WHAT FAMILY LAW ATTORNEYS NEED TO KNOW ABOUT SELECTING THE TRUSTEE OF A SPECIAL NEEDS TRUST

by Thomas D. Begley, Jr., Esquire, CELA

            In a Family Law setting, a Special Needs Trust for a spouse with disabilities receiving alimony or equitable distribution is advantageous.  In other situations where a child with disabilities is receiving child support, the value of a Special Needs Trust can be significant.  Once the decision to use the Special Needs Trust is made, the question arises as to who should serve as trustee.  Choices are usually a family member or a professional trustee.  The family’s instinct is always to choose a family member, because they feel they have greater control of the money and they will save the expense of professional administration.  This is usually not the best choice.

Alimony and Child Support

            Most professional trustees have a minimum account size.  Certain non-profit disability organizations have a minimum as low as $25,000.  Some large corporate trustees have minimums of up to $5,000,000.  Where the only source of funding for the trust is alimony or child support, there is never much money in the trust, so a family member is the only choice.

Equitable Distribution

            In cases involving an equitable distribution, the asset size may be significant enough to warrant engaging the services of a professional trustee.  Here are ten reasons to employ professional trustees:

1. Avoiding the Target on the Individual Trustee’s Back. Few people – including those named as trustees – understand that a trustee of a Special Needs Trust has serious responsibilities in the administration of that trust.  The trust administration process is rife with opportunities to make innocent mistakes. And when something does go wrong, the trustee can be held personally liable to the trust and its beneficiaries. For example, a trustee might:

• make an improper distribution,
• pay unnecessary taxes,
• cause a beneficiary to lose public benefits,
• fail to comply with the instructions given by the grantor, or
• invest trust assets poorly.

In each of these scenarios, the trustee can be held personally responsible.  Since individual trustees lack expertise in this area, it is important they understand that by accepting an appointment, the named trustee may be exposed to significant liability and will be operating with a target on their back. Notably, liability will often extend to a trustee’s personal funds.

2. Knowledge of the Law. While people commonly name friends and family as trustees, this is not always a good idea because these individuals lack the professional knowledge necessary to effectively administer the trust. Trustees must command more than a working knowledge of the following areas:

• Tax Law. A trustee must have a knowledge of income, gift, estate, generation-skipping taxes, and capital gains taxes.
• Accounting. Trustees must make accountings to beneficiaries, courts and, possibly, public benefit agencies.
• Changes in the Law. Laws change frequently, particularly tax laws and public benefits laws.

3. Access to Investment Expertise. Good professional trustees have investment expertise, which is usually far superior to that of the proposed friend or family member trustee.
4. Prevention of Family Friction. One of the reasons that parents establish trusts for their children is to protect the children from themselves.  If a brother is named as trustee for his sister’s trust and the sister wants money, the brother’s job is to say no if the request is inappropriate.  This naturally causes friction among family members.  Most parents want their children to live harmoniously, and appointment of a family member as trustee for another family member is an almost certain recipe to engender family discord.
5. Avoiding Familial Pressure and Other Difficult Situations. There are many situations in which a trust beneficiary wants money, but the proper answer is no.  It is difficult for the family member serving as trustee to tell the beneficiary no and still maintain a good relationship between the two.
6. Escaping Potential Conflicts of Interest. Frequently, the family member selected to be the trustee of the Special Needs Trust is also a remainder beneficiary.  The more the trustee distributes to the beneficiary, the less will remain to be distributed to the trustee on the beneficiary’s death. This can create a conflict of interest that may result in the trustee failing to make appropriate distributions to preserve the value of the trust. A professional trustee is duty-bound to make distributions according to the terms of the trust and will not stand to benefit from any unspent funds.
7. The Timely Administration of Trust Assets. Even well-intentioned family members can end up delaying the trust administration process. In many cases, it takes many hours for trustees to familiarize themselves with their responsibilities. Family members often are busy in their own lives and do not have the time to study the trust document, understand the trust goals, understand all of the family dynamics, and fully understand the duties of the trustee. This can seriously delay distribution requests and may ultimately hold up trust assets if the trust falls out of compliance. Corporate trustees are much more likely to administer the terms in the trust in a timely manner.
8. Advance Knowledge of Public Benefits Laws and the Disability System. One purpose of a trust is to preserve public benefits eligibility. Common benefits for trust beneficiaries include:

• Supplemental Security Income (SSI)
• Medicaid
• Medicaid Waivers
• Supplemental Nutrition Assistance Benefits (SNAP)
• Federally Assisted Housing
• Veteran’s benefits

A professional trustee will have in-depth knowledge of public benefits laws and will keep abreast of important changes. Professional trustees are also able to navigate the disability system to the advantage of the trust beneficiary.

9. Trust Protectors Can Provide Additional Assurances to Concerned Grantors. One reason many families are reluctant to appoint a corporate trustee is that they are not familiar with the personnel in the corporation’s trust department or how the trust works.  A trust protector, usually a family member, can be appointed in the trust document. A trust protector is given the power to remove and replace the trustee with another corporate trustee.  Naming a trust protector may give the grantor enough confidence to consent to the appointment of a corporate trustee.
10. Trust Administration Fees are Worth the Expense. Many families are reluctant to appoint a corporate trustee for fear of the professional trustee’s fees.  As a general rule, most corporate trustees charge between 1 percent and 2.5 percent of the trust assets as a minimum fee.  Of course, for smaller trusts, the minimum fees often are a reason not to use a corporate trustee, as there is often much less work involved in their administration.  However, naming a family member as trustee does not necessarily avoid this problem, as a family member can also charge trustee fees.