When a client receives a settlement, they often need a trust to protect the money. It could be a settlement protection trust or a special needs trust, depending on the client’s situation. Attorneys often ask us who should be the trustee of the client’s trust.
Option 1: Assigning a Professional Trustee
The first option is a professional fiduciary such as a trust company or company that provides fiduciary services.
The benefits of having a professional trustee are as follows:
- They know the Medicaid and SSI rules, and they know how to interact with those agencies in conjunction with a settlement.
- They can take care of annual reporting to these respective agencies
- They will make sure they don’t make any distributions from the trust that will jeopardize the client’s eligibility for those benefits going forward.
A fiduciary act as trustee is a good idea if there’s no one in that client’s life who is financially sophisticated and responsible enough to act as trustee. The downside with a professional fiduciary or trust company act as trustee is that they get paid from the trust for their service; there are fees involved.
Option 2: Asking a Family Member or an Individual Person to serve as Trustee
The second option is to choose a family member or an individual to serve as the trustee. When a family member acts as a trustee, they most often don’t get paid for doing so, and the client saves some money. However, the family member or individual has to be financially sophisticated enough to understand the Medicaid and SSI rules, reporting requirements, and they must know how to prepare the tax returns that are associated each year with the trust (depending on the type of trust) to make sure that everything is in order.
These responsibilities might be a burden to family members and they might not want to take on the task of being a trustee. There’s also a family dynamic that comes into play in a special needs trust situation, where a parent is acting as a trustee, and their child is the beneficiary of that trust. If the beneficiary wants to make a purchase using funds from the trust but the trustee doesn’t think it’s in the beneficiary’s best interest, then there could be family conflict that can hurt the relationship between the child and the parent.
Sometimes in that situation, it makes sense to offload the responsibility of being a trustee to a professional fiduciary to preserve the intact family dynamic and the relationship between the parent and the child.
When deciding who should be the trustee of a client’s settlement trust, several factors are involved: the client’s financial situation, the size of the settlement, what the financial goals are, how much the fees are, and others.
Along those same lines, it is in the beneficiary’s best interest if the money inside the trust is invested to make the funds grow and earn interest. Often, our firm works with the trustee (whether a professional trustee or a family member or friend) to invest the funds into a diversified, conservative portfolio of investments based on the needs and goals of the client.