One of the most important decisions a special needs trust's donor (the person who supplies the funds for the trust) makes is the choice of a trustee for the trust. A trustee typically manages the day-to-day operations of the trust, often making distributions to the trust's beneficiary, investing the trust's assets, and paying the trust's bills. But how can the donor make sure that the trustee will properly manage the trust when the donor is no longer around to keep an eye on the trustee, especially if the trust's beneficiary is not capable of supervising his own trustee? In many cases, a trust protector can ensure that a beneficiary is protected from trustee mismanagement.
Once she assumes office, a trustee almost always serves in a "fiduciary capacity," meaning that she is in a position of trust and confidence and has a legal duty to properly manage the trust's assets while keeping in mind the best interests of the trust's beneficiary. A fiduciary is held to a high standard of conduct, and she owes the trust's beneficiary a strict duty of loyalty. However, in many cases involving special needs trusts, the beneficiary of the trust is unable to properly enforce this fiduciary duty because of his special needs. This is where a trust protector comes in.
A trust protector is a person chosen by the donor who is responsible for monitoring the trustee's actions. The trust protector's duty is to serve as an additional pair of eyes for the trust's beneficiary, making sure that the trustee is properly performing her job. The trust protector typically has access to the trust's accounts, and can compel a trustee to produce a summary of what she has done for the beneficiary. If a trust protector believes that the trustee is not properly performing her duties, he can usually fire the trustee. Depending on how the trust is drafted, the donor can even give the trust protector the power to name a new trustee if the donor has not done so himself in the trust document. (Most of the time, however, the trust protector must name an independent trustee as the new trustee, avoiding the scenario where the trust protector fires a trustee only to name himself as the new trustee.)
Trust protectors may be useful in a variety of situations. Take the case of Jennifer and her son, Adam. Jennifer is elderly and would like to make sure that her son, who has special needs, is cared for at home for as long a possible after she is gone. So Jennifer decides to establish a special needs trust that will hold her home for Adam's benefit, and she funds this trust with enough money to make sure that the property is well kept and that the bills are paid. However, Jennifer's closest relative, her niece Margaret, does not want to serve as trustee of Adam's trust because she does not want the added responsibility of managing a home. Jennifer decides to name John, a friend of hers who knows Adam and who runs a property management company, as the trustee instead. Although Jennifer trusts John, she decides to name Margaret as a trust protector to review his yearly accounts and make sure that he charges the proper amount for his services and is keeping the property in good shape.
Every special needs trust is different, and in many cases, especially when a donor is serving as trustee, a trust may not initially need a trust protector. The best way to decide if your special needs trust should include one is to speak with your qualified special needs planner.
This information is not intended to be a substitute for specific individualized tax, legal or estate planning advice as individual situations will vary. Neither Royal Alliance Associates, Inc., nor its registered representatives or employees, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.
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Content provided by the Academy of Special Needs Planners, Copyright 2020