Special needs trusts – Part 4: Choosing a trustee

One of the biggest decisions you’ll face in setting up a special needs trust (SNT) is naming who will serve as the trustee – in other words, who’ll be in charge of managing and spending money for your adult child after you no longer can. The wise grantor setting up the special needs trust (that’s you!) will consider several factors when making this important choice. Although you can wait to make the decision while the SNT documents are being prepared, giving it some thought beforehand is a good idea.

(Before reading any further, please note that if your adult child has a pooled trust, you’ll be off the hook for choosing a trustee. The nonprofit organization that maintains the pooled trust will appoint a trustee to manage the fund. Go back to Part 3 to learn more about the pros and cons of pooled trusts.)

Most of the time, families create a special needs trust that requires the selection of a trustee. It’s nice to have that control – but how do you choose?

This discussion about SNT trustees on the Nolo website is clearly presented and covers the important points. For those of you who don’t like to follow links, I’ll rephrase what the article says.

Usually, the parent(s) of the disabled child are the trustee(s) of the SNT until no longer able. Once the last parent of your adult child dies or is incapacitated, the trustee you’ve selected – the successor trustee – will have to handle these and other tasks:

  • enhance the beneficiary’s life by using the trust fund to purchase goods and services (except food or shelter)
  • make the trust fund last as long as possible. Sometimes that can mean saying “no” to a spending request.
  • manage the fund to earn dividends or interest
  • keep records
  • file reports for SSI and Medicaid
  • file taxes

Most of us will look to family members as candidates. The ideal trustee would have these attributes:

  • be willing to serve as trustee
  • be capable of performing the duties well
  • be trustworthy to act in the beneficiary’s best interest – as opposed to increasing his or her own wealth
  • be willing to follow your wishes, and to follow the laws and rules (no mavericks, please!)
  • have familiarity and empathy with the beneficiary – living nearby is a plus, too
  • be expected to live years beyond when you check out. For instance, your grandfather is probably not the greatest choice (even if he is as sharp as a tack and fit as a fiddle).

Some of us do not have an individual relative who would meet these important criteria. But, you might have two or more family members who each have some attributes that in combination would fit the bill. Happily, you’re allowed to appoint two or more c0-trustees. That can raise other issues, though: would they work well together, or argue a lot? Also, you’d have to decide whether to allow each trustee to act alone, or stipulate that all trustees must agree to every action regarding the trust.

Your attorney may ask you to name a few candidates and rank them in order of preference. That way, if your first choice dies or has a change of heart, the second person on the list will get to do the honors, and so forth. Perhaps at some later date you’ll want to scramble the order, or add or subtract a potential trustee. No problem – that can be accomplished by updating the trust documents.

If you’re not seeing a willing and able candidate among family members, an alternative is to hire a professional or corporate trustee. They may be found in institutions such as banks, savings and loans, law firms, trust companies, or brokerage houses. While such professionals know how to manage trusts, they may not have much experience with special needs individuals, and they don’t know your special needs individual. Some institutions won’t even agree to the task unless the trust fund is “large enough.” The “large enough” threshold may be on the order of $250,ooo or even $1 million.

Your attorney, special needs financial advisors, and others in the special needs community may be able to recommend professional trustees who have done well for other families.

According to this attorney, the size of the minimum annual fee charged by professional trustees makes them an expensive choice for small trust funds. She suggests pairing a professional and a family member as co-trustees for larger trust funds, and using family members or pooled trusts for smaller SNT funds.

Assuming you select a non-professional as trustee, you’ll want to give him or her as much support as possible. Other than naming a co-trustee, here are some ways to do this:

  • use a trust protector or advisor. These individuals have no legal authority over the trust but are knowledgeable about issues such as investment strategies or compliance with SSI and Medicaid rules. The trustee is advised to consult with them for guidance.
  • provide a written description of the trustee’s duties. This may be a letter included with the trust papers, a book, etc.
  • provide background information about the needs of the beneficiary. It could be a document compiled for the trustee, or maybe a copy of the special needs letter of intent you’ve created.
  • name the trustee as a remainder beneficiary of the trust property after the trust ends. While it is thoughtful to provide monetary compensation for his/her work as a trustee, consider whether this arrangement might corrupt how the trustee would manage the fund during the beneficiary’s lifetime. As Nolo puts it, “every dollar spent on the beneficiary is a dollar that the remainder beneficiary won’t receive.”

Here’s how the trustee-choosing process played out for us:

Before meeting with our attorney, we had a vague idea about whom we’d name as trustee. Since we were creating our living trust and healthcare directives at the same time as the SNT, we were shuffling lists of our relatives: “this person can be #1 for special needs trustee; that person can be #1 for my power of attorney for health care,” etc.

We ended up choosing one of Nathan’s aunts as the trustee on his special needs trust, with other aunts as the alternates. None of them live in the same town as Nathan, so there’s an issue that may need a workaround when the time comes. As our nephews and nieces mature, some of them may end up on the list as replacements.

Among our trust documents, our attorney included a ten-page letter of instructions for the trustee – in plain English, not legalese! Ten pages sounds like a lot, but it covers several “what-if’s” that may never be a factor. Better to have too much information than not enough. The documents also included a flier from a local wealth management group that has helped many trustees of SNTs in the past.

The attorney and his paralegal emphasized to us that they’ll be available to answer any questions the trustee may have.

As you can see, choosing a trustee is a challenging task. Being a special needs trustee is a challenging task too: those of us who aren’t angels would prefer taking a giant step backward when asked. Hopefully, you’ll be able to find (or hire) a person who is competent, reliable, endowed with common sense and a big heart – and who steps forward when asked.

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About janet565

I've lived in the Inland Empire of Southern California since 1982. Born and raised in New Jersey, I've also lived in upstate New York and in Oregon. My profession involves maps and geography, which is usually very interesting. My hobbies are pretty boring - none of them involve tigers (or ligers) or jumping out of aircraft - so they do not bear mention here. I hope you find the blog useful, and wish you well....

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