Selecting a trustee to administer your child’s special needs trust is one of the most consequential, and difficult, choices a parent can face. Many parents hope to designate themselves as trustee, a natural choice when your own child’s welfare is the goal. Many courts, however, discourage this route for fear of conflicts of interest. Moreover, very few people possess the mix of fiscal responsibility, attention to detail and legal knowledge required to manage a child’s trust properly.
Trustworthy Family Members
You might know someone who already fits the bill. In principle, anyone who can be deemed “legally competent,” over the age of 18 and is able to manage his or her own affairs, can be named as a trustee. A trusted loved one, equipped with a certain measure of intelligence and the capability required to familiarize themselves with the ins-and-outs of government benefit programs, may be an adequate choice.
In the absence of a well-suited family member, many parents turn to independent trustees, people or firms that manage trusts for-hire. A great number of attorneys, accountants, investment companies and banks offer this service, although some only accept trusts with considerable assets (small sums of money may be appropriate for a pooled trust).
The benefits of hiring a professional, expertise and autonomy, should be fairly obvious. Further, independent trust management entities are regulated, required by law to comply with statute and ensure that the beneficiary’s interests are kept at the forefront of every decision.
Thus far, we’ve stressed the “independence” of trust managers. That’s because trust companies associated with large financial institutions are rarely the best choice for families. Not only do big banks charge high trustee fees and operate at unfavorable expense ratios, most national firms are ill-equipped to act with the flexibility needed in the complex and ever-changing world of special needs trusts. To serve your child’s best interests, you’ll need to find a trustee who possesses both financial expertise and the time to communicate often.
Of course, the idea of turning over a lot of money (and your child’s well-being) to a stranger can come with a lot of apprehension. There are several strategies, though, that may allow families to split the difference.
Trusts can have multiple co-trustees. One option is to appoint both an independent trustee and a trusted family member to administer the trust together, combining the expert’s experience and technical know-how with your loved one’s knowledge of and concern for your child’s unique needs.
A second idea is to appoint a family member (or yourself), not as trustee, but as a trust “protector,” someone designated to watch over the trust in the long-term. Trust protectors can be granted a number of special powers, per the trust document, from mediating conflicts between trustees and the beneficiary to removing an unsatisfactory trustee and replacing them with someone else.
The Basic Structure Of A Trust: Roles & Responsibilities
At bottom, trusts are simply legal arrangements, embodied in documents, that define new obligations and privileges for three parties:
- Grantor – the person who establishes the trust
- Trustee – the person who manages the trust’s assets
- Beneficiary – the person who receives benefits from the trust
A grantor creates the trust, supplies the fund with assets, and designates a trustee to manage the resources. The trustee accepts this responsibility, as the “title” (legal ownership) for the assets is transferred into the name of the trust. Then, the trustee manages the finances, selecting investment vehicles in line with the purpose and goals of the trust’s founding document.
Importantly, the trustee does not “own” the money in the trust. Nor does the trust’s beneficiary, even though the assets themselves may originally belong to this person. The trust owns the assets – and this legal distinction grants trusts most of their benefits.
The Duties Of A Trustee
Special needs trusts have the distinct advantage of allowing people with disabilities to enjoy goods and services purchased using the trust’s assets while remaining eligible for means-tested government benefits. In essence, the assets in a special needs trust are meant to “supplement” benefit programs, funding things like the purchase of a new home or clothing, that Medicaid and Supplemental Security Income don’t usually cover.
As a result, special needs trusts add an extra layer of complexity to the legal and financial considerations that structure every trust. Every trustee will have to stay abreast of state law and, just as important, the (extraordinarily complicated) eligibility requirements of Medicaid and Supplemental Security Income. Improper spending can threaten a beneficiary’s eligibility for government benefits, effectively undermining the entire purpose of a special needs trust.
Any trustee should have a comprehensive understanding of both federal- and state-administered benefit programs, along with the acumen necessary to evade their potential pitfalls.
More fundamentally, trustees can only use a trust’s assets to benefit the beneficiary (and owe the beneficiary a “duty of loyalty”). This is a requirement, one called a fiduciary duty in the legal context. Trustees who violate their fiduciary duties, either intentionally or through gross carelessness (negligence), can be held liable for any harm that their misconduct causes. In practice, few trustees willfully abuse their privileges.
A trustee’s job is largely one of financial management: using assets to improve the beneficiary’s life, while promoting the longevity of the trust’s assets. How can we spend the money well, responding adequately to the beneficiary’s needs, but also make the money last? An alternative option is to hire a dedicated money manager to invest the fund’s assets, rather than leaving this duty to the trustee. While this isn’t a requirement, it can be a great idea to have an investment professional experienced with special needs trusts handling the financial decisions.
The activities of a special needs trust, of course, have to be documented and reported. Beneficiaries must receive (at least) annual accounting reports, the form of which may be mandated if the trust is under court supervision. Ideally, a trustee will maintain perfectly accurate records, documenting every distribution. Staying current serves a trustee well when it comes time to file income tax returns, or when the Social Security Administration or Department of Human Services requests proof of the trust’s expenditures.
Make The Right Choice The First Time
Deciding on the right trustee is one of the most significant choices a family can make. As we’ve seen, trustees are granted far more than the right to manage and distribute a child’s assets. The trustee for your child’s special needs trust will be tasked with an even greater goal: supporting your child’s future. If choosing a trustee is in your near future, it may help to reach out to an experienced settlement and trust planner.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).