USING TRUST PROTECTORS FOR SPECIAL NEEDS TRUSTS
by: Begley Law Group
by Thomas D. Begley, Jr., Esquire, CELA
[Article originally published in The Barrister] When drafting a Special Needs Trust (SNT) it is always better to utilize the services of a Professional Trustee rather than a family member. However, the individuals establishing the trust are usually not comfortable with a Professional Trustee, because they are not familiar with the Trustee and are not sure exactly how the trust will operate. One way to give comfort to the individuals establishing the trust is to appoint a family member as a Trust Protector. Another reason to use a Trust Protector is that Trustees who are good at administering SNTs today may not be good tomorrow. Banks merge and the acquiring bank may no longer be interested in administering SNTs. Some banks who administer SNTs realize they are difficult and opt to get out of that business. Individuals who work at a bank and are responsible for ensuring that SNTs are administered correctly and with good client service retire or leave and their replacements may not be as qualified. Again, a Trust Protector may be the answer. A Trust Protector can be used if a there is a Self-Settled SNT (SSSNT) or a Third Party SNT (TPSNT).
The following questions should be considered in addressing the issue of a Trust Protector:
- Who. Who should be appointed Trust Protector? Generally, a family member is the likely candidate to be appointed Trust Protector. This gives the individuals establishing the trust comfort that the trust beneficiary will be protected. Others who could fill the role are an accountant or an attorney. While either of these may be more qualified than a family member, neither gives the individual establishing the trust the same comfort level. The trust beneficiary should not be the Trust Protector.
- Basic Authority. What authority should the Trust Protector be given? The Trust Protector should always be given the power to review reports and accounts of the Trustee. In addition, the Trust Protector should be given the authority to remove the Trustee and to replace the Trustee with another Trustee. The Trust Protector would also be the individual named in the trust document to receive notice if any Trustee then serving chooses to resign and should be given authority to replace the Trustee in that event. The next question is whether the Trust Protector should be given the right to remove the Trustee “at will” or only upon a showing of “reasonable grounds.” What grounds would be considered “reasonable?” If the reasonable grounds standards is imposed, the document should spell out what is reasonable.
If the Trust Protector is given the power to replace the Trustee, should there be a limitation on who the replacement Trustee may be. It generally makes sense to limit the authority of the Trust Protector to replace the Trustee with another Corporate Trustee with assets of a minimum size or with a Disability Organization experienced in administering SNTs.
- Additional Authority. The Trust Protector should also be given additional authority. For example, the Trustee could be given the authority to amend the trust document if there are changes in tax laws or public benefit eligibility rules and to respond to the beneficiary’s current needs and capabilities. In certain situations, the Trust Protector might also be given the authority to remove and replace Investment Advisors.
- Duties of the Trust Protector. The Trust Protector’s primary duty is to ensure good trust management by the Trustee. The Trust Protectors are given the duty to consult with the Trustee on an annual or other periodic basis. An issue arises as to whether or not the Trust Protector is a fiduciary. If the individual establishing the SNT ascribes too many duties or too high a level of care of the Trust Protector, they may be unable to find someone willing to serve.
- Compensation of the Trust Protector. Should the Trust Protector be compensated? If so, what should the basis of the compensation be? Often a family member is willing to serve without compensation, but they could invest significant amounts of time. What is fair?
In conclusion, a well-drafted Trust Protector provisions adds significant value to an SNT.