There are special considerations when choosing a trustee for a special needs trust. As with any trust, the trustee should be responsible and trustworthy. If the trust is for the benefit of someone with a disability, you have added issues to factor into your choice that are critical to family relationships, safeguarding assets in the trust, and maintaining the beneficiary’s eligibility for government benefits.
In my practice it is typically the parents or grandparents of a child with a disability who creates a special needs trust. The natural choice to my clients for a trustee is someone who knows and cares about the child–usually a family member. Oftentimes, however, the family member is unaware of what is involved with administering a trust for a disabled person, which could lead to legal and financial problems for the trust and the trustee. Professional trustees (financial institution, etc.) are viewed with skepticism because the child often has specific, individual needs unfamiliar to someone who doesn’t know the child, and their fees can seem excessive.
ISSUES TO CONSIDER
- Trustee will need to learn about government benefits, trust taxation, money management. There are rules and regulations that the trustee will need to know. Government benefits are complex, and maintaining them requires diligence. Certain actions can jeopardize the beneficiary’s receipt of government benefits. There are tax rules for trusts, and assets in the trust that need managed. Your trustee should prepare to become very knowledgeable in unfamiliar areas of government benefits, trust taxation, and trust asset management.
- Trustee can be held liable. A trustee of any trust can be held liable for “wrongdoing,” even for mistakes. With a special needs trust, mistakes from a well-meaning family member serving as a trustee could result in the loss of crucial government benefits for the disabled beneficiary, most notably, medical insurance (Medicaid). Unfortunately, family-member trustees often do not purchase trustee liability insurance, making them vulnerable if they make an improper distribution that jeopardizes receipt of benefits, or if they fail to file taxes or submit accountings correctly. (I highly recommend trustee liability insurance for trustees.)
- Family relationships might become strained. If Uncle John is serving as the trustee of his niece Jane’s special needs trust, it is John who decides whether a distribution should be made. If Uncle John and Niece Jane have always had a good relationship, and suddenly he is in a position of having to disappoint Jane by deciding against her request for something, their relationship might become strained. Additionally, if John is a future beneficiary in the trust if Jane dies, an inherent conflict could also strain relationships. Perhaps John is declining Jane’s distribution requests so as to keep as much money in the trust as possible for him if Jane dies? Whether true or not, such a conflict has the potential of creating familial tension.
- Cost. One of the main complaints with professional trustees is their fee. For some financial institutions, annual trustee fees can range from 1-5% of the value of the assets of the trust. This might not be excessive when you consider costs associated with a family member serving as trustee. Due to liability and time concerns, it is advisable for the trustee to hire an attorney to advise on government benefits and maintaining eligibility. A CPA is advisable due to tax filings and tax considerations with trusts. An investment professional is suggested to meet the trustee’s fiduciary obligation to maintain trust assets. The family-member trustee can be compensated a reasonable fee for his or her services as trustee. It’s the trust that pays for these services. A professional trustee’s fees might be comparable to the cumulative fees associated with having a family member serve as trustee–if so, then I suggest factoring in other considerations above when choosing a trustee.
There is a middle ground. For clients who want the personal involvement of a family-member trustee, but want the expertise of a professional trustee, I recommend designating the family member as “trust protector” and a professional trustee as the trustee of the trust. The trust protector safeguards the financial and other interests of the beneficiary, and can take legal action on behalf of the beneficiary if there are problems with the trustee. The professional trustee has the financial ability to compensate the trust if mistakes are made, and the expertise to reduce the chance of making mistakes.
If you have questions about special needs trusts, special needs planning, choosing a trustee, or the role of a trust protector, please contact me by email at firstname.lastname@example.org, or visit my website for other ways to reach me. Planning for the future of a loved one with a disability is both critical and complex!