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The trustee of your child’s special needs trust will manage the assets in the trust, assess your child’s needs, and buy goods and services for your child. The trustee’s decisions will determine the quality of your child’s life. This article will explain the following:
Typically you (the parent or parents) will be the original trustee(s) if you have a living special needs trust. When I refer to “trustee lineup,” I refer to the successor trustees after you and your spouse (if one).
The Trustee’s Job
I think about the trustee’s job in two ways:
1. The trustee’s duty to the beneficiary, and
2. Trust management issues.
Regarding the beneficiary: Imagine a friend asked you to act as a trustee for their son, Robert, who has a disability. Robert’s parents die. You are now the trustee for Robert’s special needs trust. Below are some imaginary decisions you may have to make as a trustee:
Notice how your decisions will affect the quality of Robert’s life. Notice how you must weigh the short-term benefits versus your long-term financial responsibility to conserve the trust assets to last Robert’s lifetime. To answer the above questions, you would need more information, such as Robert’s age, the value of the assets in the trust, whether Robert’s day-to-day expenses are being met, and so forth.
My point is when you choose a trustee, you are trusting the trustee’s judgment. These discretionary decisions comprise the bulk of the trustee’s job — deciding what goods and services to buy for your child.
Regarding trust management, the trustee must do the following:
The above list of trustee responsibilities may seem daunting. However, the reassuring news is the trustee can always hire an attorney, an accountant, a financial planner, or others for advice, paying for these professionals from trust assets. You want to pick a trustee who will confidently seek professional advice.
Tip: Make a list of the professionals –attorney, financial planner, accountant, and others – you know, like, and trust. Store this list wherever you keep the special needs trust. It may be of invaluable help to your successor trustee.
Types of Trustees
There are two types of trustees: individual and corporate. Usually, you (the parents) will be the first trustees. You will want to name a lineup of successor trustees in the special needs trust. You want to name as many people as you trust and no more. Often, the trustee lineup is other relatives or friends, usually one at a time. Although you can have co-trustees, having just one decision-maker is generally best. However, I discuss below common circumstances when co-trustees are named.
When picking an individual trustee, you want to pick someone who knows and cares for your child, is trustworthy, can either manage the trust assets skillfully or is willing to reach out for professional help when necessary. When contacting professionals, paying for such advice with trust funds is proper. It would be expected for an individual trustee to hire a lawyer for government benefit advice or guidance in interpreting the trust, an accountant to prepare the trust tax return, and a financial advisor for investment advice.
Technically, if you name your child a successor trustee, there is a potential conflict of interest. After your child with a disability dies, the beneficiary of the special trust, the trustee (your other child) will likely be a remainder beneficiary. Most of my clients are not worried about such a conflict of interest.
The other type of trustee is a corporate trustee. The primary downside to a corporate trustee is the trust officer does not know your child. The potential upside to a corporate trustee is this is their business. They manage trust assets, understand how to make trust distributions without jeopardizing government benefits, file a trust tax return, etc.
Most (not all) corporate trustees won’t accept to act as a trustee unless the trust asset value is above $300,000-$500,000. And that figure, unfortunately, is the bare minimum. Some more prominent trust companies want trust asset values north of one or two million dollars. These asset values are beyond the reach of the majority of families. If parents need a corporate trustee but cannot afford to name a bank or trust company, there is one silver lining — pooled-income trusts (see below).
One further note about trustees’ fees: It will not surprise that corporate trustees prefer to manage trusts with high asset values. That preference is reflected in how they structure their fees. Fees (as a percentage of asset value) drop as trust asset values rise. For example, if a wealthy parent dies and leaves $20 million to a special needs trust, the bank may charge as low as .5% per year ($100,000 per year). If another parent leaves $2 million to a trust, the bank may charge between 1% and 2% per year ($20,000-$40,000). If a middle-class family leaves $200,000 to a trust, the bank will likely refuse to act as trustee because the amount is below their minimum asset level. Or, if the bank agrees to act as the trustee, the bank’s minimum trustee fee would be prohibitively expensive. For example, let’s say the bank’s minimum trustee fee is $14,000 per year. If a family leaves $200,000 to a trust, the bank’s annual $14,000 fee for administering the trust is 7% per year.
