Special needs trusts (SNTs) — trusts created for the benefit of a disabled beneficiary — present exciting opportunities for corporate fiduciaries. They also risk sapping fiduciaries' time and emotional energy. Sometimes, the wisest choice is for a corporate trustee to limit its responsibilities so that it serves only as an investment advisor or custodian.
The number of SNTs and interest in them has ballooned in the last decade. There are two types of these trusts that supplement, rather than reduce or replace, public assistance benefits available to disabled beneficiaries. The first is third-party funded trusts, which are usually created as part of a family's estate planning for the benefit of a child with special needs. They can vary in size from less than $100,000 to tens of millions. Whatever the size, the grantors' goal is almost always the same: to assure that their disabled child's needs are met when the parents are no longer available to care and provide for him. Usually the needs of other family members, as well as tax planning considerations, take a back seat to the parents' overriding goal of providing for their disabled child.
The second type came into being as a result of the Omnibus Budget Reconciliation Act of 1993 (OBRA ‘93), which amended the Social Security Act to permit certain self-funded payback trusts. A disabled person's own assets are transferred to this trust without a transfer penalty, thus permitting the individual to receive cash assistance, such as Supplemental Security Income (SSI) and medical benefits (like Title XIX or Medicaid). These trusts must provide that upon the disabled beneficiary's death, the state or states that have provided medical assistance to him will be reimbursed to the extent of trust funds then available. Any remainder may then pass to designated remainder beneficiaries. With the growth of medical malpractice awards and other personal injury awards, as well as inheritances, many disabled individuals are able to receive public benefits while preserving hundreds of thousands, in some cases millions, in OBRA '93 trusts.
For corporate fiduciaries, there is a fundamental distinction between SNTs1 created by family members for a disabled minor and OBRA' 93 trusts created by a court or guardian with the disabled beneficiary's own funds. Usually, families that establish SNTs will have determined in advance whether a corporate fiduciary should serve as a trustee. Sometimes there will even be a discussion of what initial responsibilities the corporate fiduciary will be asked to assume, and whether it has the capability of doing so. While the parents are alive, they generally continue to exercise most of the decision-making for their disabled son or daughter. Unfortunately, though, there often is little or no thought given to what the corporate fiduciary duties will be once the parents are deceased or otherwise incapable of serving as co-trustees. And, without an involved, interested and knowledgeable family member to assist the corporate fiduciary, the fiduciary burden may become very different. Usually, the changed circumstances of a family-created special needs trust present relatively manageable problems in comparison to those that arise for corporate fiduciaries acting as trustee of an OBRA '93 trust. The families whose children are the beneficiaries of an OBRA '93 trust often will have had little or no experience with probate courts, banks, investments and so on. The concepts of diversification and fiduciary discretion often are unfamiliar to them — and may be greeted not only with puzzlement but, often, with distrust or even outright hostility.
With both types of trusts, corporate fiduciaries may find that the time and staff effort involved in administration cannot be justified by the fees generated. In some cases, the risks of accepting such appointments simply outweigh any possible benefits. Some examples, composites of actual cases,2 may be helpful to explain this assertion.
When John and Louise established a special needs trust for their only child, Bill, they recognized his mental retardation meant that he was not only unlikely to be self-supporting, but also that he probably would never live independently. While Louise was alive she organized an active social schedule for Bill; although he was 40 years old, he still lived at home. After Louise's sudden death, John and Bill became increasingly isolated, rarely leaving their home and losing all contact with other family members. Bill, who had attended regularly (and enjoyed) a daytime vocational program, became increasingly over-weight, and lost many of his social skills. John's physical and mental health also deteriorated. Eventually, after John became lost while returning home from grocery shopping, he was diagnosed with severe dementia. He was hospitalized in a local psychiatric facility and was later placed in an Alzheimer's treatment unit of a long-term care facility, where he died within a short time.
John and Louise had never named a successor guardian for Bill, but they had designated a local bank as their successor executor and as sole trustee of Bill's trust. The local bank had long ago become part of a much larger, multi-state institution and the closest trust officer was now located about 50 miles away. Little or no due diligence was performed before the bank's petition to be appointed as executor and trustee was filed. Not only were John's financial and personal affairs in complete disarray, but also Bill literally had no place to live. (Indeed he had accompanied his father to the psychiatric hospital and remained there for almost a month.) Although about $1 million in assets passed to Bill's trust, the administration of the estate and, above all, the urgent efforts involved in resolving Bill's medical, vocational and housing needs required hundreds of hours of administrative time. Particularly galling was the reaction of the local probate judge to the trustee's request for $10,000 in compensation for its “extraordinary services.” The judge suggested that there was nothing “extraordinary” in a mentally retarded person's situation being chaotic under such circumstances and she questioned the trustee's judgment in accepting the fiduciary appointment if it was unequipped to deal with such exigencies.3 The extraordinary services fee request was withdrawn with the hope that the fiduciary fees from the trust would, in the long run, provide adequate compensation. But, Bill's initial placement in a state group home was a disaster and, in the end, the trustee was persuaded to resign by Bill's state “case worker” in favor of an individual with professional experience in developmental disabilities who established an independent, fully staffed residence for Bill, where he now lives with two other developmentally disabled individuals.4 The bank has had no further involvement in Bill's trust and is considering adopting a policy of declining all future special needs appointments.
