When a Family Member Serves as Trustee – “Fair and Honest Is Not Enough”

Parents typically face two choices when selecting a trustee
to manage a special needs trust for their child when the parents have died. One
choice is a professional trustee–a bank or trust company or an individual who
is in the business of serving as a trustee. Of course, professional trustees
charge fees, and many banks and trust companies have a minimum trust balance
requirement in order to serve as trustee. The other choice is to name a family
member to serve as trustee, such as a sibling of the trust beneficiary or some
other trusted family member. However, in most cases, this family member will
never have served as a trustee and may have no idea what will be required to
take on the responsibilities of a trustee.

As lawyers, we regularly (some might say incessantly) remind
our clients that agreeing to serve as trustee brings with it some very
important responsibilities and that the failure to carry out those
responsibilities can have very unfortunate results. Because a trustee is
managing money for the benefit of someone else, the law holds the trustee to a
much higher standard of conduct than if the trustee were managing his or her
own assets. In other words, a person can be sloppy about his or her personal
financial records, but if he or she agrees to manage someone else's money, the
rules are different. The law imposes a "fiduciary duty" on
trustees–the duty to act in the best interests of the beneficiary (the person
for whose benefit the trust was established).

This fiduciary duty is magnified when the beneficiary, due
to a cognitive disability, does not have the capacity to oversee the trustee's
performance. Understanding the requirements of fiduciary duty is especially
important for trustees of special needs trusts. First, there are the usual
fiduciary duties, among which are the obligations to keep accurate and detailed
records, to ensure that funds are invested in a responsible manner, not to
engage in "self-dealing" or to commingle the trust assets with the trustee's
own, and to ensure that fiduciary income tax returns are filed on a timely
basis.

In addition, the trustee of a special needs trust must
administer the trust in a manner that is consistent with the rules of the
Medicaid and/or Supplemental Security Income (SSI) programs. The trustee's
failure to carry out these responsibilities could lead to a termination of
income benefits and medical coverage for the beneficiary. And if the trustee's
mistakes are egregious, the trustee may end up being personally liable for the
financial consequences, meaning that the trustee would have to dig into his or
her own pocket to compensate the beneficiary for these mistakes.

We often notice mistakes when we prepare accountings for our
trustee clients. And while professional trustees, such as bank trust
departments, also make mistakes, we see more problems when family members serve
as trustees. But when we point out these mistakes to the trustee, we will often
get these responses:

•           "I
don't keep detailed records of how I spent the money. If necessary, I can tell
you what you need to know just from memory."

•           "Of
course I used trust funds for (the beneficiary's) benefit, and I resent the
implication that I might have misspent trust funds or used some of this money
for my own expenses."

•           "Yes,
I signed the trust agreement, but I never really read the document. I've been
too busy caring for (the beneficiary). I've always been fair and honest in how
I've used funds in the trust for (the beneficiary's) benefit, and I don't care
what anyone thinks about the job I've done."

Unfortunately, in the world of trusteeship, fair and honest
is not enough. A parent may have chosen Uncle Joe to serve as trustee, and he
may be the most honest, well-intentioned and dedicated advocate one could ever
find for the child. Uncle Joe may spend hours as a friend and companion each
week, he may talk to doctors, social workers and residential counselors, and he
may have used trust funds to make the child's life as comfortable and enjoyable
as possible. Nonetheless, if Uncle Joe cannot accurately account for every
dollar he spent from the trust, he remains potentially liable. And if he spent
trust funds in a manner that violated an SSI or Medicaid program rule, then he
put the child's government benefits at risk, regardless of how genuine his
intentions might have been.

All in the family

We know that choosing the trustee of a special needs trust
can be one of the most difficult decisions our clients must make. Our clients
who are parents of children with disabilities naturally gravitate toward other
family members–siblings, cousins, aunts and uncles. In most instances, clients
select family member trustees for both emotional and financial reasons.

Clients may believe that a family member will have an emotional
attachment to the beneficiary of the trust and as trustee will stick with the
job, come what may. Clients also assume that a family member trustee–unlike a
bank–will not charge a fee, thereby saving the trust considerable money over
the course of the beneficiary's lifetime.

Hindsight is always 20/20

After many years of practice, and after working with many,
many trustees over the years, we have changed our way of thinking. While in
some situations it is appropriate for a sibling or other family member to serve
as trustee, in many cases, particularly with a larger trust, naming a family
member is not the best decision, for several reasons.

First, clients fail to appreciate the amount of work
involved in being a good trustee. Even in those instances where the family
member retains outside assistance for such services as tax return preparation,
annual accountings, and investment review, the family member remains legally
responsible to ensure that all of those steps are taken and is potentially
liable if any step is not taken. A good trustee needs to actively supervise all
trust activity, and it can be a time consuming job.

Second, clients often assume that a family member trustee
will not charge for services. In fact, every trustee–family member, bank or
some other professional–is entitled to a fee as a matter of law, and no trustee
can be compelled to serve without the right to be paid for time spent.

Experience has taught us that these two assumptions–that a
family member can handle the job without a problem and that the job will be
done for free–are inaccurate. In recent years we have seen more and more family
member trustees resign from the job. The time and effort required to do the job
right was simply more than they expected, and they wanted out. They may want to
remain involved in the life of the child with the disability in some capacity,
but not as a fiduciary charged with managing money and property.

For those family members who continue to serve as trustees,
many have begun taking compensation. And so they should–serving as a trustee is
often time consuming and complex. Trustees who take the job without any
compensation often end up resentful and frustrated. But once the family member
starts taking commissions, there may be no significant cost savings over what a
corporate trustee would charge. In that case, it may turn out that our client
was operating under a false assumption when selecting the trustee. The point is
that the client should realize that a family member may not be good at handling
these pesky fiduciary tasks and may still charge a commission.

Are we saying that a family member should have no role?
Absolutely not. We are saying that family members are often better suited for
other roles: guardians, agents under powers of attorney or health care proxies,
or just as plain old advocates or companions. In those cases where a bank or
other professional trustee is used, the family member can still be given
certain rights to make sure things are going well, such as the right to request
copies of all trust financial statements, the right to receive annual
accountings of trust activity, and if the bank or professional trustee is not
responsive or proactive, the right to change trustees. Many family members
would choose this level of responsibility over outright trusteeship if they
understood the demands of serving as trustee. Our job as special needs planning
attorneys is to help our clients understand the options.

 "Reprinted with
permission of the Special Needs Alliance – www.specialneedsalliance.org."