One of the most frequently asked questions handled by this office involves the duties and responsibilities of a Special Needs Trustee. Many people have a fear of establishing a Special Needs Trust for a disabled child or a loved one because they have been misinformed regarding the complexities of Trust management. In truth, a Special Needs Trust is no more difficult to manage than any other type of Trust (and can be downright easy, if handled correctly). This article will help to answer some of those questions.

To begin with, the person establishing the Trust is called either the Grantor or Settlor. The Grantor is the person who first signs the Trust document, thereby bringing it into existence.  The Grantor may choose to fund the Trust as well, though this is not always the case. The Grantor is the person who gives instructions to the lawyer regarding any specific directions and other information written into the Trust.  The Grantor is also the person who chooses the Trustee(s), those people who will be the managers of the Trust. Almost anyone can act as a Trustee as long as they are eighteen years or older, are not under a Guardianship themselves, and are not a convicted felon.

In the case of a Special Needs Trust, the disabled person for whom the Trust has been established is the Beneficiary of the Trust.  The disabled Beneficiary cannot be the Trustee of their own Special Needs Trust. This makes Special Needs Trusts very different from most other Trusts where the same person can wear all three hats, so to speak.  The Beneficiary of a Special Needs Trust can only wear two hats.

Except when the Beneficiary is also the Grantor, the Grantor can name themselves or another person or persons to be the Initial Trustee(s).  The Grantor may also name alternate or Successor Trustees who will take over the running of the Trust if the Initial Trustee(s) can no longer carry out the responsibilities of Trust management. 

The Initial Trustee is responsible for signing the Trust at the same time as the Grantor. Once the Initial Trustee has signed the Trust, the Grantor’s job is done.

The Trustee’s job is just beginning.  The job of the Trustee is that of a Fiduciary, a person entrusted with the responsibility of handling things for another, in this case the disabled Beneficiary.

The most common Fiduciary responsibility is that of financial management. The Trustee has the job of signing the checks and balancing the books of the Trust. The Trustee also has ultimate responsibility for determining what the Trust will buy, sell, pay for, not pay for, and invest in.

In a properly drafted Special Needs Trust, the Trustee is given virtually complete discretion in making these decisions. In a properly drafted Trust, the Trustee is also empowered to hire Financial Planners, Accountants, Lawyers and other experts to assist him in this job. The Trustee can also hire care providers and other specialists to ensure that the Beneficiary’s personal needs are being looked after properly.

There has been a great deal of confusion regarding what constitutes a “proper” expenditure from the Trust. The most important thing for a Trustee to remember at all times is that a Special Needs Trust cannot function as a basic support Trust for the care and maintenance of the Beneficiary.  In other words, the Trust should not be the Beneficiary’s main source of support. A Special Needs Trust is designed to provide for supplemental and extra care over and above what the government provides. The Special Needs Trust is what the Social Security Administration calls “the payor of last resort.”

Thus, if the government (or some other source) is providing for such items as housing, food, healthcare and needed therapies the Trust should not do so. Trust funds can be used to make up for shortfalls in, or supplement, those things provided by the government. For example, if private medical insurance pays for only twelve doctor visits and the Beneficiary needs twenty, the Trustee can authorize the Trust to pay for the additional services. If the Beneficiary requires a special dietary supplement that Medicaid will not cover, the Trustee may direct the Trust purchase it. If the Beneficiary requires adaptations to his home and no other funds are available for rebuilding, the Trustee can hire the appropriate contractors and pay the costs through the Trust. If the Trustee determines that travel to a different locale might be therapeutic for the Beneficiary, then the Trust can be used to pay for such a trip. Such outlays are entirely within the discretion of the Trustee. 

There is no website or reference that gives a laundry list of permissible expenditures from a Special Needs Trust. Each Trust is individually written to specify what constitutes “supplemental and extra care” in light of the disabled beneficiary’s specific needs. That is the art involved in drafting a Trust.

The best rule of thumb in Trust Management is for the Trustee to behave with the same degree of responsibility toward the Trust funds as he would show his own, only more so.

For example, a Special Needs Trust can pay for a car, necessary adaptations to the car, car insurance and registration, auto maintenance, gasoline, and so on. It is up to the Trustee to determine if the Beneficiary has the requisite responsibility to possess a car. It is also up to the Trustee to determine what kind of car the Beneficiary may need, whether it is an adaptive van or a sports coupe. The Trustee must therefore be aware of the Beneficiary’s needs and limitations and should act freely in exploring such issues if he does not know the answers.

