Selecting Right Trustee for Substance Abuse Trust

Editor’s note: This is the final part of a three-part series on trusts for people with substance use disorders. Click here for part one and here for part two.

No matter how clearly a substance abuse trust may express a parent’s directions, ultimately, the success of the trust will come down to the actions and decisions made by the trustee over the course of the trust. So, in addition to settling on the language to be included in the trust document, the parents, as settlors, should be equally focused on selecting the trustees who will best carry out their intentions.

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Choosing the trustees for a substance abuse trust should begin with an understanding of the duties they will be called on to perform. The next step is picking the individuals or institutional trustees most qualified to fulfill those duties. Finally, the parents should also consider naming a trust protector, who would serve in a supervisory role to ensure the trust is being properly administered.

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What are the duties of a trustee?

1. Basic fiduciary duties

There are several fiduciary duties imposed on every trustee:

Administer the trust in good faith, and in accordance with its terms and purposes.
Act with loyalty to the beneficiaries by acting solely in their interests.
Invest the trust property prudently by considering the purposes, terms, distributional requirements and other circumstances of the trust.
Act impartially when there are multiple beneficiaries.

2. Special duties

Exercising discretion in distributing trust property for the beneficiary’s use is one of the trustee’s essential duties. Many trusts use the phrase “to provide for the beneficiary’s health, education, maintenance and support” as the standard by which the trustee is to exercise their discretion. While those terms may work well in most cases, for a child with a substance use disorder, they could prove harmful if they enable the child to obtain cash or other property that could be used to buy drugs and alcohol, or if they would cause the child to become ineligible for needs-based government benefits.

Instead, the trustee’s duties regarding distributions could be tied specifically to paying for the costs of rehab, job training, professional service fees and other items that are part of the treatment plan developed by the beneficiary’s treatment team. Tying distributions into the treatment plan would mean the trustee, perhaps assisted by someone familiar with treatment management, would have to work closely with the treatment team to carry out the plan.

If the trust contains incentive clauses, the trustee will have the additional duty of having to assess whether the beneficiary has reached the goal and, if so, what benefit they are entitled to. These clauses can be difficult to administer, since it can be hard to verify if the beneficiary has actually met the goals. For example, how can the trustee verify the beneficiary’s assertion that he has refrained from using drugs for the period set in the trust? Clever beneficiaries have been known to fix employment records and lab results in order to claim that an incentive is merited.

3. Duty to coordinate, prioritize public benefits

If the beneficiary is eligible for benefits from government programs, such as SSI or Medicaid, or from private health insurance, a whole new set of duties will be imposed on the trustee to make sure that distributions will not be classified as “maintenance” or “support,” since that could result in the child being declared ineligible. Because distributions from the trust are meant only to supplement the benefits that SSI or Medicaid is providing, but never duplicate or supplant them, the trustee will have to closely monitor the uses of the distributions so they do not cross the line into support and maintenance.

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Who are candidates for the trustee position?

Possessed with an understanding of what the trustee’s job will entail, the next step is to review the potential candidates to determine who is best suited for that role. There are two categories of trustees: individual and institutional.

Individual trustee: These trustees can include family members, such as the beneficiary’s sibling, aunt or uncle, or a trusted family friend. The advantage of appointing an individual is they will know the beneficiary and can provide more personalized service than an institutional trustee. By the same token, appointing a family member or friend as trustee risks turning what may start out as a caring and supportive relationship into one filled with hostility and anger, if, say, the trustee denies the beneficiary’s demands that are not authorized by the trust. The child can be asked to sign an anti-harassment pledge in which they agree to keep their contact with the trustee within reasonable boundaries, but there is no assurance that will work. Sometimes individual trustees end up resigning from the trust due to emotional fatigue.
Institutional trustee: Appointing a trust company, bank trust department or a corporate trustee connected to a brokerage firm to serve as the trustee will avoid possible intrafamily conflicts. However, if it is not prepared to spend the extra time and resources necessary to properly coordinate expenditures with the child’s treatment plan, an institution serving as trustee will have its own problems. Some institutional trustees may be more focused on their investment performance than tending to the mental and physical needs of their beneficiaries. In the case of a substance abuse trust, “hands-on” involvement with the beneficiary is essential.
Co-trustees: An alternative solution may be to appoint an individual and an institutional company to serve as co-trustees. The individual could focus on being personally involved with the beneficiary and their treatment plan, while the institutional trustee would handle the investment side of the trust. However, both trustees should be involved in making distribution decisions.
Special needs trustees: The best type of institutional trustee for a substance abuse trust would be one that specializes in administering special needs trusts, which are usually created for the benefit of children with intellectual disabilities. They usually have case managers and social workers who are experienced in handling the medical and health needs of disabled beneficiaries, and they may be willing to extend their services to work with the treatment team for a beneficiary with a substance use disorder. They are also knowledgeable about SSI and Medicaid eligibility rules.

When is it best to use a trust protector?

Settlors may also want to consider appointing a trust protector. Depending on applicable state law, this person acts as the settlor’s surrogate — even after the settlor dies — permitting the trust to adapt to changing circumstances as they may occur without the need to incur the expense and delay of court action to achieve the same results. For example, the protector could have the power to direct that the trust be modified or terminated, to remove the trustees if their performance was found to be unsatisfactory or to appoint one or more successor trustees.

Additionally, the trust protector could direct the trustee’s actions concerning how the trust assets would be invested and could approve or veto proposed disbursements from the trust. The trustee would be obligated to comply with such directions, unless they would be manifestly contrary to the trust’s terms or a breach of the protector’s duties.

Specifically, as applied to a substance abuse trust, a protector can provide supervision if the trustee lacks experience in coordinating trust distributions with a substance abuse treatment plan, or with monitoring the beneficiary’s eligibility for SSI and Medicaid. Rather than relying on the trustee to appoint agents for help in these matters, the protector would be charged with actively monitoring the progress of the beneficiary’s recovery and, if necessary, direct the trustee to hire a treatment manager for the beneficiary or an advocate to secure SSI and Medicaid benefits.

Protectors often can be helpful in situations where an individual trustee is someone who is a relative of the beneficiary. In this scenario, the protector can guide the trustee through complicated aspects of managing the trust, such as when the beneficiary suffers a relapse, while the trustee can provide a personal presence to help the beneficiary through a difficult time.

Ultimately, it’s the support from all parties that will help the beneficiary continue on the road to recovery, the ultimate goal of the trust.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Martin J. Hagan, a partner at Meyer, Unkovic & Scott, has been serving clients in the areas of estate planning and administration, estate and gift taxation, special needs trusts, elder law, and estate and trust litigation for over 35 years. Hagan earned his Bachelor of Arts and Juris Doctor from the University of Notre Dame.