A special type of corporate trustee is a trustee that managers a pooled special needs trust. Often, a pooled special needs trust requires a smaller asset size. Pooled trusts are like a mutual fund. There is one master special needs trust with separate accounts for each person with a disability. All the assets contributed for each person are pooled and managed together to reduce administrative costs. The trustee is often a nonprofit organization experienced in serving people with a disability and knowledgeable about government benefits.
Each pooled trust has its own rules. Unlike other corporate trustees like a bank, when the beneficiary with a disability dies, a percentage of the remaining assets go to the pooled trust to offset administrative costs. The size of the percentage varies among pooled trusts.
Common Misconceptions When Picking a Trustee
When I talk to parents about the successor trustee lineup for their child’s special needs trust, here are three of the most common misconceptions parent make about deciding who to pick as a trustee:
“I Should Not Pick a Trustee Older than Myself.”
Although age is one factor in picking who should act as a successor trustee, I advise my clients to ask themselves: “If I died today, who would I want as trustee?” If your answer is your father, mother, uncle, aunt, or an older brother or sister, I recommend you seriously consider naming that person. Why? Because the trust language will state the named trustee only acts “if able and willing.” For example, if you name your father or mother and they are no longer “able or willing” to act as trustee after you die, the next successor trustee will act.
“I Should Not Pick a Trustee Who Lives in Another State.”
Although proximity to where your child lives is one factor in picking who should act as a successor trustee, it is not a litmus test. For example, if you trust a child of yours to act as a successor trustee, but that child does not live near your child with a disability, I would not let geographical proximity necessarily dictate who you name as trustee. Being an out-of-state trustee makes the job more challenging, but it’s doable.
The out-of-state trustee would be wise to hire a “local advocate.” A local advocate can regularly visit your child with a disability and report back to the out-of-state trustee. The out-of-state trustee will also likely visit your child with a disability regularly. Paying for the out-of-state trustee’s travel fees to visit the beneficiary would be a legitimate trust expenditure.
“I Should Not Pick the Same Person to Act as Both Trustee and Guardian.”
You may hear this refrain from some professionals. They assert that you should name different people for each role for “checks and balances.” Notwithstanding this assertion, most of my clients name the same successor lineup for both trustee and guardian. Why? First, most families have a limited number of candidates to name. Indeed, many families feel fortunate if they have any people to name. Second, it’s all about the people you trust. If you trust person A to be a guardian, you are likely also to trust person A to be a trustee.
Of course, you can name different people to be guardians or trustees. However, don’t let anyone tell you it’s necessarily “best practice.” It always depends on your particular family circumstances.
The Different Ways You Can Structure the Successor Trustee Lineup
How you structure the successor trustee lineup depends on many factors, such as the number of potential trustees, age, location, and capabilities. The successor trustee lineup is typically structured as a series of sole or co-trustees.
Sole Trustee
“Sole trustee” is when parents name one trustee to act at a time. If one trustee is unable or unwilling to act, the next trustee in line acts as the trustee. It’s simple. At any one time, there’s only one “decision maker.” With my clients, this type of structure is the most common.
Co-Trustees
The downside to a sole individual trustee is the person might act impulsively without carefully making a reasoned decision. For example, an individual trustee invests much of the trust assets in a startup company rather than an “all-weather” diversified portfolio. Or the individual trustee permits their spouse to borrow money from the trust. Hopefully, the trustee would recognize that such a loan would be an imprudent investment and an improper form of self-dealing.
To lower the risk of uninformed decisions, you can name co-trustees. Co-trustees add checks and balances to the decision-making process. If one co-trustee wants to do something inappropriate, the other co-trustee will hopefully intervene.
Co-trustees combine strengths. For example, let’s say you want to name a friend as a trustee because she is so devoted to your child. However, she does not have much investment experience. You do not want to burden her with trust paperwork and tax filings. You might name her a co-trustee with a corporate trustee like a bank. Although they are co-trustees, your friend will likely focus on your child’s needs, and the corporate trustee will take the lead on managing the trust assets. You can also include a provision in the trust authorizing your friend, as the individual co-trustee, to replace one corporate co-trustee with another.