A responsible Trustee will always err on the side of caution. It would almost certainly be an abuse of discretion for the Trustee to permit the purchase of an Aston Martin V-12 Vanquish such as James Bond uses, no matter how much money the Trust holds. Likewise, the purchase of a 45,000 square foot home on A1A would probably be beyond the pale. (This might not be the case where a powerfully funded Trust acquires such purchases as investments, but such situations are not the norm.)

Likewise, the Trustee must be extra careful in those situations where he or she stands to gain some benefit from the purchases of the Trust, such as a parent purchasing a home for the disabled Beneficiary in which the entire family will live. It is easy in such circumstances to conjure up the quintessential “dream house,” but remember, it is not the family’s home as much as it is the residence of the Beneficiary, and must be chosen and outfitted with this in mind. Additions such as a pool or a Jacuzzi should be considered only if they stand to benefit the disabled family member.

The Trustee has broad discretion in investing the Trust funds and under normal circumstances a Trustee will not be held responsible if an investment loses money in the usual course of business. However, wastage of money, either through a pattern of flippant investments or careless distributions is the responsibility of the Trustee. Heavy capital investment in high-risk ventures, such as a reality TV show or a start-up company or a new restaurant should be avoided. Distributions upon demand to the Beneficiary can drain the Trust and cause a loss of governmental benefits. Under such circumstances, the Trustee may be held responsible and be required to repay the lost money.

In cases where the primary caretaker of the Beneficiary has provided sums of money for care or other needs prior to the establishment of the Trust it is permissible to request of the Trustee that the Trust reimburse these expenses. The caretaker should provide as complete a listing of outlays to the Trustee as they can in order to be compensated; it is up to the Trustee to determine what is legitimate. But beware: In situations where the Trustee and the caretaker are not acting at arm’s-length (such as a parent who is both caretaker and Trustee), such repayments can be carefully scrutinized by a Court.

The Trustee should never borrow funds for his own personal use. Nor should the Trustee ordinarily use Trust funds to invest in businesses owned by the Trustee and his associates, particularly start-up ventures.  The Trustee must make certain that all the Trust’s bills are paid. Although Trust funds are immune to the creditors of the Beneficiary, they are not immune to collection by creditors of the Trust itself.

The Trustee is allowed however to take reasonable compensation from the Trust for being the Trustee. Some Grantors choose to make this a fixed amount when creating the Trust or put other restrictions upon it. “Reasonableness” is determined by the circumstances. A lawyer acting as Trustee may charge his usual hourly fee for example; a corporate Trustee such as a bank may have a complete schedule of charges; a parent may charge the Trust for time and out-of-pocket expenditures on a self-determined basis.

It would not be appropriate however, for anyone to charge $40.00 for a single book of stamps or charge ten thousand dollars per hour for writing checks. Such abuses will not only subject the Trustee to an obligation for repayment but may result in civil or even criminal penalties for the greedy Trustee.

The typical Special Needs Trust does not usually require Court approval or an annual accounting; settlement Special Needs Trusts may, depending on the circumstances. Unless the Trust is holding a wide variety of assets, an accounting is usually simple: Providing bank statements or the checkbook register for review is generally all that must be done. 

Some Attorneys make a strong distinction between “First Party” and “Third Party” Trusts, that is, Trusts that are self-funded by the Beneficiary and Trusts that are funded by others, to the extent that they will recommend the establishment of two parallel Special Needs Trusts. In fact, this is not necessary if the Trust is properly drafted.  The major reason for the distinction is that “First Party” money (which originally belonged to the Beneficiary) is subject to Medicaid repayment upon his death; “Third Party” money (which originally belonged to a parent or has been Court-ordered into the Trust) is not. In practice, liens are rare. This issue can be addressed easily: The Trustee need only open different bank accounts within the Trust to hold the funds from these different sources.  

In sum, practice caution and be a responsible fiduciary. Even if you are the Grantor/Trustee parent of a Special Needs Beneficiary, understand that the Beneficiary has rights that are different from yours. A Beneficiary is legally permitted to demand accountings. A Beneficiary can legally require you to justify your decisions as Trustee. Even in cases where the Beneficiary is a minor or incapacitated or otherwise unable to advocate for herself, other persons such as friends, relatives, treating professionals, caretakers, police or judicial officers can step into her shoes and act on her behalf at any given time. Should such an “other person” bring to light improprieties in a Trustee’s actions, the consequences to the Trustee could be serious.  

The best rule of thumb in Trust Management is for the Trustee to behave with the same degree of responsibility toward the Trust funds as he would show his own, only more so.