Using Private Trustees to Administer Special Needs Trusts

A number of
articles in The Voice
have stressed the importance of being careful when choosing trustees to manage
special needs trusts. Often the choices seem to come down to only two: a family
member or a bank. However, family members are often problematic for reasons
explained in a recent Voice
article. On the other hand, banks and trust companies can be impersonal,
often will not handle trusts with less than $1 million in assets, and may not
have personnel who are knowledgeable about the multitude of unusual issues
specific to serving a special needs beneficiary.

There is
sometimes a third option: a private trustee who is not affiliated with a bank
or trust company. In most states, individuals perform as trustees without any formal
licensing. Typically they include attorneys, certified public accountants,
enrolled agents or registered investment advisors who have experience in trust
administration and offer trustee services on a formal or informal basis. In
other states, there are nonprofit organizations that offer trustee services. In
Arizona, the legislature and courts have set up a system for licensing
"fiduciaries" (which might include trustees in some cases). A
fiduciary is a term that encompasses all positions in which the care of the
person or estate of another is given to someone else, such as a trustee,
executor, guardian, conservator or agent. There is also a nonprofit
organization, the Arizona Fiduciary Association, that provides training and
education for professional fiduciaries.

California
appears to be leading the way by screening and licensing private trustees.
After many years of lobbying by private professionals, in 2007 California
enacted the Professional
Fiduciaries Act creating the Professional Fiduciaries Bureau as a
unit of the California Department of Consumer Affairs. Under the Act the Bureau
licenses and regulates non-family member fiduciaries who serve as trustees,
conservators, guardians, executors, and as agents under a power of attorney or
advance health care directive. Requirements for licensing include passing a
written examination, having substantial experience and general education, and
completing 30 hours of approved specialized education courses. Applicants must
clear credit, bankruptcy, and criminal checks as well, and subscribe to a code
of ethics. License renewal requires 15 hours of continuing education each year.
Most licensed private professional fiduciaries in California are members of the
Professional Fiduciary Association of California (PFAC), an affiliate of the
National Guardianship Association. PFAC has been operating since 1999 and
currently has 567 members (see www.pfac-pro.org).

Private
professional trustees often provide a far better alternative to family members
and corporate trustees in handling special needs trusts for people with
disabilities. Many private trustees have previously served as trustees at large
financial institutions. Others have special knowledge of trust administration
as a result of their experience as attorneys, tax professionals, financial
professionals or social workers. Because such trustees typically have a smaller
case load than a bank or trust officer, they can be expected to provide more personalized
service.

Some private
trustees may have substantial experience administering special needs trusts and
are knowledgeable about public benefits and other issues unique to
beneficiaries with disabilities. They may even be familiar with coordinating
with family trust advisory committees and care managers in managing the care of
a disabled trust beneficiary. Private trustees are especially useful where the
residence is being left in trust for the beneficiary. This is because many
corporate trustees either refuse to handle such assets or charge an extra fee
because of the additional work of maintaining a residence.

Private
trustees can be less expensive alternatives to a corporate trustee. In
California, private fiduciaries who handle special needs trusts will either
charge an hourly rate, typically between $75 and $150, or they will charge a
flat annual fee based on the amount of assets under management. The flat rate
is often around one percent of the value of the trust, collected each year.
Special skills, academic degrees, and extensive experience can be expected to
result in higher rates. Finally, because private trustees are often
individuals, the expense of bonding always needs to be considered. In some
states, depending upon the type of trust, the trustee may be required to post a
surety bond to protect the trust beneficiary in the event of trustee
mismanagement of the trust assets. The cost or premium for the bond will be
paid from the trust.

Private
trustees almost always work with other professionals. If not an attorney, a
professional trustee will often have one attorney with whom he or she works
consistently, or he or she may retain different attorneys for different
matters. Some trustees are accustomed to going to court because they handle conservatorship
and guardianship matters that require court approval. Those trustees with a
law, social service, investment, tax or bookkeeping background will often
handle such matters themselves. Others will contract for these services. Some
private trustees offer case management services and will arrange for
caregivers. Others work with geriatric care managers for care coordination
services. In other words, there is wide variety of interests and skill sets
among private trustees. Accordingly, the choice of a particular private trustee
for a particular trust needs to be made with care to ensure a good fit for the
needs of the trust beneficiary.

There is,
however, another side of this evaluation of a good fit. The private trustee
must determine that the trust is one that he or she wants to take on. In
evaluating whether there is a good fit, the potential trustee will consider
several factors. One is the amount of money held by the trust. Private trustees
typically have a lower minimum trust requirement than banks and trust
companies, but there is a point where the costs of administering the trust do
not justify any paid trustee. A second factor is whether or not a residence
will be owned by the trust. A third factor is the nature of the beneficiary's
circumstances. Some beneficiaries require little attention while others have
challenging needs and may require constant attention.

Further,
private trustees will want to read the trust carefully to find out what duties
they will be undertaking, and what authority they are entitled to exercise.
Provisions in the trust that will take extra time or effort can be expected to
either reduce a trustee's interest in being hired or increase the fees. Private
trustees will especially want to have a close look at any trust protector
provisions that might expose them to additional supervision or sudden
termination. They will also want to determine whether they can expect
assistance or interference from a family trust advisory committee. Private
trustees will factor in other sources of expected difficulty outside the trust
document such as the potential for lack of cooperation from the special needs
trust beneficiary and the likelihood of intrusive second-guessing by family
members.

One approach
to resolving such potential problems is to write the special needs trust with
the participation of the proposed trustee and his or her attorney. Family
members, their attorney, and the trustee and trustee's legal counsel can work
together to insure the trust can meet everyone's needs and concerns.

In
conclusion, finding an appropriate trustee to manage a special needs trust is
not an easy job. Family members may lack essential expertise to manage the
trust assets and the beneficiary's government benefits, not to mention the
complicated family dynamics when the trustee and beneficiary are related. Banks
and trust companies may have a minimum asset threshold that is too high for a
particular trust or there may not be a suitable bank in the area with the
expertise to meet the unique needs of beneficiaries with disabilities. Between
the family member trustee and the bank trustee is a third option that may be
the best choice – a private trustee. In many communities private trustees can
bring great expertise, skill, and economy to the administration of special
needs trusts and provide the best service to the trust beneficiary.

The
Special Needs Alliance online.