Rules and Guidelines to Know When Managing a Trust for a Family Member
When a family member is appointed as trustee, it is often their first time taking on this role and acting in a fiduciary capacity. There’s a lot of new information to take in and systems to learn how to navigate, and it can be overwhelming – particularly if you’re administering a Special Needs Trust (also called “Supplemental Needs Trusts” or “SNTs”).
A common challenge for newcomers to trust management is knowing the rules they need to follow and what actions they need to take to follow those rules. This is often referred to as being “in compliance” with the laws, regulations, and other guidelines that govern trust administration. To help you in your role as trustee, here are some of the key rules and guidelines you need to consider:
What’s in the Trust Document
You are probably aware that your responsibility as trustee is to administer the trust funds according to what’s outlined in the trust document. Some trusts designate that funds should only be used for specific purposes like healthcare or educational costs, others may provide caps for how much can be spent on certain purchases like travel, or they could identify categories of spending that are off limits like alcohol or gambling. Remember that it doesn’t matter if you agree or disagree with these guidelines, you are obligated as a trustee to follow the trust’s rules. As a trustee, you are also charged with the fiduciary duty of loyalty to the trust beneficiary, regardless of whether you agree or disagree with their choices.
Using funds for the “Sole Interest” of the Beneficiary
In addition to following the guidance outlined in the trust document, the Social Security Administration (SSA) has what is called a “sole benefit” rule for SNTs. This mandates that trust funds only be spent on goods and services that "solely" benefit the special needs beneficiary. But what exactly does this mean?
In 2019, the SSA provided updated guidance and examples in their POMS manual – which details how Supplemental Security Income (SSI) benefits are to be used and claims should be processed. The “sole benefit” rule is now sometimes referred to as the "primary benefit rule” meaning that others can benefit from a purchase made with trusts funds, as long as the beneficiary is the primary benefactor. For example, if the trust buys a couch for the beneficiary’s home, that does not mean no one else can sit on it. On the other hand, it may violate the sole benefit rule if the trust purchased a laptop for the beneficiary to video call their grandparents on the weekends, but the beneficiary’s brother used it for schoolwork and video games the rest of the week.
Rules around Maintaining Public Benefits
If you are the trustee for an SNT you know that there are certain rules you need to follow to help your loved one maintain their eligibility for public benefits like SSI and Medicaid. Specifically, what trustees need to be aware of is something called “in-kind support and maintenance” (ISM). ISM includes food and/or housing expenses that are paid for by someone else – including funds from a trust. Because the SSA considers ISM to be income, this can result in essential benefits being reduced. Even if an SNT trust document allows funds to be used for housing or food, you may want to put additional restrictions in place to help maximize a beneficiary’s public benefits.
How Funds are Invested and Managed
The Uniform Prudent Investor Act (UPIA) sets out guidelines for trustees and other fiduciaries (e.g., guardians, conservators, etc.) to follow when investing trust assets. As an example, it states that “a trustee shall diversify the investments of the trust” (UPIA § 3). This means that it is the responsibility of a trustee to ensure that the assets are being invested in a diversified way. You don’t need to manage the assets yourself or know how to build a diversified portfolio. But, it is your responsibility to choose – and monitor – an investment advisor who understands these guidelines and can provide a high-level overview of how funds are being invested, how they’re managing risk, and other decisions they’re making to extend the lifetime of trust assets that are needed to cover your loved one’s expenses well into the future.
Following Guidelines for Annual Accountings
The IRS and most state tax bureaus require trustees to file tax returns annually for the trust. Additionally, most state Medicaid or SSA offices require an annual accounting report for SNTs. Specific rules and requirements will vary by state, but submitting accurate records of disbursements, deposits, and other financial activity is critical. (Court supervised trusts have similar requirements and typically their own forms and procedures.) For tax filings, we recommend talking with an accountant who is experienced in trusts to make sure you are keeping the types of records you will need come tax time.
If the Trust is Paying for a Caregiver
Compensating a caregiver using trust funds can be a permitted use of funds (if not restricted in the trust document), but doing so can introduce additional regulations you need to keep in mind. Make sure you understand what it means to enter an employer-employee relationship with a caregiver, and what actions you’ll need to take regarding employee classification, withholding taxes, and more.
When it comes to being a trustee, there are a lot of rules and regulations of which to be mindful. This is not a comprehensive list, but is a good starting point to know what guidelines you need to learn more about. We always recommend seeking the guidance of professionals that are experienced in estate and trust planning, Elder Law, special needs planning, and accounting to help you stay in compliance as a trustee.
This article is not intended to provide investment, tax, or legal advice. Before making decisions involving investing, legal, tax or accounting concerns, you should consult appropriate professionals regarding your speciﬁc situation.