The role of trustee is laden with distinct and demanding duties. Even more exacting and demanding than the typical role of trustee is service as the trustee of a special needs trust (“SNT”). Estate planners draft with increasing regularity SNTs for clients who may have a family member with a disability. Insurance agents may be providing funding mechanisms for those trusts. Accountants may be aiding in the tax reporting and accounting for those trusts. Financial planners may be struggling with proper asset allocations for SNTs where the beneficiary’s needs may be unpredictable. Yet, it is only the trustee whose day to day performance must balance routine service as fiduciary with the added dimension of serving the unique needs of a beneficiary with a disability.
When a SNT is created for someone with a disability, income and assets aren’t the only things placed in “trust.” Any trust account gives rise to the care and loyalty of a fiduciary relationship between trustee and beneficiary. A fiduciary role in an SNT carries a special set of duties because the trust purpose is to help support a disabled person, enhance his or her quality of life, and provide his or her family with peace of mind that their loved one is well cared for. The trustee of a SNT therefore must be equipped and ready to serve these extraordinary needs with diligence and compassion, befitting their position of trust.
An additional consideration is that the administration of a SNT is subject simultaneously to federal statutes, Social Security Administration publications, state regulations, state trust law, and applicable court rulings. Specifically, on the federal level, the trustee should be familiar with OBRA 93 changes to the Social Security Act and the Program Operations Manual System (POMS) of the Social Security Administration. As every trust is governed by state laws and regulations as well, the trustee must be familiar with the Prudent Investor Act, the Principal and Income Act, for Maryland the Code of Maryland Regulations (COMAR), and recent case law of the jurisdiction governing the operation of trusts.
Here are some examples of the complexity of administering a special needs trust:
Federal law and regulations governs disbursement of funds for medical treatment in certain circumstances. Generally, if the trust beneficiary is the recipient of a Medicaid program as his or her health insurance, then the trustee jeopardizes eligibility by paying for medical services that would otherwise be paid by Medicaid.
If the trust beneficiary is receiving Social Security Income, the payment of sums for food and housing will reduce the beneficiary’s monthly SSI by up to one-third Disbursements of cash and cash equivalents by the trustee will reduce SSI dollar for dollar until benefits are eliminated.
Interpretations of the applicable federal law by the Social Security Administration’s POMS limit expenditures to those for the sole benefit of the beneficiary. Accordingly, the trustee must question whether or not an expenditure of funds is for anyone’s benefit other than the beneficiary. For example, the purchase of a handicap accessible vehicle which the beneficiary will not drive but will be used by the entire family may still be considered for the sole benefit of the trust beneficiary.
As one can readily see, these rules can lead to some confusion for trustees and interested persons alike. Yet, the trustee’s duty to uphold the terms of the trust document and the law will nonetheless require the trustee to sustain positions that are distasteful or contrary to the desires of interested persons.
The OBRA 93 addition to the Social Security Act adds yet another layer of complexity for self-settled SNTs where the beneficiary is a Medicaid recipient. Self-settled or first party SNTs are those created with the beneficiary’s own assets typically as a result of an inheritance or recovery in a law suit. Federal law requires that these must have a pay back provision, providing that any trust assets remaining upon the beneficiary’s death will be paid to the Government to the extent of an existing Medicaid lien. Accordingly, the state government or representative agency will maintain an interest in the operation of the trust, with an eye toward recovering expenditures made for the beneficiary through the Medicaid system. Thus, the government may be an interested party in all matters before the court and demand copies of annual accountings for the trust. The trustee must be mindful of not only the beneficiary’s needs but also the government’s looming interest.
To guide the attorneys drafting SNTs, professionals investing the SNT assets, and the families of beneficiaries of SNTs, a review of the standards that govern trustees’ performance in the SNT context is in order. For those establishing a SNT, this information will help discern what to look for in a SNT trustee, what to expect, and how to help ensure that the needs of persons with disabilities are respectfully met.
A trustee has many duties under the common law and by code of law. Together they form the bond between trustee and beneficiary that is the SNT trustee’s legal and ethical duty to protect.
- Skill and Care
1. LOYALTY. Loyalty is the core of what it means to be a trustee. Appending the trustee’s duty of loyalty is the POMS requirement that disbursements must be for the sole benefit of the beneficiary of the trust. The combination of common law duty of loyalty to the beneficiary and the layering of state and federal regulations, require that the trustee apply trust assets in ways that benefit the SNTs intended beneficiary, with third party beneficiary’s interests considered in a residual fashion. The state government interest in protecting any possible remainder interest in the trust subjects the trustee to additional pressure in construing their duty of loyalty to the trust beneficiary as trust disbursements must be weighed with an eye toward governmental oversight and possible objection to disbursements.
