Skills, Availability and Possible Conflicts of Interest of Trustee Candidates. A special needs trust must be a discretionary, spendthrift trust where the beneficiary has no control whatever over distributions. (See sidebar.) For this reason, the trustee must have absolutely no conflict regarding serving the beneficiary’s interests above all others. The parents often think that they or other family members are best suited to serve as trustee because they love the disabled beneficiary and best understand his or her needs, especially when the family trustee is authorized to seek professional assistance with tax, investment and government benefits issues. A serious problem arises, however, when the parents also want to name the same family member as the residuary beneficiary of the special needs trust to receive any funds left at the beneficiary’s death. This is an obvious conflict of interest because it creates a situation where the trustee will benefit personally from minimizing what is paid out of the trust. If leaving the remainder of the trust to family members is important, parents should consider an independent trustee, perhaps with family members in advisory roles. However, if it is more important for a family member to serve as trustee, the parents might consider naming a charity as the residuary beneficiary.
4. The Availability and Cost of Backup Support for Trustees. Professional trustees like banks, or perhaps the family CPA or regular estate planning attorney, may know how to invest trust funds and do the trust taxes, but may not know much about government benefits rules or the particular needs of a beneficiary over time. These professionals will often need advice from other experts — special needs attorneys, care managers, family care-givers — and the trust instrument should authorize paying for that advice. Similarly, the family member who is closely attuned to the beneficiary’s needs, and who may be an excellent advocate for the beneficiary regarding government benefit programs, is probably not an investment or tax expert. However, the backup help needed to support family member trustees is becoming more widely available as some brokerage firms and trust companies are responding to families’ needs for financial and other support services for special needs trusts.
In other words, help is available, but that help may cost money. Parents should attempt a careful analysis of expected investment advice charges, money management charges, tax preparation charges and attorney fees when considering naming a family member as trustee of a special needs trust. They should compare these charges to the commissions and extra charges that a bank or trust company might charge to serve as trustee, as well as the usually lower commissions charged by non-profit pooled trusts.
Conclusion. Like a Savile Row suit, good special needs planning is tailored to the individual needs and resources of the beneficiary and the realities of his or her family circumstances. Working with a legal advisor to choose a trust team requires a frank and thorough interchange of information and experience. Beware of advisors who present a plan and a trustee choice (often themselves) without this thorough exchange of information and options. There is no one-size-fits-all special needs planning and no one right choice of trustee in all circumstances.
SIDEBAR: A Trustee’s Job Is Complex
A trustee holds legal title to trust assets in a fiduciary capacity for the sole benefit of the beneficiary. Traditionally, a trustee’s job was to invest trust assets wisely, to handle tax matters, to keep good accounts, to avoid co-mingling personal assets with trust assets, to avoid conflicts of interest, to act impartially and loyally towards beneficiaries, and to follow the distribution standards set out in the trust. For example, a simple trust might direct the trustee to distribute all income to the grantor’s spouse and at the spouse’s death distribute the principal to the grantor’s children. A traditional trust might also have a spendthrift provision to protect trust assets from a beneficiary’s creditors.
A trustee of a special needs trust has all the traditional trustee duties plus a primary duty to supplement, not supplant, means-tested government benefits. Instead of clear instructions about distributions, the special needs trustee has complete discretion to make — or not make — distributions for the beneficiary’s special needs.
Basically, a beneficiary of a special needs trust can have no control whatsoever over trust distributions. Special needs trusts are drafted this way so that the assets will be considered “unavailable”for means-tested government benefit programs. If a beneficiary could demand distributions, SSI or Medicaid could declare the beneficiary ineligible because of excess “available resources.”“If you can get it, they can count it”is the classic rule. Whether serving as trustee of a self-settled special needs trust funded with the beneficiary’s own funds or as trustee of a third-party special needs trust funded by others, a special needs trusteemust have a thorough knowledge of the means-tested benefits the beneficiary receives in order to supplement those benefits, not jeopardize them.