One of the most difficult and important tasks in preparing a trust for an individual with special needs, whether due to a personal injury or otherwise, is the selection of a trustee or trustees to manage the trust. Proper management of the trust can make a huge difference in the beneficiary's quality of life for years to come, if not for her entire life.
The role of trustee, which is a significant responsibility for any trust, becomes much more difficult in the case of a special needs trust. As with all trusts, the trustee must make appropriate investments, plan distributions so that the trust will maintain its buying power, prepare proper trust accountings, and file trust income tax returns. In the case of special needs trusts, the trustee must also make sure that the beneficiary maintains her eligibility for public benefits, that she receives appropriate care management so that trust distributions improve her life, and that such distributions are coordinated with the services the beneficiary receives.
The trustee of a special needs trust often finds his job complicated by the kinds of questions and conflicts of interest that seldom arise with other trusts. For instance, should the trust pay for housing for a beneficiary's entire family when she depends on her parents for support? Should such housing be purchased or rented? What about paying a stipend to a parent or grandparent so that he can stay at home and care for the child? One special needs trustee we know recently was asked to approve the use of trust funds to purchase pornographic material for a beneficiary.
Due to the complications of the trustee's role, we strongly urge clients to use professional trustees such as trust companies, banks and attorneys. They are equipped to handle the investment, accounting and tax sides of trust operations and can do so with little risk or difficulty. They should be better equipped to fend off inappropriate requests for distributions and to deal with conflicts of interest. On the other hand, many professional trustees are ill-equipped to deal with the issues presented by beneficiaries with special needs, whether they be eligibility for public benefits or responding to sometimes frequent requests for distributions for unusual purposes. They may be more comfortable simply managing trust assets. Anyone selecting a professional trustee must ask about the prospective trustee's experience with special needs trusts and their methods for responding to these questions.
When a large institution is serving as trustee, an inexperienced trust officer may be assigned to the account. He may have little experience dealing with special needs issues. And the person assigned may change over time as employees come and go and, in the case of many banks, as the identity of the bank itself changes from one to another. This can be extremely frustrating for beneficiaries and their families.
Choosing family members and friends as trustees also has advantages and disadvantages. The advantage is that these are people who know and care about the beneficiary and may be able to you the trust funds to provide the greatest benefit for the person with special needs. Many clients are reluctant to give up control to an unknown third party. A further perceived advantage is that family members normally don't charge for their services.
The reality, however, is that trustee fees - typically about 1 percent of trust assets per year, with a minimum for smaller trusts - is very reasonable given the services provided. The risk that a family member trustee will make mistakes or not be able to follow through on the basic trustee responsibilities of prudent investment and accounting are so great that the trustee fee can simply be seen as reasonably-priced insurance. Even the most skilled and responsible family member with the best of intentions may not be able to follow through on all of the trustee details given the press of other matters in her life.
In short, to appoint a family member is both a large compliment and placing a large burden on her shoulders. Further, it creates risks that no special needs trust should run.
Clearly, there are problems with both family trustees and professional trustees. One solution which we have used with success in our practice is co-trustees - both a professional and family member trustee working together. This can be the best of both worlds. Everyone can rest easily knowing that the basic trust functions will be carried out by the professional trustee. But the family member trustee will be on the scene to make sure that the trust is used to best serve the beneficiary.
While the combination of a family member and a professional trustee may work best, professional trustees may not be available for smaller trusts. Given that the minimum fee most trustees charge would be unaffordable for smaller trusts, most trustees also have a minimum sized trust of anywhere from $250,000 to $1 million that they will manage.
For such smaller trusts, there are a number of solutions. First, it may be appropriate to have a family member as the sole trustee, especially if the trust will be spent down relatively quickly in any case. Second, the trust may be combined with a structured settlement. If the structured settlement is used with monthly payments coming to the trust, the trustee will not have to deal with investment issues and accounting and tax requirements should be quite simple.
A third option is to take advantage of available pooled trusts. In eastern Massachusetts, two non-profits operate pooled disability trusts for the benefit of multiple individuals with special needs. Although these are called "pooled" trusts, in fact the agencies keep separate accounts for each trust fund. They are set up to provide trustee services to individuals who do not have other solutions. In addition, since this is what they do, they have extensive in-house knowledge of the various public benefits programs and services available to individuals with special needs.
The one downside of using either of these pooled trusts is their requirement that a percentage of the trust funds remaining upon the beneficiary's death be retained by the trust to cover trust costs. Since these generally are relatively smaller trusts, many trusts have little or nothing left upon the beneficiary's death in any case.
The two trusts and their web sites are the PLAN of Massachusetts and the CJP Disabilities trusts operated by Jewish Family & Children Services.