Estate Planning for Children with Special Needs Part III

Choosing the Right Fiduciary

Arguably, the single most important task for parents who are planning for the care of a child with special needs after their passing is to ensure that they pick the right trustee to manage the trust established on behalf of such child.  The temptation is to make a sentimental choice of a family member or to accept the recommendation of a bank or trust company based solely on the recommendation of an attorney, accountant or financial advisor.  However, the selection of a trustee for a special needs trust must reflect the unique elements and challenges inherent in managing and administering it.  The failure to select the proper fiduciary can lead to disastrous results for the child with special needs.

The core qualification of any proposed trustee for a special needs trust mirror those for other financial based estate planning documents such as an executor under a will or an agent under a general durable power of attorney.  These fiduciaries needs to be trustworthy and have the common sense to properly manage money, as well as to seek professional assistance when necessary for the performance of his, her or its duties.  For the most part, these qualifications will suffice for a will or power of attorney, as the job of the fiduciary is to properly invest assets and make mandated disbursements and distributions.

In order to administer a special needs trust, however, there need be two additional qualifications.  The first is to have a knowledge of the laws effecting needs-based public benefits and the changes which are frequently being made to same.  The second is to be ready, willing and able to have an ongoing and meaningful relationship with the beneficiary so that his or her needs are properly ascertained and met.  Far too often these qualifications are not considered.

One potential trustee is a sibling or other family member.  The thought is that a family member, especially a brother or sister, will do what is right for the beneficiary.  However, there are numerous pitfalls with this choice:

  1. The sibling is typically a remainder beneficiary of the trust, which means that he or she will often inherit part or all of what is left from the trust when the child with special needs dies.  This poses at the very least a potential conflict of interest, as the more spent on the beneficiary the less the trustee will receive upon the beneficiary’s death.
  2. The sibling and beneficiary do not see eye-to-eye on how the funds should be distributed.
  3. The sibling inadvertently gives cash to the beneficiary jeopardizing needs based benefits.
  4. The sibling, unaware of the intricacies of this area of law, makes expenditures which disqualify the beneficiary from his or her benefits.
  5. The sibling mismanages or steals the funds.
  6. The sibling predeceases the beneficiary.

An alternative to an individual is a corporate trustee.  A corporate trustee may merge with another entity but it will never die.  A corporate trustee can arguably mismanage the trust assets but it will not steal.  However, not all corporate trustees are qualified to be trustees of a special needs trust.  Although most should be able to invest and manage trust assets prudently, there are far too many banks and trust companies who do not understand this area of law, and will make distributions that lead to the loss of public benefits for the beneficiary.

Even worse, the corporate trustee will have no relationship to the beneficiary.  This point was highlighted in 2012 with the decision know as In The Matter of the Accounting by J.P. Morgan Chase, N.A. v. Marie HMarie H. died in 2005, leaving behind a net estate of $8,000,000 to be divided equally between her two children, one of whom, Mark, was an adult with profound disabilities.  Inexplicably, his trust was funded with less $1,500,000, rather than approximately $4,000,000.  Despite helping themselves to commissions and fees, the co-trustees, J.P.Morgan and the attorney who drafted the trust, had never visited Mark in the years which followed his mother’s death, nor had they spent a penny of the trust money on him.

In all, the right trustee has to possess all of the qualities mentioned herein.  More often than not, the trustee should be an organization which specializes in these trusts, of which there are a few.  To insure that the funds are properly distributed, the trustee can work with a distribution director, which is a group that handles personal contact with the child with disabilities, and guides distributions to reflect the beneficiary’s needs while preserving his eligibility for benefits.  If family is to be involved, it can be in the role of a trust protector.  A trust protector can monitor the actions of the trustee and remove and replace it when necessary.

A special needs trust can be of great benefit to a child with disabilities.   However, the trust is only as effective as the people or financial institution managing it.  When preparing a special needs trust, remember that the selection of the trustee is of paramount importance and must be undertaken with great care and diligence.

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