Co-trustees can also guard against conflicts of interest. For example, suppose you have two sons without disabilities and a daughter with a disability. In the trust document, the sons will receive the trust property after the death of your daughter. Both sons love their sister, but you are worried that one might be tempted to skimp on goods and services for his sister to inherit more money after her death. As a safeguard, you can appoint both sons as co-trustees, so they would have to decide to skimp on goods or become dishonest before your daughter could be harmed. Alternatively, you could appoint one son and an independent third person as co-trustees. In this way, you can guard against potential conflicts of interest but still have a loving, concerned relative as a trustee for your daughter.
What if the co-trustees disagree?
That’s certainly a potential problem. If you decide to name co-trustees, I recommend you ask the same question to your attorney. Trust language varies on how this issue is handled. Some trusts give ultimate control to one co-trustee over the other. And other trusts do not; if the issue is big enough that the co-trustees cannot agree, then maybe it’s good the decision process halts for further discussion. Ultimately, if not resolved, the case could end up in court.
If my client names an individual as a co-trustee with a corporate trustee, I often state in the document that if the two co-trustees cannot agree, the decision of the corporate trustee controls. Corporate co-trustees may only accept the role of trustee if they have such control.
Five Common Situations When Parents Name Co-Trustees:
Let’s say parents have three children. One child has a disability. The parents want the other two adult children to act as co-trustees. However, I would avoid three trustees. In my opinion, that’s too much decision-making by committee.
Parents name a friend to act as co-trustee with a corporate trustee. The corporate trustee will do most of the investing, accounting, tax returns, and distribution work. However, the friend will have equal power as a co-trustee. The friend, hopefully, knows the beneficiary with a disability and will be exceptionally responsive to the needs and wants of the person with a disability.
In these cases, I often insert a provision in the trust allowing the individual trustee to replace the acting corporate co-trustee with a new corporate co-trustee. For example, if the corporate co-trustee is not responsive to the beneficiary's needs, the individual co-trustee can designate a new corporate co-trustee.
For example, Mr. and Mrs. Smith have two children, Bob, 20, and Carrie, 17. Carrie has Down Syndrome. Bob is in college. Bob is a wholesome young man who loves his sister. However, the Smiths are reluctant to name Bob as the sole trustee because he’s financially inexperienced. Instead, they name Bob and Mrs. Smith’s sister, Beverly, as co-trustees. Bob knows Carrie the best; Beverly is a mature, capable person with sound financial skills.
You can name a sole trustee; if that person cannot act, then you name co-trustees. For example, you name your sister as the first successor sole trustee. If your sister is unable or unwilling to act, you name your nephew and niece co-trustees. Your nephew and niece are “great,” but they’re young, and you feel more comfortable with the checks and balances of co-trustees. If your nephew or niece cannot act as a co-trustee, the other acts either as sole trustee or co-trustee with another person or with a corporate trustee.
See how you can get creative when structuring the trustee lineup?
Changing the Trustee Lineup
If you establish a special needs trust for your child, most special needs trusts will give you the authority to change the trustee lineup. For example, if you have a child too young to act as a trustee, you can amend the trustee lineup later to add your child as a successor trustee when they are older and more experienced.
You should hire an attorney to draft the amendment when amending the trust. However, amending the trust is typically a simple job and should be relatively inexpensive. You don’t have to amend the entire trust. The amendment simply removes one paragraph and replaces it with another paragraph. That’s why every paragraph in a trust document is numbered. Trust paragraphs are like LEGO pieces - replace one part with another part.
Ask yourself, “Do I have the right trustee lineup?” for the rest of your life.
The trustee of your child’s special needs trust will manage the assets in the trust, assess your child’s needs, and buy goods and services for your child. The trustee’s decisions will determine the quality of your child’s life. This article will explain the following:
- The trustee’s job;
- Types of trustees;
- Common misconceptions when picking trustees;
- Different ways to structure the trustee lineup.
Typically you (the parent or parents) will be the original trustee(s) if you have a living special needs trust. When I refer to “trustee lineup,” I refer to the successor trustees after you and your spouse (if one).
The Trustee’s Job
I think about the trustee’s job in two ways:
1. The trustee’s duty to the beneficiary, and
2. Trust management issues.
Regarding the beneficiary: Imagine a friend asked you to act as a trustee for their son, Robert, who has a disability. Robert’s parents die. You are now the trustee for Robert’s special needs trust. Below are some imaginary decisions you may have to make as a trustee:
- Should I pay for Robert to go to Walt Disney World for four days with his sister? The cost would include paying for his sister to supervise.
