Leaving an IRA to a Special Needs Trust Is No Longer Such a Bad Idea
An exception to the SECURE Act's otherwise stringent rules about?distributions from inherited IRAs?potentially changes longst...Read more
A recent felony charge against the mother of a special needs child in Minnesota offers a good reason why an independent trustee of a special needs trust, or at least oversight over a family member serving as trustee, may be a good idea.
Pamela Fischer, 66, of Rochester, Minnesota, has been charged with the financial exploitation of her adult daughter, who has both physical and mental disabilities. After the death of the child’s father, a special needs trust was set up in 2013 to hold the daughter’s share of the inheritance, nearly $35,000. The trust now has a balance of $18.11, and Ms. Fischer has admitted using the money in her daughter’s trust for her own benefit. She was also receiving the daughter’s Social Security payments and has admitted to spending a portion of those on herself as well.
All sorts of mishaps can befall a trust, not just fraud but also mismanagement, whether intentional or not. Even with the best of intentions, those agreeing to be trustees can find themselves overwhelmed by the demands and complexities of the position; it can feel like a full-time job, between paying numerous bills, coordinating with medical professionals, securing housing, medical care and government benefits, and attending to a host of other responsibilities.
Fortunately, if you have concerns about your trustee, you have some options to safeguard your child’s best interests:
Corporate trustees with legal or financial backgrounds can be hired to regularly review the administration of trust documents. They stay current with changes in trust and tax law, as well as public benefit programs rules. A professional trustee might be associated with a bank or trust company, or perhaps be the special needs planner you have already engaged. They will come at an additional cost, but consider this money well spent as the price of insurance against mismanagement, especially for trusts involving substantial funds.
But if cost is an issue, or if a parent prefers to avoid leaving things entirely to someone outside their circle of friends and family, there are other options.
One solution is to have the parent and a professional trustee serve as co-trustees. The parent has a clear understanding of the family’s objectives and the needs of their child, while the co-trustee uses their expertise to keep an eye on issues of finance and public benefits law. This can be a good combination for a well-funded trust. For trusts involving smaller sums of money, there is an alternative solution, in the form of pooled trusts.
With a pooled trust, a non-profit organization serves as the trustee. There are fees associated with a pooled trust, but it is generally less expensive than a for-profit professional. A pooled trust company works almost exclusively with beneficiaries who have special needs, and is thus likely to be attuned and sympathetic to parents and children facing these challenges. Pooling trust resources can reduce administrative fees and thus free up funds for investment. They also offer access to an array of investment opportunities. Pooled trusts are available in most states. For the Academy of Special Needs Planners' list of pooled trusts around the nation, click here.
Families that would rather not engage an outside entity, yet still want an additional layer of protection, can engage a trust protector to oversee the trustee. The trust protector could be a relative, a friend, or anyone else in one’s circle of trusted people. Their duty is to provide an additional pair of eyes for the trust's beneficiary, making sure that the trustee is properly performing her job. The trust protector typically has access to the trust's accounts and can require the trustee to produce reports and summaries of what she has done for the beneficiary. If a trust protector believes that the trustee is not properly performing their duties, he usually has the power to fire them. Depending on how the trust is drafted, the trust protector may even have the authority to name a new trustee if this is not already stipulated in the trust document. (Usually, however, the trust protector must name an independent trustee to avoid a conflict of interest by, for instance, firing a trustee only to name himself as their replacement.)
Bottom line: It makes sense to review your trust closely and consider adding an extra layer of protection so that your loved one doesn’t run the risk of ending up with a depleted trust like the daughter in Minnesota. Your special needs planner can help you design a strategy that works best for you.