The travails of Bill's fiduciary pale beside those of the corporate trustee in charge of a trust for Peter, a three-year-old child who was severely injured at birth and received a $5 million settlement. Because a probate judge found that Peter's parents were not qualified to handle his financial affairs, he appointed a corporate fiduciary as guardian of Peter's estate, directed it to create an OBRA '93 trust and to name itself as trustee. The trustee purchased both a $50,000 handicapped van for Peter and a $500,000 fully accessible house for his family. Since Peter required care 24/7, the trustee agreed to pay all household expenses and to compensate Peter's parents (neither of whom were otherwise employed) for their “extraordinary” efforts at a rate of a total of $700 per week. Arrangements also were made for a home health aide to come twice a week to relieve the parents. Additionally, a charge account for Peter's expenses was established. The family, however, chafed at any restriction imposed by the trustee and even balked at supplying receipts for purchases made for Peter. When a dispute developed over credit card expenditures (purchases from an adult video store being unrelated in the trustee's view to Peter's needs), the family left the jurisdiction in the van, abandoning the renovated house and demanding that the trustee purchase a new home in a different state, which, they argued (correctly but with doubtful relevance), was closer to their extended family. When the trustee refused this request, the parents challenged the decision in probate court, even asserting that the new state had jurisdiction over Peter's trust. Although the family's lawyer failed in her subsequent attempt to remove the trustee or to change jurisdictions, she did succeed in having a substantial portion of her fees paid from the trust. The family eventually returned to the first home, but the family-fiduciary relationship remained tense and the trustee's problems continued. A family member (a cousin who was apparently staying at the home) was arrested for allegedly possessing drugs. The school authorities reported concerns to the local child welfare agency about Peter's frequent absences. Probate hearings became routine, as the fiduciary repeatedly sought the protection of court orders for its fiduciary decisions. The probate judge strongly resisted the fiduciary's suggestion that it resign in favor of an individual successor; the judge indicated that he had appointed this particular corporate fiduciary because of its acknowledged expertise in handling substantial trusts. The judge said he'd look with consternation on any attempt to resign and the corporate fiduciary was reluctant to antagonize a judge who must pass on hundreds of its trust accountings each year.
To this day, the trustee is faced with years of litigation and little hope of establishing a working relationship with the parents (who continue to be compensated by the trust for their care of Peter and whose attorney now routinely submits her fees to the probate court with a request — generally granted — that they be paid from trust funds). No end to the drama is in sight, and the cost of all of this to the trust has been staggering. Hundreds of thousands of dollars that could have been used to fund Peter's future care have been consumed in the struggle.
HOW TO DO IT
These are extreme examples of the trustees' dilemmas with SNTs. Yet they accurately reflect the situations that corporate fiduciaries do encounter. Disgruntled beneficiaries are a fact of fiduciary life. What is noteworthy here is that these special needs beneficiaries — Bill and Peter — were not disgruntled. Indeed, in both of these cases the experienced trust officers cared deeply about the beneficiaries and went far beyond their professional obligations to address their special needs. Bill and Peter had every reason to be grateful for their fiduciaries' hard work and by any objective standard their lives were significantly improved by their fiduciaries' efforts. Rather, it was the special circumstances surrounding these beneficiaries that created the fiduciaries' problems: in Bill's case, a lack of understanding of what his needs would be and an institutional inability to respond effectively to the crisis created by his father's incapacity and subsequent death; in Peter's case, an unhappy personal situation in which the corporate trustee became the focus of a dysfunctional family's anger and greed.
What these examples demonstrate is not that corporate fiduciaries should refuse to become involved in special needs trusts. To the contrary, their investment expertise and administrative skills can be critically important to protecting the interests of a disabled beneficiary. Rather, these cases show that there are aspects of the SNT fiduciary relationship that may be better assigned to individuals who have the time, knowledge and accessibility that allow them to deal with the beneficiary's family, as well as the social welfare agencies and others who are critical to meeting the beneficiary's special needs.
Corporate fiduciaries should analyze cases carefully before accepting SNT assignments and insist on their responsibilities being limited to those areas in which they cannot merely perform, but excel, while avoiding those that are beyond the scope of their institutional expertise. For example, rather than serving as sole trustee and employing an individual agent to serve as a case manager (who organizes the beneficiary's care and reviews the appropriateness of medical or other expenditures), corporate fiduciaries should seek a co-trusteship with a qualified individual who assumes responsibility for administering all services and arrangements for the beneficiary's care. Responsibility for investment management and record-keeping is reserved to the corporate fiduciary. The individual co-trustee also can serve an important role in bridging the gap between the family's perception of the corporate fiduciary's role and its actual one. This is particularly important when a family is unfamiliar with the concepts of trusts and fiduciary duties or when the beneficiary's or his family's needs are as much (or more) related to personal problems and challenges as to financial needs. This type of division of responsibility will not only serve the self-interest of the corporate fiduciary but also assure that even before accepting an appointment the corporate fiduciary's principal concern — the best interest of the disabled beneficiary — is being fulfilled.
- The terms “special needs” or “supplemental needs” trusts are used interchangeably by most commentators to identify trusts that are intended to permit a disabled beneficiary to qualify for public assistance benefits while receiving additional trust benefits for his special needs.
- The hypotheticals in this article are based on multiple actual cases. Of course, the names, significant details, and other identifying information have been changed and events combined to preserve confidentiality.
- The assistant attorney general representing the state agency dealing with services to persons with mental retardation also criticized the fiduciary's conduct. But he acknowledged that his client agency could not provide meaningful assistance to the family and had been unable to locate a placement for Bill.
- In this case the individual was a young lawyer with a personal interest in mental retardation. In other cases, retired child welfare workers and former bank trust officers have served successfully in such roles.