- Should I hire a job coach for Robert?
- Should I pay for a promising new therapy for Robert?
- Should I pay for a dental implant or a less-expensive dental bridge for Robert?
- Should I pay for Robert to attend summer camp — for one week or two?
- Should I pay for generic or brand-name medication for Robert?
- Should I pay for a pricey (yet excellent) after-school program for Robert?
- Should I pay for tuition for Robert to take computer classes at a local community college? Robert wants a job creating computer games. However, it’s probably an unrealistic goal.
- Should I pay for driving lessons for Robert?
- Should I hire a school law attorney to advocate for Robert at an IEP meeting?
- Should I buy a condo for Robert to live in?
- If Robert has a stay at a hospital, should I pay extra for a private nurse?
Notice how your decisions will affect the quality of Robert’s life. Notice how you must weigh the short-term benefits versus your long-term financial responsibility to conserve the trust assets to last Robert’s lifetime. To answer the above questions, you would need more information, such as Robert’s age, the value of the assets in the trust, whether Robert’s day-to-day expenses are being met, and so forth.
My point is when you choose a trustee, you are trusting the trustee’s judgment. These discretionary decisions comprise the bulk of the trustee’s job — deciding what goods and services to buy for your child.
Regarding trust management, the trustee must do the following:
- Follow the terms of the trust;
- Protect the trust assets;
- Invest the assets productively;
- Buy goods and services for the beneficiary without needlessly reducing the SSI cash benefit or harming Medicaid eligibility;
- File an annual tax return;
- Prepare annual accountings;
- Keep the beneficiary (and the beneficiary’s guardian, if one) informed;
- Avoid commingling the trust property with non-trust assets;
- Avoid engaging in “self-dealing” with the trust.
The above list of trustee responsibilities may seem daunting. However, the reassuring news is the trustee can always hire an attorney, an accountant, a financial planner, or others for advice, paying for these professionals from trust assets. You want to pick a trustee who will confidently seek professional advice.
Tip: Make a list of the professionals –attorney, financial planner, accountant, and others – you know, like, and trust. Store this list wherever you keep the special needs trust. It may be of invaluable help to your successor trustee.
Types of Trustees
There are two types of trustees: individual and corporate. Usually, you (the parents) will be the first trustees. You will want to name a lineup of successor trustees in the special needs trust. You want to name as many people as you trust and no more. Often, the trustee lineup is other relatives or friends, usually one at a time. Although you can have co-trustees, having just one decision-maker is generally best. However, I discuss below common circumstances when co-trustees are named.
When picking an individual trustee, you want to pick someone who knows and cares for your child, is trustworthy, can either manage the trust assets skillfully or is willing to reach out for professional help when necessary. When contacting professionals, paying for such advice with trust funds is proper. It would be expected for an individual trustee to hire a lawyer for government benefit advice or guidance in interpreting the trust, an accountant to prepare the trust tax return, and a financial advisor for investment advice.
Technically, if you name your child a successor trustee, there is a potential conflict of interest. After your child with a disability dies, the beneficiary of the special trust, the trustee (your other child) will likely be a remainder beneficiary. Most of my clients are not worried about such a conflict of interest.
The other type of trustee is a corporate trustee. The primary downside to a corporate trustee is the trust officer does not know your child. The potential upside to a corporate trustee is this is their business. They manage trust assets, understand how to make trust distributions without jeopardizing government benefits, file a trust tax return, etc.
Most (not all) corporate trustees won’t accept to act as a trustee unless the trust asset value is above $300,000-$500,000. And that figure, unfortunately, is the bare minimum. Some more prominent trust companies want trust asset values north of one or two million dollars. These asset values are beyond the reach of the majority of families. If parents need a corporate trustee but cannot afford to name a bank or trust company, there is one silver lining — pooled-income trusts (see below).
