Serving As A Trustee Some Do’s and Dont’s

If you serve as a trustee, whether by choice or necessity, here
is a list of suggestions that may help make your job easier, and highlight a
few common mistakes that I hope you will avoid once you take the helm.

With this in mind:

1.Keep Receipts

You may think that it goes without saying that a trustee
will keep receipts, but we are continually surprised at how frequently a
trustee is unable to produce any documentation which corroborates purchases
made with trust funds. Often the issue arises in the context of reimbursement
of expenditures the trustee has made.

Here's the situation. Say the sister of a trust beneficiary
is shopping at a local mall and sees a great deal on a nice winter coat that
she knows the beneficiary needs. She buys the coat for $53.19 using her own
funds and delivers the coat to her brother. The sister then sends an e-mail to
the trustee (perhaps another sibling) asking the trustee to send her a check
for $53.19 to reimburse her for the coat. The trustee writes a check from the
trust checking account for $53.19 payable to the sister, and writes in the
check ledger "reimbursement – winter coat.”

Is the expenditure permissible? Absolutely. Trust funds may
be used to purchase clothing for the beneficiary, the beneficiary needs the
coat, and the price is reasonable. So far so good.

The problem is that without a receipt there is no way for
the trustee to prove that a coat was actually purchased with the money. The
trustee may say, "But it's my sister – I know she wouldn't lie to me.”
That may very well be the case, but in the world of trust administration, the
trustee cannot rely on getting the benefit of the doubt. If the trustee cannot
corroborate a purchase with a receipt or other documentation from the merchant,
the trustee runs the risk of having to reimburse the trust out of the trustee's
own funds.

The rule is simple: no receipts, no reimbursement.

2.Don't Use an ATM Card

Some people prefer to pay for everything with cash. They may
not like credit cards because of the risk of paying interest on a purchase, or
they may dislike the idea that the credit card company maintains a running
record of their financial activity. Or they may just like the feel of a roll of
bills in the pocket. They may feel that if they need something and there isn't
enough money in the bank, they simply will wait to make the purchase until they
save enough money to do so. We respect this school of thought.

Unfortunately, this practice can be a very cumbersome
practice for a trustee. When we prepare accountings for our trustee clients, we
often see ATM withdrawals followed by a description of the item purchased with
the withdrawn funds. For example, a trustee may provide us with a copy of her
check ledger which shows a $60 ATM withdrawal, followed by the explanation,
"winter coat for (beneficiary).”

Is the expenditure permissible? Absolutely (see explanation
in item 1 above). But exactly $60.00 for a winter coat? How often do you pay an
even dollar amount for an item? Almost never.

If a trustee insists on using cash to make purchases, then
she should follow the rule outlined in item 1 above (keep receipts), and make
sure that any change that is left over from a purchase is returned to the
trust. So in our example, the check ledger would show a $60.00 withdrawal for
purchase of the coat, and then a $6.81 deposit reflecting the unused balance.
The trustee would have the receipt for $53.19 to support the expenditure.

Doable? Yes. But on a recurring and regular basis, it can
become overly cumbersome and lead to mistakes. And what if the balance is not
returned to the trust account? The trustee remains personally liable for the

Our advice? If a trustee wants to manage her personal
financial affairs using only cash, that's fine. But when serving as trustee,
write checks or use a credit card (and pay the credit card bill promptly and in

3.You CANNOT Use Trust Money to Make Gifts

A final accounting was prepared for the trustee of a
first-party supplemental needs trust. That type of trust must comply with
certain rules required by the Supplemental Security Income (SSI) and Medicaid
programs. Among them are that the trust must be for the sole benefit of a
person with disabilities. A final accounting is required when the beneficiary
dies and the trust terminates. In this case, the beneficiary was a relatively
young woman who suffered a catastrophic injury and required nursing home care.
She was unable to communicate and unable to travel outside of the facility;
thus there were few opportunities to utilize trust funds for her direct

A review of the accounting prepared by the trustee revealed
that many distributions from the trust account were for birthday gifts,
graduation gifts, and holiday gifts for the beneficiary's children and other
family members. When inquired about these distributions, the trustee stated that
this is how the beneficiary "would have wanted her money to be spent"
in light of the fact that it could not be used for her direct benefit, that at
least her children and other family members would derive some benefit.