2. COMPLIANCE. As with all trusts, the trustee has a duty to comply with and implement the terms of the trust. To direct the trustee in such duty, the SNT documents should be drafted with language atypical of ordinary trusts describing the beneficiary’s condition and personal needs that the SNT will implement. These statements guide the SNT trustee in ensuring that the beneficiary’s needs are met, and they form a benchmark for compliance.
3. PRUDENCE. Trustees must exercise sound discretion as fiduciaries, to act wisely on behalf of others. Sound discretion requires the training, knowledge and experience appropriate to this sensitive work. SNT trustee duties include the work of managing trusts and investing assets, but extend far beyond to include day-to-day details of special SNT trust administration rules, public benefits available to disabled persons under Social Security and Medicaid, and the special needs of disabled persons. Federal entitlement programs have complex rules for trust assets that can jeopardize eligibility for these federal benefits, so SNT trustees must know how to expend trust assets and protect eligibility at the same time.
4. ACCOUNTING. As with any trust, the trustee has a duty to account for the decisions, records and funds of the trust. This accounting duty runs in two directions. First and foremost, it runs between the trustee and the beneficiary, who is entitled to documents and other trust information, so they can be well-informed. Where beneficiaries are unable to understand these documents, the SNT trustee may need to provide them to a guardian or other family member. The trustee’s accounting duty also runs between the trustee and the Court and/or other state agency that may have jurisdiction over the trust. As noted above, the Medicaid lien held by states on self settled special needs trusts transforms state Governments into interested persons if not third party beneficiaries of the trust.
5. PROTECTION. The trustee has a duty to protect and safeguard trust assets. This duty begins with the need to take prompt, active control of trust property, and to keep it safe from loss. This duty is heightened in the context of serving the needs of a person with disabilities who might not be able to assist the trustee with the protection of trust assets. For example, the SNT trustee must take care to ensure that any debts incurred by the beneficiary are valid and not a result of any fraud or undue influence. This duty to protect may extend to pursuing recoveries from insurance carriers, recovering funds lost via inappropriate or fraudulent transactions through financial institutions, or holding prior trustees responsible for misuse of trust assets.
6. PRODUCTIVITY. The trustee must make trust property productive. This duty has two parts. First, the trustee must appropriately invest trust assets for proper income and gains. Second, the trustee must appropriately apply the trust assets toward the beneficiary’s needs and desires, consistent with the trust documents. Investing trust assets is subject to federal and state laws and an “allocation model,” which is based on the beneficiary’s current and future needs, and colored by attention to maximizing quality of life in both the short term and long term. To meet long-term goals, the SNT trustee will work to make trust assets grow with investments such as stocks and bonds. To meet short-term goals, the trustee will need to keep a portion of the trust assets liquid and free from risk in vehicles such as government-backed securities and cash accounts. These responsibilities mean that, for an SNT, the trustee must be familiar with the beneficiary’s disability, prognosis and general state of health. The SNT trustee must be experienced in managing these inconsistent obligations – to grow trust assets, meet a beneficiary’s short-term needs and care for his or her financial and personal wellbeing over the long term.
7. RETENTION. From the duty of productivity arises the duty of retaining SNT trust assets, especially expensive items like cars, homes and other property purchased for the beneficiary’s benefit, in a way that preserves value. These items must be analyzed for appreciation or depreciation and, in some cases, must be kept in the name of the trust. (Maryland and other jurisdictions require that SNT purchases over a specific value using SNT assets must be titled in the name of the SNT.) In many cases, the duty of retention means making careful, efficient purchases to stretch trust assets, so they can serve the beneficiary’s long-term needs. This duty can mean, for instance, carefully analyzing which car to buy for a disabled person’s benefit, whether to buy a new or used one, how best to outfit lift systems, who will drive it, how the car will be owned and insured, etc. Likewise for purchasing a home for a beneficiary’s benefit, decisions extend beyond handicap accessibility and comfort to what is best for the beneficiary financially: whether the home will appreciate, what repairs may be necessary, what taxes and other carrying costs may be, etc. – in short, whether the home will be a sound investment. The SNT trustee’s duty of retention requires balancing all of these factors, to ensure that trust assets are retained wisely.