One further note about trustees’ fees: It will not surprise that corporate trustees prefer to manage trusts with high asset values. That preference is reflected in how they structure their fees. Fees (as a percentage of asset value) drop as trust asset values rise. For example, if a wealthy parent dies and leaves $20 million to a special needs trust, the bank may charge as low as .5% per year ($100,000 per year). If another parent leaves $2 million to a trust, the bank may charge between 1% and 2% per year ($20,000-$40,000). If a middle-class family leaves $200,000 to a trust, the bank will likely refuse to act as trustee because the amount is below their minimum asset level. Or, if the bank agrees to act as the trustee, the bank’s minimum trustee fee would be prohibitively expensive. For example, let’s say the bank’s minimum trustee fee is $14,000 per year. If a family leaves $200,000 to a trust, the bank’s annual $14,000 fee for administering the trust is 7% per year.
A special type of corporate trustee is a trustee that managers a pooled special needs trust. Often, a pooled special needs trust requires a smaller asset size. Pooled trusts are like a mutual fund. There is one master special needs trust with separate accounts for each person with a disability. All the assets contributed for each person are pooled and managed together to reduce administrative costs. The trustee is often a nonprofit organization experienced in serving people with a disability and knowledgeable about government benefits.
Each pooled trust has its own rules. Unlike other corporate trustees like a bank, when the beneficiary with a disability dies, a percentage of the remaining assets go to the pooled trust to offset administrative costs. The size of the percentage varies among pooled trusts.
Common Misconceptions When Picking a Trustee
When I talk to parents about the successor trustee lineup for their child’s special needs trust, here are three of the most common misconceptions parent make about deciding who to pick as a trustee:
“I Should Not Pick a Trustee Older than Myself.”
Although age is one factor in picking who should act as a successor trustee, I advise my clients to ask themselves: “If I died today, who would I want as trustee?” If your answer is your father, mother, uncle, aunt, or an older brother or sister, I recommend you seriously consider naming that person. Why? Because the trust language will state the named trustee only acts “if able and willing.” For example, if you name your father or mother and they are no longer “able or willing” to act as trustee after you die, the next successor trustee will act.
“I Should Not Pick a Trustee Who Lives in Another State.”
Although proximity to where your child lives is one factor in picking who should act as a successor trustee, it is not a litmus test. For example, if you trust a child of yours to act as a successor trustee, but that child does not live near your child with a disability, I would not let geographical proximity necessarily dictate who you name as trustee. Being an out-of-state trustee makes the job more challenging, but it’s doable.
The out-of-state trustee would be wise to hire a “local advocate.” A local advocate can regularly visit your child with a disability and report back to the out-of-state trustee. The out-of-state trustee will also likely visit your child with a disability regularly. Paying for the out-of-state trustee’s travel fees to visit the beneficiary would be a legitimate trust expenditure.
“I Should Not Pick the Same Person to Act as Both Trustee and Guardian.”
You may hear this refrain from some professionals. They assert that you should name different people for each role for “checks and balances.” Notwithstanding this assertion, most of my clients name the same successor lineup for both trustee and guardian. Why? First, most families have a limited number of candidates to name. Indeed, many families feel fortunate if they have any people to name. Second, it’s all about the people you trust. If you trust person A to be a guardian, you are likely also to trust person A to be a trustee.
Of course, you can name different people to be guardians or trustees. However, don’t let anyone tell you it’s necessarily “best practice.” It always depends on your particular family circumstances.
The Different Ways You Can Structure the Successor Trustee Lineup
How you structure the successor trustee lineup depends on many factors, such as the number of potential trustees, age, location, and capabilities. The successor trustee lineup is typically structured as a series of sole or co-trustees.
Sole Trustee
“Sole trustee” is when parents name one trustee to act at a time. If one trustee is unable or unwilling to act, the next trustee in line acts as the trustee. It’s simple. At any one time, there’s only one “decision maker.” With my clients, this type of structure is the most common.
Co-Trustees
The downside to a sole individual trustee is the person might act impulsively without carefully making a reasoned decision. For example, an individual trustee invests much of the trust assets in a startup company rather than an “all-weather” diversified portfolio. Or the individual trustee permits their spouse to borrow money from the trust. Hopefully, the trustee would recognize that such a loan would be an imprudent investment and an improper form of self-dealing.
To lower the risk of uninformed decisions, you can name co-trustees. Co-trustees add checks and balances to the decision-making process. If one co-trustee wants to do something inappropriate, the other co-trustee will hopefully intervene.
