Advisor note: This article was written back in 2017, however, the information is still relevant.
It is common for a parent to want to be named as trustee of a special needs trust benefitting her child, especially when the parent is the one creating or funding the trust. There are many reasons why this makes sense. It positions the parent to have complete control over trust distributions. It is also very unlikely that anyone else can match the loyalty and dedication that comes from the strong filial bond between a parent and child. The parent is almost always the individual most familiar with the child’s specific, unique needs that the trust must seek to fulfill in its administration. Another advantage is that the parent will usually work without compensation.
Despite all this, a parent serving as trustee can also confront many daunting problems involving trust laws and public benefits regulations that affect the administration of a special needs trust. The laws governing trusts vary from state to state, and public benefits rules can also vary in different parts of the country. The federal regulations are complex, highly technical, and subject to change. Even tax laws can cause headaches.
The alternative for most families is a corporate trustee, which brings with it objectivity and knowledge in areas such as investments, accounting, tax and trust laws, and public benefits, that a parent often lacks. Corporate trustees are trained to review on a regular basis the trust documents under their administration. They also usually have systems in place to keep current with changes in trust and tax law, as well as public benefit programs rules. But it is not unusual for a parent to feel uncomfortable ceding so much responsibility over their child’s welfare to a seemingly impersonal professional trustee.
One solution is for the parent and professional trustee to serve together as co-trustees. The parent has a clear understanding of the family’s objectives and the needs of their child with a disability, while the professional trustee usually has expertise in financial matters and public benefits law. This is often a good combination for a trust of substantial size. In trusts involving smaller sums of money, the combination of a parent and a nonprofit organization as co-trustees might make more sense.
Perhaps an even better alternative is to consider the use of a trust protector to oversee the corporate trustee. A trust protector is an independent third party, either an individual or an institution, whose role is to “look over the shoulder” of the trustee to ensure that the trust is properly serving the purpose for which it was intended. The trust agreement typically details the trust protector’s responsibilities and areas of authority. One power often given a trust protector is the ability to remove and replace a corporate trustee. Naming a parent as trust protector allows the parent to have formal authority in the oversight of the trust. The corporate trustee, who is more knowledgeable on the technical and legal trust issues, can then serve with the benefit of a parent’s insight into the particular needs of the child with disabilities.
Another option may be the use of a special needs pooled trust. With a pooled trust, a non-profit organization serves as the trustee. There are fees associated with a pooled trust, and the trustee is still an organization. However, a pooled trust company works almost exclusively with beneficiaries who have special needs and can perhaps provide a more personable, yet equally as professional, trustee than a for-profit corporate trustee.
A parent who wants to be involved in the operation of a special needs trust benefitting his child is commendable and encouraged. But deciding whom to name as trustee, co-trustee or trust protector should involve a careful review of the talents the parent has, and perhaps more importantly, the talents the parent lacks. It is often the combination of a parent and a professional trustee in these roles that forms the best team to provide the most versatile support to the child with special needs.
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.
Securities and investment advisory services offered through Royal Alliance Associates, Inc. member FINRA/SIPC. Royal Alliance Associates, Inc. is separately owned and other entities and/or marketing names, products or services referenced here are independent of Royal Alliance Associates, Inc. Special needs consulting services are not offered through Royal Alliance Associates, Inc.
Content provided by the Academy of Special Needs Planners, Copyright 2022