THE SPECIAL NEEDS TRUST TRUSTEE VERSUS THE …



[pic] ACADEMY OF SPECIAL NEEDS PLANNERS

MONTHLY TELECONFERENCE

THE SPECIAL NEEDS TRUST TRUSTEE VERSUS THE BENEFICIARY’S GUARDIAN:

IS THIS WHERE AN EROSION OF ABSOLUTE DISCRETION BEGINS?

By

A. Frank Johns, JD, LLM in Elder Law, CELA[1]

Booth Harrington & Johns of NC, PLLC

Charlotte and Greensboro

North Carolina

Toll Free 1 877-503-5337

nc-

THE SPECIAL NEEDS TRUST TRUSTEE VERSUS THE BENEFICIARY’S GUARDIAN:

IS THIS WHERE AN EROSION OF ABSOLUTE DISCRETION BEGINS?

By

A. Frank Johns, JD, LLM in Elder Law, CELA[2]

I. INTRODUCTION

Elder law and special needs practitioners are often involved with the development of special needs trusts (“SNT’). Almost as often, the beneficiaries of the SNTs have been declared incapacitated with guardians or conservators[3] appointed by the probate or similar court having jurisdiction. Regardless of when the guardian is appointed, or whether the court has jurisdiction over the trust, does the guardian have legal authority to require the trustee to make distributions or purchases from the corpus of the trust? Does the judge have such authority?

This session identifies how SNTs are created and whether jurisdiction attaches; identifies the various kinds of trustees appointed; identifies if and when a guardian is involved; identifies various ways the fighting may begin; and presents examples of situations that may erode the trustee’s absolute, unfettered discretion when the guardian of the beneficiary, or a judge, insists on intervention, distributions, payments or purchases from the corpus of the SNT not supported by the express language of the SNT, or rejected under the trustee’s exercise of discretion.

II. CREATION OF THE SNT AND JURISDICTION

A. Non-judicial Creation of the SNT – Testamentary or Third Party Inter Vivos.

1. Creation of a supplemental needs trust out of a trust;

2. Creation of a minimum or fully funded stand-alone special needs trust that pours back into the decedent/grantor’s estate in order to capture testamentary benefits if any;

3. Creation of third party special needs trust with no requirement of judicial oversight or accountings.

B. Judicial Creation of the SNT – Trial Court or Probate Court.

1. Conventional Court created SNT by a trial judge having jurisdiction over civil litigation, with the Court’s order retaining jurisdiction over the SNT for limited or specified over-sight;

2. Probate Court created SNT by the probate or similar judge having jurisdiction.

C. Probate Code, Trust Code or Guardianship Law.

1. Uniform Probate Code – Article V. (UPC);

2. Uniform Trust Code (UTC);

3. Uniform Guardianship and Protective Proceedings Act (UGPPA).

III. DESIGNATION OF THE SNT TRUSTEE

A. Family Member as Trustee;

B. Individual, Non-professional, Non-family Person as Trustee;

C. Individual Professional as Trustee;

D. Public Agency as Trustee;

E. Commercial Corporate For-profit Fiduciary as Trustee;

F. Corporate Nonprofit Fiduciary as Trustee.

IV. CREATION OF THE GUARDIANSHIP

A. Guardianship Created before any need of an SNT;

B. Guardianship Initiated for the Sole Purpose of Creating the SNT;

C. Guardianship Created after the Creation of the SNT;

D. Guardian a Family Member, an Independent Professional, a Public Agency or a Corporate or Non-profit Fiduciary.

V. VARIOUS REASONS WHY THE FIGHTING MIGHT BEGIN

A. Family Member as Trustee

1. Ignores advice to have professional administrative assistance in making proper distributions;

2. Fails to organize and conduct meetings of the advisory committee;

3. Fails to file tax returns or to pay taxes;

4. Pays salaries to other family members, and even the beneficiary;

5. Makes care-giving payments to self; pays for luxurious vacations that include the trustee as companion;

6. Fails to manage the investments of the trust corpus.

B. Individual, Non-professional, Non-family Person as Trustee

1. Ignores advice to have professional administrative assistance in making proper distributions;

2. Fails to organize and conduct meetings of the advisory committee;

3. Fails to file tax returns or to pay taxes;

4. Pays salaries to family members, and even the beneficiary;

5. Makes care-giving payments to self; pays for luxurious vacations that include family members and even the trustee as companion;