8. COMMUNICATION. The trustee has a duty to communicate necessary information about the trust to the beneficiary. In the case of a beneficiary with disabilities, such communication may take place through a family member, agent, or court designated guardian. To encourage solid communication between the trustee and the beneficiary, the trustee might invite visits with the trustee, conduct personal reviews of financial statements, and correspond with the beneficiary about developments affecting the trust. The SNT trustee also needs need to be well informed about the medical status and anticipated needs of the beneficiary, so the duty of communication is a two-way street. For this reason, the SNT trustee must encourage open, trusting dialogue to best serve the needs of disabled beneficiaries.
9. CONFIDENTIALITY. While the SNT trustee has the duty to communicate, the SNT trustee also has a duty to maintain confidentiality. Beneficiary finances, health information and personal needs may be private and should not be shared more than minimally necessary to honor the beneficiary’s needs and goals. In some cases, this duty of confidentiality may mean withholding information from third parties whom the SNT trustee suspects may want to use the trust for their own personal benefit rather than the benefit of the beneficiary. Zealously protecting the beneficiary’s confidences also means carefully scrutinizing professionals who may assist in operating the trust, to ensure that they do their jobs well without betraying confidences.
10. SKILL AND CARE. All of the foregoing duties suppose that the trustee is sufficiently knowledgeable about the world of goods and services available to persons with disabilities. Absent such knowledge, the trustee will be unable to properly administer the trust and serve the needs of the beneficiary. The skill and care required of the trustee is not limited to knowledge of the law and methods of accounting. The SNT trustee should also be familiar with the goods and services that are important to the beneficiary’s quality of life. The SNT trustee might need to know how to obtain an educational plan review for a student in a public school or where best to purchase a handicap-accessible vehicle. The trustee may become knowledgeable about handicap accessible design or community services available to assist persons with disabilities. Each building block of knowledge can help facilitate the beneficiary’s access to other supports for enhanced quality of life.
While Compassion may not be a duty of a trustee, in the context of special needs trusts, compassion may be the most important quality. Without heartfelt understanding of the special needs of disabled beneficiaries and their families, no SNT trustee can hope to provide the beneficiary with the level of service and support these sensitive matters require. While compassion must be balanced against legal and financial professionalism, there is no substitute for a professional who genuinely cares and whose caring experience helps disabled beneficiary navigate the sometimes complex personal, legal and financial matters for which a SNT is created.
All of these duties, even if performed well, may not satisfy all beneficiaries. However diligent a SNT trustee may be, the conflicting obligations inherent in the role of trustee create a risk that either the beneficiary or other interested persons may be dissatisfied or simply may not get their way. On some occasions, the trustee must say no to disbursement requests which are imprudent or incongruent with the goals and purposes of the trust. For example, a request for travel may be impractical in terms of the beneficiary’s needs or the cost in relation to the size of the trust.
Moreover, the demands of families can be a great burden to the trustee as well. The compassionate trustee will note that the emotional toll of caring for a disabled family member often leaves parents and siblings nervous and anxious leading to a relationship with the trustee characterized by unwarranted suspicion and vociferous demands. The role of trustee of an SNT is not for the timid or the easily scarred individual.
Another concern for the potential Trustee of a SNT is the possibility that the Trustee may be held liable for allegedly tortuous use of trust owned assets. Common to SNTs is the purchase of a car, especially handicap accessible vans. In general, the trustee of a SNT will purchase the vehicle such that it is owned by the trust and not by the beneficiary’s family. This is required by Maryland COMAR regulations and is prudent practice in the District of Columbia. The vehicle will be operated by a member of the beneficiary’s family. What if the vehicle is driven in an unsafe manner leading to injury or death? Would a trustee be held liable under a theory of negligent entrustment? The trustee could be liable if the trustee had reason to know that the vehicle might be used in an unsafe manner. Perhaps the trustee has a duty to inquire if the driver had a history of speeding tickets or other traffic infractions or might become aware of a poor driving record as the driver receives tickets. In such cases, it can be said that the trustee could reasonable foresee misuse of the vehicle and such misuse is the proximate cause of injury. The potential to be held liable as a trustee, points out the possibility that there are duties which be unknown to the trustee, and not easily discerned from the case law and literature.
Finally, all of the diligence in the world cannot always protect the trustee from liability. Even if one follows all of the known law and abides by the duties elucidated above, the trustee may yet find themselves confronted by disappointed beneficiaries and their families or government agencies with an interest in preserving trust principal to protect their remainder interest. The special rules governing SNTs and duties of serving as trustee to a person with disabilities may cause the Trustee to take positions contrary to the desires of interested persons. Anger can turn to threats and threats can materialize into actual complaints. Given the vicissitudes of service as a trustee, and the extraordinary demands of serving as the trustee of a SNT, this role is not for the faint of heart or the trustee unwilling to devote extra effort to the role.