Making the Right Choice for Trustee of a Special Needs Trust
by Don Drake, Connelly Law Offices, Ltd.
"Those who follow this site know that October is National Special Needs Law Month," said certified elder law Attorney RJ Connelly III. "When creating a special needs trust (SNT) for a loved one with a disability, the individual creating the trust, or the grantor, typically becomes the trustee. It is, however, crucial to choose a successor trustee who will continue responsibly managing the SNT to benefit the special needs individual. There are also times when the grantor may not be the most ideal person to manage the trust, especially in cases where the beneficiary may have a substance use disorder or a mental illness (see our previous blog on the SNT for a Substance User). When it comes to selecting a reliable, honest, and capable successor trustee, there is much to consider since trusts often operate on the honor system unless there are egregious circumstances that the courts are forced to address."
The Role of a Special Needs Trustee
Being appointed and serving as the trustee for an SNT is a profoundly serious undertaking with the trustee being held to a high standard of performance, much higher than the performance that is acceptable for the person's own financial affairs. The role of the SNT trustee includes many responsibilities:
Appropriate trust property investments
Accounting and bookkeeping of trust activities
Communication among trust beneficiaries
Tax filing for the trust
Proper distribution of trust assets to the beneficiary while considering current and future needs
Understanding and staying current as to the needs and welfare of the trust beneficiary
Ensuring the beneficiary retains eligibility for public benefits programs
Reporting to the agencies who administer benefits programs
Working in partnership with family members, guardians, social workers, teachers, and others who provide support for the trust beneficiary
Management and distribution of trust property after the trust’s termination or the beneficiary’s death
How to Select the Right Trustee
"The responsibilities listed above are really just the beginning," said Attorney Connelly. "There are also the ethical responsibilities as well, which include the ability to say no when the beneficiary requests money for something that may not be in their best interest, so identifying a trustee willing to serve can be challenging." If the ideal trustee is not in the right age group, the trust document can give authority to the trustee or the trust protector to appoint a successor.
"In such cases, many families opt to hire a professional trustee through a bank, trust company, or elder law attorney as they are well-versed in handling the responsibilities of an SNT," stated Attorney Connelly. "Making that choice still allows a family member to remain a co-trustee to the SNT. On a negative note, some professional groups will only handle larger trusts and in these cases, you do lose the personal touch, and communication with them can become very difficult."
The Pooled Trusts
A more modestly funded SNT trust can become part of a special needs pooled trust run by nonprofit groups to administer a master special needs trust efficiently and expertly on behalf of multiple individual beneficiaries with disabilities. "A special needs pooled trust has positive and negative attributes," points out Attorney Connelly. "The positive, this type of trust may reduce administrative fees and increase investment funds creating access to more wealth-creation opportunities. The negative of a pooled trust is that it is generally inflexible, limiting the ability to own real estate or other non-traditional investments."
The SNT pooled trust may act as a trustee or co-trustee. An elder law attorney can assess your situation and the needs of your loved one to determine if this trust type is the right choice for them.
Consult with a Special Needs Law Attorney
"Let's say you have reached the point where you are ready to move forward with an SNT, and you identify someone who is willing to serve and is capable of being the trustee, now it's time to discuss some very important issues," said Attorney Connelly. "First, the proposed trustee and successor trustee needs to thoroughly read the trust document and understand each and every point. Understanding the full scope of the trust’s assets and responsibilities regarding its management and the beneficiary’s needs may be more daunting than the potential trustee has realized."
A special needs attorney can address specific questions and potentially amend certain trust sections if all agree. The grantor must outline specific duties if there are co-trustees, things that the grantor may not have realized. "For instance," points out Attorney Connelly, "a bank or trust company will most likely take charge of investments, tax, and accounting issues, while another trustee will spend time managing the beneficiary’s personal needs. This relationship could create some problems if all concerned don't understand what is best for the beneficiary."
If there is one successor trustee, they may seek professional consulting assistance or speak to a special needs planning attorney to successfully manage the trust and achieve the grantor’s goals. "In these cases, the SNT should pay for any advisor or attorney related to the trust," said Attorney Connelly. "The trust should state that a single successor trustee is not liable unless there is gross negligence or an intentional violation of their responsibilities. Remember, professional trustees tend to be held to higher standards than a family member trustee, and liability issues are less problematic with a professional co-trustee."
Supporting the Beneficiary
"In the majority of SNTs I am involved with, a special needs beneficiary typically has a large support group, including a guardian, family members, counselors, teachers, and other professional support people around them," said Attorney Connelly. "So, in addition to the specific responsibilities of the trustee, the select successor must maintain frequent contact with these support groups to better understand the beneficiary’s changing conditions and needs. The beneficiary’s daily routines, the special services they receive, and how they are paid give much-needed information to the trustee, who can tailor the benefits management based on this information."
Serving as a trustee to a special needs trust requires compassion, competence, and a willingness to dedicate the time needed and have an intimate understanding of the beneficiary's needs. Even with many demanding tasks, family members and friends often serve as trustees without compensation, however, this depends on the needs of the recipient. "If the duties are especially formidable, and in many situations, they can be, compensation may be appropriate and incentivize a potential trustee to accept the role," Attorney Connelly said. "If someone decides to include compensation for the non-professional trustee, a special needs planning attorney can help structure the SNT to address compensation issues for them. If a decision is made to use a professional trustee, keep in mind that they have varying billing rates to consider.
"Serving as a trustee to a special needs trust requires compassion, competence, and a willingness to dedicate the time needed and have an intimate understanding of the beneficiary's needs." --Attorney RJ Connelly III
Finally, the most important consideration when choosing a special needs trustee is to find a candidate who will act honestly. An honest trustee will fulfill their legal obligations and act in the beneficiary’s best interests to the best of their ability.
"The code of good faith conduct inherent to the trustee will have them seek additional help should the job become overwhelming or out of the scope of their experience or expertise," Attorney Connelly points out. "Obviously, there is no way to predict the future, only systems to put in place and competent people assigned to manage the process as it unfolds. Working with a special needs planning attorney, like Connelly Law Offices, Ltd., upfront to structure an SNT and identify the right individuals to act as the trustee(s) will provide the most advantageous circumstances for a loved one’s future well-being."