Co-trustees combine strengths. For example, let’s say you want to name a friend as a trustee because she is so devoted to your child. However, she does not have much investment experience. You do not want to burden her with trust paperwork and tax filings. You might name her a co-trustee with a corporate trustee like a bank. Although they are co-trustees, your friend will likely focus on your child’s needs, and the corporate trustee will take the lead on managing the trust assets. You can also include a provision in the trust authorizing your friend, as the individual co-trustee, to replace one corporate co-trustee with another.
Co-trustees can also guard against conflicts of interest. For example, suppose you have two sons without disabilities and a daughter with a disability. In the trust document, the sons will receive the trust property after the death of your daughter. Both sons love their sister, but you are worried that one might be tempted to skimp on goods and services for his sister to inherit more money after her death. As a safeguard, you can appoint both sons as co-trustees, so they would have to decide to skimp on goods or become dishonest before your daughter could be harmed. Alternatively, you could appoint one son and an independent third person as co-trustees. In this way, you can guard against potential conflicts of interest but still have a loving, concerned relative as a trustee for your daughter.
What if the co-trustees disagree?
That’s certainly a potential problem. If you decide to name co-trustees, I recommend you ask the same question to your attorney. Trust language varies on how this issue is handled. Some trusts give ultimate control to one co-trustee over the other. And other trusts do not; if the issue is big enough that the co-trustees cannot agree, then maybe it’s good the decision process halts for further discussion. Ultimately, if not resolved, the case could end up in court.
If my client names an individual as a co-trustee with a corporate trustee, I often state in the document that if the two co-trustees cannot agree, the decision of the corporate trustee controls. Corporate co-trustees may only accept the role of trustee if they have such control.
Five Common Situations When Parents Name Co-Trustees:
- Often, parents want their children without a disability to act together:
Let’s say parents have three children. One child has a disability. The parents want the other two adult children to act as co-trustees. However, I would avoid three trustees. In my opinion, that’s too much decision-making by committee.
- Parents have an only child with a disability:
Parents name a friend to act as co-trustee with a corporate trustee. The corporate trustee will do most of the investing, accounting, tax returns, and distribution work. However, the friend will have equal power as a co-trustee. The friend, hopefully, knows the beneficiary with a disability and will be exceptionally responsive to the needs and wants of the person with a disability.
In these cases, I often insert a provision in the trust allowing the individual trustee to replace the acting corporate co-trustee with a new corporate co-trustee. For example, if the corporate co-trustee is not responsive to the beneficiary's needs, the individual co-trustee can designate a new corporate co-trustee.
- A trustee is young:
For example, Mr. and Mrs. Smith have two children, Bob, 20, and Carrie, 17. Carrie has Down Syndrome. Bob is in college. Bob is a wholesome young man who loves his sister. However, the Smiths are reluctant to name Bob as the sole trustee because he’s financially inexperienced. Instead, they name Bob and Mrs. Smith’s sister, Beverly, as co-trustees. Bob knows Carrie the best; Beverly is a mature, capable person with sound financial skills.
- Parents prefer the checks and balances of co-trustees.
- Naming a sole trustee and then co-trustees:
You can name a sole trustee; if that person cannot act, then you name co-trustees. For example, you name your sister as the first successor sole trustee. If your sister is unable or unwilling to act, you name your nephew and niece co-trustees. Your nephew and niece are “great,” but they’re young, and you feel more comfortable with the checks and balances of co-trustees. If your nephew or niece cannot act as a co-trustee, the other acts either as sole trustee or co-trustee with another person or with a corporate trustee.
See how you can get creative when structuring the trustee lineup?
Changing the Trustee Lineup
If you establish a special needs trust for your child, most special needs trusts will give you the authority to change the trustee lineup. For example, if you have a child too young to act as a trustee, you can amend the trustee lineup later to add your child as a successor trustee when they are older and more experienced.
You should hire an attorney to draft the amendment when amending the trust. However, amending the trust is typically a simple job and should be relatively inexpensive. You don’t have to amend the entire trust. The amendment simply removes one paragraph and replaces it with another paragraph. That’s why every paragraph in a trust document is numbered. Trust paragraphs are like LEGO pieces - replace one part with another part.
Ask yourself, “Do I have the right trustee lineup?” for the rest of your life.