We understand the trustee's thinking, as well as her
frustration over the fact that this money was otherwise going unused. Why
shouldn't this money be used to help this young woman's family, especially
since this would certainly have been her intention if she were able to make her
wishes known?

The simple reason is that the law requires a first-party
supplemental needs trust to limit expenditures to the purchase of goods and
services for the person with a disability. Not for her spouse, not for her
children, not for her church or synagogue, and not for her favorite charity.
And if the terms of the trust are not followed, then the preferential treatment
that is given to these trusts by the SSI and Medicaid programs may be lost,
meaning that the individual may lose Medicaid coverage, may lose regular
monthly income from the SSI program, and may be forced to begin paying
privately (using trust funds) for goods and services that would otherwise be
provided by these government benefit programs.

The bottom line? These government benefit programs are
voluntary. If an individual with a disability has money, and she (or her
guardian or advocate) wants the freedom to spend the money in any manner she
wants or give it away whenever she wants, then she is free to do so. But once
she decides to take advantage of the benefits provided by the SSI and Medicaid
programs, she must comply with their rules. And those rules say that funds in a
first-party supplemental needs trust can only be used to purchase goods and
services for the beneficiary-they cannot be used to make gifts. Period.

4.Don't Throw Anything Out Until Your Job is Done

When an individual accepts the role of trustee, she should
understand that that every trust transaction will someday be subject to review
and scrutiny. Indeed, a fundamental responsibility of every trustee is the responsibility
to account, i.e., to provide detail, to the penny, of what the trust took in,
what the trust earned (in the form of interest and dividends), what was spent,
and what is left. This obligation applies to every trustee, be she the trustee
of a special needs trust, a life insurance trust, or one of the many other
types of trusts that are prepared for estate planning purposes.

Unfortunately, this is one of those areas where it is easy
for trustees to get lazy because in many instances the trustee does not have to
"pay the piper" until the job is done. In other words, unless the
trust document or some other court order requires it, a trustee is not
typically obligated to prepare accountings of trust activity on an annual
basis. Rather, the accounting is often not required until the trustee wants out
of the job (i.e., the trustee wants to resign), or until the trust terminates
(usually at the beneficiary's death). At that point, the trustee must prepare a
comprehensive accounting beginning with the date the trustee was appointed and
continuing through the date of termination.

A good trustee will retain all financial records relating to
the trust until such time as her final accounting has been prepared, reviewed,
and she has been released from any further responsibility and liability. In
some cases these comprehensive accountings can cover a span of years that
stretches into decades. Without good financial records, it can be nearly
impossible to produce a detailed historical summary of trust financial activity.

Unfortunately, many financial institutions do not maintain
financial records for more than a few years. Understanding this, it is the
trustee's responsibility to retain hard copies of all bank and other financial
statements, the check ledger and other documentation of trust activity until
her final accounting is prepared and approved.

It is a good practice for all trustees to periodically have
their accounts settled on a voluntary basis by preparing interim accountings.
These interim accountings will wipe the slate clean for the period of time
covered, and once the trustee's accounts have been settled, the trustee is able
to get rid of the underlying financial records. Just remember, there is no
statute of limitations in the world of trust accountings. Until such time as
the trustee's job is done or the interim accounting has been approved, she is
on the hook. Don't throw anything out.

5.Don't Take it Personally

We alluded to this in our last article on the topic, and it
bears repeating. When you accept the role of trustee, you accept all of the
important responsibilities that accompany the position. You may be a favorite
sibling, a dedicated advocate, or a loyal family friend; nevertheless, in the
world of trusteeship, none of those relationships matter. What matters is your
ability to follow the rules, as outlined in the trust document and as provided
for in the government benefit programs which support your beneficiary.

Thus, if you cannot provide a receipt for the purchase of
the winter coat, you should expect that the person reviewing your
accounting-whether it be a judge, an attorney for your beneficiary, or a
representative of the Medicaid program-will not give you the benefit of the
doubt, and you may have to dig into your own pocket to reimburse the trust

As they say in the movies, "It's not personal. It's
business." Treat it as such.

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