6. Fails to manage the investments of the trust corpus.

C. Individual Professional as Trustee

1. Ignores advice to have professional administrative assistance in making proper distributions;

2. Fails to organize and conduct meetings of the advisory committee;

3. Fails to file tax returns or to pay taxes;

4. Pays salaries to family members, and even the beneficiary;

5. Makes care-giving payments to self; pays for luxurious vacations that include family members and even the trustee as companion;

6. Fails to manage the investments of the trust corpus.

D. Public Agency as Trustee

1. Ignores advice to have professional administrative assistance in making proper distributions;

2. Fails to organize and conduct meetings of the advisory committee;

3. Fails to file tax returns or to pay taxes;

4. Pays salaries to family members, and even the beneficiary;

5. Makes care-giving payments to self; pays for luxurious vacations that include family members and even the trustee as companion;

6. Fails to manage the investments of the trust corpus.

E. Commercial Corporate For-profit Fiduciary as Trustee;

1. Pursues subsidiary investments that allow the corporate entity additional fees, expenses and commissions over and above those allowed the trustee;

2. Denies or reduces the expenditures necessary to sustain the quality of life of the beneficiary because it does not believe in a declining balance corpus;

3. Intends to grow the trust corpus in favor of contingent beneficiaries;

4. Fearful of liability for distributions not considered “sole benefit”;

5. Makes distributions or expenditures that are not “sole benefit”;

6. Accedes to public agency demands to use trust corpus to pay for those goods and services that are considered governmental benefits of the beneficiary.

F. Corporate Nonprofit Fiduciary as Trustee.

1. Intent on growth of future retained corpus in pooled SNT by denying or reducing the expenditures necessary to sustain the quality of life of the beneficiary;

2. Makes distributions or expenditures that are not “sole benefit”;

3. Covers general administrative expenses of the nonprofit not attributable to the actual administration of the SNT;

4. Delivers goods and services to the beneficiary not a part of the care plan and contrary to the recommendations of the advisory committee of the SNT.

VI. EXAMPLES OF SITUATIONS THAT ERODE THE TRUSTEE’S ABSOLUTE, UNFETTERED DISCRETION

A. Legal Authority of Beneficiary’s Guardian to Require Trustee to make Payments or Distributions

1. Statutory authority

a. Federal law or regulation

1) OBRA ’93,

2) Transmittal 64

3) 42 USC 1396p

4) SSI-POMS

b. State law or regulation

1) Each state’s guardianship statute and regulations if any;

2) Each state’s probate code and regulations;

3) Each state’s trust code (UTC) or statute, including Trust & Estate Dispute Resolution Acts (TEDRA)

a) UTC Sections related to administration, distribution, conflicts and dispute resolution;

b) State Trust Statutes with separate attention to such conflict;

c) TEDRA stand alone state statutes; incorporated into UTC statute.

1. Each state’s Medicaid statute and regulations or guidelines.

B. Legal Authority of Civil Judge or Probate Judge to Order or Require Trustee to make Payments or Distributions

1. In re Conservatorship of Kane, 137 Cal. Rptr. 4th 400 (1st App. Dist. Div. 5 2006)

Notwithstanding California Probate Code § 2580 (b)(5), substituted judgment permits probate court to create revocable or irrevocable trust for the benefit of conservatee.

2. In re Irrevocable Supplemental Needs Trust of Collins, A04-1018 (Minn. App. Ct. 2004).

As parent and trustee of daughter’s SNT, appellant did not abuse the exercise of his sole discretion in providing the beneficiary with a snowmobile and Britney Spears concert tickets.

3. In re Guardianship of DeLuna, 13-06-541-CV (Tex. App. Ct. 2008)

Probate judge’s rejection of personal injury settlement that would fund an SNT was held an abuse of the court’s discretion.

4. In re D.M.B., ___ A. 2d ____ (D.C. App. 2009).

Court supervising a special needs trust has the authority and discretion to approve modifications and distributions from the trust, including trustee compensation.

