ALWAYS USE A PROFESSIONAL TRUSTEE FOR A SPECIAL NEEDS TRUST
by: Thomas D. Begley, Jr.
[Updated January 22, 2016]
Choosing a Trustee
Choosing a trustee of a special needs trust is a crucial decision to be made by the grantor of the trust. The range of options includes:
- Parent, sibling (or other individual)
- Financial institution
- Nonprofit organization
Each of these possibilities has potential advantages and disadvantages.
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. The family 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. It is always advisable to have an independent, nonfamily member serve as the sole trustee or, at a minimum, as a co-trustee. A professional trustee can be objective and usually has skills, such as investment 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 the court will insist upon the appointment of an independent trustee. If necessary, have a family member serve as trust protector with the right to remove and replace a professional trustee.
Advantages of selecting a professional trustee are:
- Knowledge of public benefits laws
- Knowledge of tax law
- Investment expertise
- Avoidance of conflict of interest
- Familiarity with the system of social services available to the beneficiary.
It is good practice wherever possible to have a professional trustee for every special needs trust.
Whether a professional trustee can be removed is an important question. The first issue is whether 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 any reason without cause, 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. A family member, other than the beneficiary, can be appointed as trust protector and can be given the authority to remove and replace a trustee. The authority should be limited to replacing the professional trustee with another professional trustee with trust assets under management of a certain size (i.e., $20 million). While $20 million may seem like a relatively small amount, it makes it possible to appoint a nonprofit as trustee or to deposit trust assets in a pooled trust. Many nonprofits do not have more than $20 million under management. The beneficiary should not have the authority to appoint or remove a trustee.
The advantage in naming a parent or sibling as trustee is that the parent or sibling generally knows the beneficiary well. It is thought that a parent or sibling will serve without compensation, but frequently this turns out not to be the case. Even if the parent or sibling is willing to serve without compensation, the courts will generally require that they post a bond. In order to ensure that the trust funds are properly managed, the trustee would need to hire a professional money manager. The cost of the professional money manager and the bond frequently exceeds the cost of the professional trustee. The family trustee usually has no knowledge of SSI and Medicaid rules, tax law, or investment expertise. There is often friction between the family member and the trust beneficiary as to distributions.
When a family member is serving as trustee, fair and reasonable is not enough. Frequently, family members make mistakes resulting in the loss of public benefits to the trust beneficiary. These mistakes include failure to keep detailed records of expenditures, misuse of trust funds for the benefit of the trustee rather than the beneficiary, and failure to read the trust document or understand its terms. Family trustees must actively supervise all trust activity, which can be a time-consuming job. Grantors appointing family members as trustee often assume they will not have to pay trustee’s commissions. More often than not, the family member does charge these commissions. Frequently, family members resign from the job once they realize what is involved.
Frequently the family member named as trustee fails to realize the time and effort that is required to do the job correctly, and they do not understand the risk of liability in the increasingly contentious world of SSI and Medicaid eligibility and reimbursement. Many family members who accept the job as trustee resign. The family member serving as trustee serves with a target on his back. The trustee has liability for failure to act properly. The trustee is liable not only to the beneficiary, but the State Medicaid Agency and other remainder beneficiaries.
The solution is to appoint a professional trustee and name a family member as trust protector with the right to remove and replace the professional trustee with another professional trustee.