Responsibilities of a Special Needs Trust Trustee

For individuals with disabilities, an inheritance or settlement can jeopardize their government benefits, such as Medicaid and Supplemental Security Income (SSI). A special needs trust (SNT) can help the individual remain eligible for these benefits while ensuring they have additional financial support.

What Is a Special Needs Trust?

A special needs trust (SNT) is a type of trust that can be created to benefit a person with a disability. It is funded with the disabled person’s own assets. Trusts for incapacitated persons funded with someone else’s assets, typically parents, are referred to as supplemental needs trusts. Special needs trusts offer a number of benefits to the individual:

• Helps ensure they stay eligible for public benefits
• Supplements their income, so that they can pay for needs not covered by public benefits (such as education or recreation)
• Preserves any assets they may have from an inheritance, a lawsuit settlement, or gifts

What Is the Role of the Trustee?

The trustee plays a critical role in the life of the special needs trust beneficiary. Serving as the trustee of an SNT involves several important considerations and responsibilities.

In managing the SNT, the trustee must act in the best interests of the trust beneficiary. They must make decisions that help the beneficiary maintain their public benefits as well as the highest quality of life possible.

1. Making Distributions From the Trust

The SNT trustee makes distributions to the beneficiary, transferring assets or income from the trust to the beneficiary. When making distributions, the trustee is responsible for ensuring the following:

• The distribution is allowable under the trust's terms.
• The payment will not compromise the ability of the beneficiary to receive benefits. (In certain rare instances, a trustee might decide to make a distribution that disqualifies the beneficiary from benefits. This may be the case when it is in fact in the best interest of the beneficiary.)
• The trustee must understand the trust’s terms as well as the benefits regulations.
• Trust distributions cannot go to expenses that Supplemental Security Income or Medicaid covers. For example, a beneficiary receiving SSI cannot put trust distributions toward food and basic shelter expenses. This is because SSI is intended to pay for these types of expenses. A Medicaid recipient cannot use trust funds to pay for covered medical expenses. Using distributions for covered expenditures could cause a beneficiary to lose their benefits.
• Funds from the trust must directly benefit the beneficiary. The trustee is not permitted to distribute funds to a third party. SNT funds may indirectly benefit another person as long as they primarily support the beneficiary.

2. Managing Investments of Trust Property

In addition to handling distributions from the trust, SNT trustees are also responsible for overseeing investments. The level of risk should be appropriate for the situation. Investment options may depend on the age, life expectancy, and needs of the beneficiary.

In many cases, a financial advisor selects investments. Yet even when a financial professional is involved, the trustee should provide oversight, attending meetings with financial advisors and accountants.

3. Maintaining Trust Records

Recordkeeping is another essential obligation of special needs trustees.

• While the trustee can hire a professional bookkeeper or accountant, they are responsible for ensuring accurate and detailed records are kept. Records must track all financial transactions related to the trust, including income, disbursements, and investments.
• The trustee must provide regular accountings of the trust to the beneficiary. These reports must also go to the representative of the beneficiary and any co-trustees or other interested parties. Accountings should include a detailed description of all financial activity related to the trust since the last accounting. They also should contain an updated balance sheet.
• Records should also include all correspondence and communications related to the trust. This includes any meetings or discussions with the beneficiary or other interested parties.

It is essential that the trustee maintain proper records for audit by the beneficiary or a court. This documentation shows that the trustee acted in the beneficiary's best interests and followed the trust's terms.

4. Tax Reporting for the Special Needs Trust

Tax obligations also apply to SNT trustees. Responsibilities include filing state and federal income taxes for the trust. The deadline to file an annual tax return generally falls on or around April 15.

For third-party SNTs, the trustee is responsible for reporting income, deduction, and credit. Trustees use Form 1041 to report income to the federal government.

Beneficiaries and their representatives must also receive copies of tax documents.

In some cases, particularly when there is a large, complex trust, tax professionals prepare the trust's taxes for filing. Yet, as part of their role, trustees must comprehend the basics of trust accounting and how the government taxes distributions.

5. Fulfilling Fiduciary Duties

SNT trustees have a fiduciary duty to act in the best interests of the beneficiary. They must avoid any actions that would harm the financial or personal interests of the disabled individual. Making decisions inconsistent with the welfare of the individual with a disability breaches the fiduciary duty, making the trustee liable.

The trustee must ensure that the trust supports the needs of the beneficiary while also following the trust’s terms. This encompasses using trust funds to pay for expenses not covered by government benefits, so that the beneficiary remains eligible for these programs.

To act in the best interests of the beneficiary, the trustee must remain informed of the person’s unique needs and circumstances. Trustees may opt to work with such professionals as financial advisors, attorneys, and care providers. These kinds of experts can help ensure that the individual with the disability is receiving appropriate support.

6. Communicating With the Beneficiary of the Special Needs Trust

In addition to helping sustain quality of life for the beneficiary, the trustee must communicate consistently with them. Failing to communicate with the beneficiary and involved family members can put a trustee at risk of legal action.

• By keeping lines of communication open with caregivers, trustees can stay informed about the needs of the person with the disability. They also can gain a thorough understanding of how to use trust funds to enhance quality of life for the individual.
• Coordinating payment for essential services like housing and medical care is often an essential part of the trustee’s role. Communication with caregivers and others involved in the beneficiary’s life is important in keeping the beneficiary eligible for benefits.
• As mentioned, the trustee may decline a beneficiary’s request so that the beneficiary stays eligible for benefits. In such cases, the trustee should explain their reasoning to the beneficiary and family members.

Consult With our Elder Law Attorneys for Special Needs Planning on Trust Administration

Serving as a trustee for a special needs trust is especially complex, with a trustee having many essential obligations and responsibilities.

Individuals who have taken on the role of trustee can benefit from consulting with a special needs attorney. Stanley Vasiliadis, a lawyer with the law firm of Vasiliadis Pappas Associates, is a long-time member of the Academy of Special Needs Planners. If you are or contemplate becoming a trustee of an SNT, consult with the attorneys at Vasiliadis Pappas Associates for assistance in properly fulfilling your role and to safeguard against allegations of mismanagement or other misconduct.