USING TRUST PROTECTORS IN CONNECTION WITH SPECIAL NEEDS TRUSTS

by Thomas D. Begley, Jr., CELA

Plaintiffs in personal injury cases often receive public benefits such as SSI, Medicaid, SNAP (Food Stamps), Federally-Assisted Housing, Adoption Assistance, Temporary Assistance for Needy Families (TANF), Utility Assistance (LIHEAP), and others. To preserve these benefits, they must place the personal injury recovery in a Self-Settled Special Needs Trust. Inevitably, family members want to be the Trustee so they can control the money. Almost as inevitably, the family member eventually fails to comply with rules and the beneficiary of the trust loses important benefits.

 

Professional Trustee

There are eight reasons why a Professional Trustee should always be considered in a Special Needs Trust:

• The family member has a target on his/her back, if something goes wrong.

• The Professional Trustee has knowledge of the law, including taxes and accountings, and keeps abreast with changes in the law.

• The Professional Trustee has investment expertise.

• The Professional Trustee avoid family friction.

• The Professional Trustee avoids conflicts of interest.

• The Professional Trustee acts in a timely manner.

• The Professional Trustee has knowledge of public benefits laws.

• The Professional Trustee can help the family navigate the disability system.

Trust Protector

However, it is not always necessary for the family to give up total control. A family member can be appointed as Trust Protector. A Trust Protector is an individual who typically serves in a non-fiduciary capacity with the power to perform acts specifically listed in the trust document. Having a family member serve as Trust Protector gives the family some comfort that they do retain some control over the trust assets. Typically, the Trust Protector is given powers as follows:

• Remove a Trustee. Not all Professional Trustees have expertise in administering Special Needs Trusts and not all Trustees afford excellent customer service. Even some Trustees who are very good now may not be so good in the future. The entity may be absorbed by a larger entity that is not interested in Special Needs Trusts. Key people involved in the administration of trusts may leave and be replaced by other key people who do not deliver the same level of expertise or service. In those situations, the beneficiary is well served if the Trust Protector is given the authority to remove the Trustee.

• Replace a Trustee. The Trust Protector should be given the authority after removing a Trustee to replace the Trustee with another Professional Trustee. The Professional Trustee could be a bank with assets of at least a specified number of dollars or a disability organization. While the minimum number of dollars in assets ensures that the bank is at least a certain size, it does not ensure that the bank manages Special Needs Trusts. The Trust Protector should inquire as to how many Special Needs Trusts the potential new Trustee has under management before making a decision. References from other trust beneficiaries, their families, and Special Needs attorneys should also be sought.

• Amendment. Laws changes and occasionally trusts have to be changed in order to conform with the new laws. While a trust can be amended through a court order, it is simpler and less expensive to give the Trust Protector this authority.

• Dispute Resolution – Beneficiary/Trustee. The Trust Protector can be given authority to resolve disputes between beneficiaries and the Trustees. While this sounds like a good solution to a potential problem, much thought should be given before authorizing a Trust Protector to fulfill this role. If a family member is named as Trust Protector, there will be a strong tendency to side with the beneficiary in disputes as to whether or not a distribution should be made.

• Dispute Resolution – Between Trustees. The family usually wants a family member to serve as Co-Trustee. If a dispute arises between Co-Trustees, a Trust Protector can be given authority to assist in resolution. Very few good Professional Trustees will agree to serve as Co-Trustee with a family member. If a family member is serving as Trust Protector and there is a dispute between a family member, Trustee and a Professional Trustee, the Trust Protector is likely to side with the family member Co-Trustee, which may not be the best decision.

Who Can Be Appointed Trust Protector?

Ideally, a Trust Protector would be an independent third party, such as a lawyer or an accountant. There are also companies that provide Trust Protector services. However, most families want a family member to serve in this capacity. There is no reason a family member cannot do a good job as Trust Protector, so long as the Trust Protector’s authority is limited to removing and replacing a Trustee and amending trust documents due to changes in the law.

Neither Social Security nor the State Medicaid Agency have ever expressed any difficulty with the concept of Trust Protectors or with their use. Many states, such as New Jersey, require that upon a change of Trustee, the State Medicaid Agency be given notice of the change. On the other hand, Professional Trustees tend to resist the idea of Trust Protectors. There is a legitimate concern that a Trust Protector may attempt to use the leverage of his power to remove and replace in order to pressure the Trustee into making inappropriate distributions. On the whole, the use of Trust Protectors is worthwhile, and if a Professional Trustee is performing poorly, there should be a relatively easy and inexpensive way to remove that Professional Trustee and replace it with another Professional Trustee.