Selecting the Trustee of a Special Needs Trust

by: Thomas D. Begley, Jr.

The appointment of a proper trustee and the drafting of appropriate removal powers are of critical importance in this type of trust. Very often, the family considers the money to belong to the family rather than to the beneficiary of the trust. This is particularly true if there is a self-settled special needs trust for the benefit of a minor. A family member, usually a parent, often wants to be named as trustee in order to be in a position to control distributions. Such an arrangement can be fraught with peril insofar as public benefit eligibility is concerned. Additionally the parent cannot make distributions that would discharge an obligation of support without tax ramifications.

It is always advisable to have an independent professional Trustee serve as the sole trustee. An independent trustee can be objective and usually has skills, such as investment, accounting, tax and public benefits expertise, that family members lack. Requiring the trust to have an independent trustee also prevents a family trustee from being caught in an endless series of conflicts of interest. Often in cases involving a self-settled special needs trust for a minor or incompetent person, the court will insist upon the appointment of an independent trustee. The trust document should clearly delineate the responsibility of each of the trustees.

Whether an independent trustee can be removed is an important question. The first issue is whether or not the trustee can only be removed for cause, or whether he or she can be removed for any reason or no reason at all. If the trustee can be removed for no reason, there should be limitation on the number of times that the removal authority can be exercised in any given period. The next issue is who will have the right to appoint or remove the trustee. The trust document itself should provide for successor trustees. A trust protector can be given authority to appoint or remove trustees. The trust document can also provide that the court retain authority to appoint and remove trustees. As a rule, the beneficiary should not have the sole authority to appoint or remove a trustee.

One or more successor trustees should be appointed and a procedure should be established for appointment of additional successor trustees.

Choosing a trustee is a crucial decision to be made by the settlor of the trust. The range of options includes:

  • Financial institution
  • Nonprofit organization
  • Parent, sibling (or other individual)

Each of these possibilities has potential advantages and disadvantages.

Financial Institution. Financial institutions include banks, trust companies, and trust companies established by securities firms. The advantage of a financial institution as a trustee is that these institutions are usually skilled in financial management. Some institutions have expertise in public benefits law or have access to lawyers who have such expertise in this area. Such institutions also have familiarity with very complex federal income tax law pertaining to trusts. A disadvantage is that the financial institution usually has little familiarity with the family and does not know the family’s specific goals. This problem can often be minimized by a clear letter of intent from the parent to the institution. Another disadvantage is that the bank charges a fee. The fee is often in the neighborhood of 1% of the first $1,000,000, and then decreasing as the size of the trust increases. However, this is a small price to pay for expertise in money management.

Nonprofit Organization. Certain nonprofit organizations that advocate for persons with disabilities have pooled trusts.  However, not all pooled trusts qualify as (d)(4)(C) trusts. The advantage of these pooled trusts is that banks or trust companies usually managed mange the funds. Separate accounts are maintained for each beneficiary and an accounting can be made from each subaccount. These nonprofit organizations have expertise in public benefits laws and have a clear sense of the objectives sought by most parents. A disadvantage of a pooled trust is that the trust cannot be specifically tailored to the needs of the individual beneficiary.

Care must be taken in the selection of a nonprofit as some nonprofit organizations are well run while others are not. If the amount of money involved is small (i.e., less than $500,000), a financial institution may not be interested in handling the account. Pooled trusts usually require that a large portion, 50% or more, of the trust assets remaining upon the death of the beneficiary be paid to the nonprofit organization. Nonprofits will often serve as trustee of a nonpooled trust and bring to the table expertise in public benefits, laws, and experience dealing with disabled beneficiaries.

Many non-profit organizations are also willing to serve as trustee of an individual, third party or self-settled special needs trust where the trust assets are individually managed rather than made part of a pooled trust.

Parent/Sibling/Individual. Where an individual is selected as the successor trustee, it is usually a parent or sibling of the beneficiary. The advantage in naming a sibling as trustee is that the sibling in some cases has a strong filial bond to the person with a disability. Another advantage is that the sibling will often work without compensation. The disadvantage in many cases is that the sibling does not have a strong filial bond with the person with a disability and, in fact, may strongly resent that person. In many cases, the person with a disability has received a considerable amount of attention and financial resources from the parents. This often causes resentment in non-disabled siblings. These siblings are definitely not suitable for selection as trustees. Another disadvantage to having a sibling as trustee is that they are generally unskilled in financial management Siblings seldom have expertise in the area of public benefits law.

In addition, the sibling who is trustee is often a remainder beneficiary where the person with a disability has no spouse or children. Remaindermen/trustees face a built-in conflict of interest. To the extent that distributions are made to benefit the beneficiary, they come, ultimately, from the pot which the remaindermen will inherit. Where a parent is named as trustee, there are additional conflicts of interest relating to family expectations.

Parents establishing trusts for their children with disabilities often feel uncomfortable dealing with a stranger, such as a bank or financial institution.  One solution is a combination of an individual and a financial institution, attorney, or a nonprofit organization. The right individual has a clear understanding of the family objectives and needs of the person with a disability, while the financial institution has expertise in financial management and often public benefits law as well. This is usually a good combination for an estate involving a large sum of money. In estates involving smaller sums of money, the combination of an individual and a nonprofit might make more sense. In instances where there is no family member who is sympathetic to the person with a disability, the nonprofit organization can be named as co-trustee with a financial institution or attorney.

Beneficiary Prohibited from Serving as Trustee. In many states, if the beneficiary is the trustee there is a merger of title and, therefore, no trust so that the assets in the trust are available resources. Some states have abolished the merger of title doctrine. SSA is inclined to say that if a trustee can distribute to himself, the assets in the trust are an available resource.