By Bernard A. Krooks, Certified Elder Law Attorney
Many individuals who have family members with special needs understand the importance of not leaving their inheritance outright to the person with special needs. Leaving money directly to this person could cause a loss of much-needed government benefits, among other issues. It is often appropriate, instead, to have the money placed into a special needs trust for the benefit of the individual with special needs. In theory, this concept is generally understood by most. However, when it comes time to implement the plan, one significant roadblock inevitably gets in the way: Who should be the trustee of my special needs trust? Arguably, this is the most important decision for you to make when setting up your special needs trust. The trustee is responsible for determining what expenditures are permitted to the beneficiary (your family member with special needs). If properly drafted, the trust document might give some direction. However, even the most carefully drafted trust document cannot anticipate each and every possible trust distribution in the future. Sometimes, Medicaid and Social Security eligibility workers will need to review the expenditures. In addition, a court is sometimes called upon to review the trust accountings. This is where the trustee may run into problems if things are not done properly. The court has the power to issue a surcharge order against the trustee for things which the court feels were not done properly. The surcharge order could require the trustee to re-pay the trust out of its own personal funds for expenditures that the court deemed improper.
Let’s say that the trustee determines that it makes sense to purchase a vehicle for the beneficiary, pay for a vacation or pay tuition expenses. At the end of the year, the trustee might be required to submit an accounting to the court for its review, detailing all the expenditures and other items for the year. The court might agree that the expenditures all make sense. On the other hand, the court might rule that the trustee should have exercised more caution. The judge might order the trustee not to make similar distributions in the future, but allow the past expenditures. In some cases, though, the judge might decide that payments from the trust violated the trustee’s fiduciary duty. The challenged expenditures might have been self-serving, or just poor decisions. The court might decide that the trustee’s decisions were so poor that the court issues a surcharge order against the trustee.
Here’s an example of how things can go wrong. In a recent case, Sam agreed to serve as trustee of a special needs trust set up for the benefit of his niece Carla, who was 6-years old and had cerebral palsy and other developmental disabilities. The initial funding for the special needs trust was approximately $200,000, which came from a medical malpractice lawsuit against the hospital where Carla was born. From time to time, the trustee paid for Carla’s expenses but also paid for certain vacations which included Carla’s siblings and other relatives (including Sam’s children). The trustee also paid for a new car to take Carla to physical therapy three times a week. When not being used to take Carla to therapy, Sam would use the car to go to work and for other personal reasons. Upon filing the accounting, the court raised its concerns regarding these expenditures.
In his defense, Sam said he reviewed the trust prior to making the distributions and thought that they should be permitted since Carla did benefit, in some way, from the distributions. Unfortunately, Sam had not previously served as the trustee of a special needs trust, or any type of trust for that matter. Thus, he was unfamiliar with trust law, including the “sole benefit” rule which applied to these types of trusts. The court issued a surcharge order against Sam and ruled that he had to re-pay the trust $34,000 out of his own funds due to the improper expenditures.
How could this have been avoided? Sam could have requested court approval prior to making these distributions. However, this would have caused additional expense to the trust and resulted in less funds being available for Carla. A better solution might be to select a trustee who has experience with special needs trusts. There are several banks and trust companies who actively seek out this type of work and who generally do a very good job. Of course, they all charge fees for their services; however, isn’t it better for the trust beneficiary and all parties involved if things are done properly? Before deciding who should be the trustee of your special needs trust, please consider all available options and consult with an experienced special needs trust attorney to make sure you do what is right for you and your family.
Bernard A. Krooks, Esq., is a founding partner of Littman Krooks LLP and has been honored as one of the “Best Lawyers” in America for each of the last seven year, past President of the National Academy of Elder Law Attorneys (NAELA), past President of the New York Chapter of NAELA and also served as chair of the Elder Law Section of the New York State Bar Association. He has been selected as a “New York Super Lawyer” since 2006. Call 914-684-2100 or visit elderlawnewyork.com.