A person smiling and helping their special needs loved one do their hair after looking into the responsibilities of a trustee of a special needs trust to find the best person for the job!

A special needs trust can be an excellent tool to protect your loved one’s assets and provide for their needs over time, including when you are no longer around to care for them. Another great benefit of using this type of trust is that it ensures your loved one can enjoy a higher quality of life while maintaining eligibility for government benefits. The trustee plays a pivotal role in managing the finances for your special needs loved one by protecting their interests and maintaining their ability to qualify for benefits programs. This makes choosing the right trustee crucial to the beneficiary’s present and future well-being and quality of life. But many people in your position wonder, What are the responsibilities of a trustee of a special needs trust? We are here to answer this question!

This blog is the second part of our two-part series in which we guide you through choosing the right person to be the trustee of a special needs trust and what their responsibilities are. If you haven’t yet, check out the first installment to learn the basics of choosing the right person for the job! Let’s dive into the responsibilities a trustee has when administering a special needs trust.

What Are the Responsibilities of a Trustee of a Special Needs Trust in California?

A trustee will have tremendous control and influence over your loved one’s financial and personal well-being, so the trustee must be honest and reliable. Here are the key responsibilities of a trustee of a special needs trust

Related Article: Special Needs Trusts: Consider These Things

Upholding Their Fiduciary Duty

California trust law imposes a fiduciary duty on trustees to always act ethically and in the best interest of both the trust and beneficiaries, but someone who is not a professional fiduciary may be unaware of exactly what that means. 

Further, if a family member takes on this responsibility and fails to fully understand what this duty requires, they can be held legally liable for their actions. Even something like accidentally causing the beneficiary to lose eligibility for benefits constitutes a breach of duty. 

With a professional fiduciary serving as the trustee, competence is never in question, and you can rest assured they will act in your special needs loved one’s best interests and in the best interest of the trust. A professional trustee can seamlessly take on this role and fulfill this duty. 

Related Article: How to Manage a Supplemental Needs Trust in California

Making Distributions from the Trust

Making distributions is another key consideration when understanding the responsibilities of a trustee of a special needs trust. When making distributions to the beneficiary or transferring assets or income from the trust to the beneficiary, the trustee is responsible for ensuring:

  • The distribution is permissible per the trust’s terms.
  • The payment will not compromise the ability of the beneficiary to receive benefits.
  • They understand benefits regulations and trust law.
  • The funds from the trust directly benefit the beneficiary and never a third party. 
  • They stay informed about changes in the beneficiary’s benefits to make informed decisions and avoid catastrophic mistakes. 

“The trustee must possess a deep understanding of public and government programs, such as Medicaid and Social Security, or else they risk disqualifying the beneficiary from receiving crucial benefits for their health and quality of life. For example, they must know how SSI defines ‘income’ and ‘resources.’ This is one reason working with a professional is essential.”

– Marcia L. Campbell, CPA and Professional Trustee

Related Article: What Can a Special Needs Trust Pay for in California?

Managing Investments of Trust Property

The trustee must handle much more than distributions from the trust. They are also responsible for managing investments, and the level of risk should be appropriate for the situation. Investment options hinge on the age, life expectancy, and needs of your loved one.

This investment responsibility relates back to fiduciary duty. If necessary or desired, a trustee can hire a financial advisor or accountant to assist in this role to select investments.

Maintaining Trust Records

Recordkeeping is a crucial obligation that a trustee must uphold, as they must be prepared for audit by the court or beneficiary. Ultimately, trustees must demonstrate that they acted in the beneficiary’s best interests and adhered to trust terms. This responsibility entails:

  • Ensuring accurate and detailed records are kept to track all financial transactions related to the trust, including income, disbursements, and investments. 
  • Providing regular trust accountings that comply with probate law to the beneficiary. These accountings must be sent to the appropriate parties and include detailed descriptions of all financial activity related to the trust since the last accounting. 
  • Maintaining records of all correspondence and communications related to the trust, including any meetings or conversations with the beneficiary or other interested parties. 
  • Reporting to the agency or agencies administering benefits programs. 

Related Article: What Are Trust Accounting Rules in California?

Tax Reporting for the Special Needs Trust

Your trustee will also need to file state and federal income taxes for the trust by a deadline that typically falls on or about April 15. 

For special needs trusts, the trustee must report income, deductions, and credits using Form 1041 to report income to the federal government. Additionally, trustees may be required beneficiaries and their representatives receive copies of tax documents. 

When the trust is especially large and complicated, tax professionals are necessary to prepare and file the taxes. Still, as part of their responsibilities, trustees must understand the basics of trust accounting and the taxes that apply to distributions. 

This responsibility is complicated, and hiring a professional trustee can be a huge asset because they will have the necessary skills, resources, and network to fulfill it. 

Communicating With the Beneficiary of the Special Needs Trust

Lastly, in line with their fiduciary duty, a trustee must also communicate consistently with beneficiaries. Failure to do so is a breach of duty and can result in legal action. This is a key responsibility because:

  • Keeping lines of communication open with caregivers enables trustees to stay informed about the needs of the person with the disability and provide an extensive understanding of how to use trust funds to sustain a high quality of life for them.
  • Coordinating payment for essential services, such as housing and medical care, is often a core part of their role, and communicating with caregivers and other relevant parties in their life is crucial to ensuring they maintain eligibility for benefits.
  • A trustee may have to decline certain beneficiary requests to ensure they continue to qualify for benefits, and in these situations, it is essential to explain the reasoning behind that decision to the beneficiary and their family.

Do You Need a Professional Trustee to Help Your Special Needs Loved One Sustain A High Quality of Life? Let Us Help.

The responsibilities of a trustee of a special needs trust can seem overwhelming as many of them are complex and require considerable financial expertise as well as extensive knowledge of trust law and government programs. Only a professional fiduciary and trustee has both. The margin for error is slim. One mistake can have far-reaching consequences on the well-being and quality of life of your special needs loved one.

To give your special needs loved one the life they deserve, it is important to find a premier trustee who will ensure your special needs loved one is in expert, reliable hands.

Elderly couple talking about the fiduciary duty with an attorney.

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