C. Case Studies.

1. Companion Cruise and More. Trustee (“T”) denies the payment request of guardian (“G”) for beneficiary (“B”) to go on cruise with girl friend (GD = Gold Digger), paying GD’s expenses and paying her an hourly fee for care-giving, and other favors and services. Truth be known, girl friend is everything to B (he’s in love), and B is a meal ticket and more to GD (she’s in love as long as there is money).

2. Paid Family Caregiver. See Stell v. Boulder County Dep’t. of Soc. Sec., 92 P. 3d 910 (Co. 2004).

3. Agency as Guardian. In 1993, just after the effective date of OBRA ‘93, PI attorney (A) settled a negligence case for a plaintiff developmentally disabled minor (B). A competent trust & estates attorney developed an SNT approved under court order. The Court name PI attorney and the mother of the minor (C) as co-trustees. The SNT was funded with $200,000.00 with a lifetime structure paying in excess of $12,000 per month into the SNT.

During the next several years, the county social service agency (DSS) took custody of the minor beneficiary away from C, but was unsuccessfully in its attempt at parental termination. However, B remained in a foster home with SSI/Medicaid.

On advice from the trust & estates attorney, A and C provided only minimal supplemental distributions for the benefit of B. Since B was so young, the objective was to build the corpus of the SNT to better serve B in later years.

When B turned 18, DSS successfully petitioned to be appointed guardian of B. DSS was also the local Medicaid agency, paying in federal and state funds in excess of $180,000 per year for special needs foster care for B. DSS suspected that the SNT had several million in trust corpus. DSS demanded that A and C make cash distributions to B, and pay for many of the supplemental items that B needed.

A and C declared that they would pay DSS nothing. DSS sought relief from the state’s judge of guardianship. A guardian ad litem (GAL) was appointed for B, siding with DSS. The wrangling went on for more than a year with A and C taking a stand that they as co-trustees chose to decline as a matter of trustee discretion.

DSS and the GAL sought removal of the A and C as co-trustees, and GAL petitioned to have her GAL fees paid by out of the SNT. The Judge entered an order for the GAL to pay the GAL fees and expenses, and for A and C to fund several specific items for B, including cash payments for particular reasons.

A and C resisted by doing nothing. DSS filed a motion to find them in contempt of the court’s order. A and C sought the advice of an SNT litigator, who sought a stay, filing a suit for Declaratory Act relief in the civil trial court where the SNT had been created.

A and C have now spent approximately $90,000 in litigation with no end in sight.

What advice would you give?

4. Mother as Guardian. Mother was guardian for her adult daughter with traumatic brain injury. Mother was also insistent that she be the trustee of her daughter’s d4A trust that was funded by a court settlement. The PI attorney representing daughter agreed, and convinced the trial judge, his close colleague and former partner, to enter the order directing the creation of the SNT with the mother as trustee.

An estate planning associate attorney created the SNT. The associate mentioned concern regarding the appointment of the mother as trustee. As soon as the SNT was set up and funded, mother directed all distributions, and used the firm associate to handle everything she wanted.

When questions were raised, she increased the associate’s fees, insisting that he make sure all filings with the probate court would cover all of what she was doing. The associate also handled all inquiries from the state Medicaid agency.

VII. CONCLUSION

This session identified how SNTs are created and whether jurisdiction attaches; identified the various kinds of trustees appointed; identified if and when a guardian is involved; identified various ways the fighting may begin; and presented examples of situations that erode the trustee’s absolute, unfettered discretion when the guardian of the beneficiary, or a judge, insists on distributions, payments or purchases from the corpus of the SNT not supported by the express language of the SNT, or rejected under the trustee’s exercise of discretion.

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[1] COPYRIGHT © 2009 ALL RIGHTS RESERVED by A. Frank Johns, BS ’68, JD ‘71 Florida State University, and LLM – Elder Law ’08 Stetson University College of Law, CELA (certified by the National Elder Law Foundation); charter partner in Booth Harrington & Johns of NC PLLC Charlotte and Greensboro; past President and Fellow National Academy of Elder Law Attorneys (NAELA); fellow in the American College of Trust and Estate Counsel (ACTEC);past chair of NAELA Council of Advanced Practitioners; charter chair of the North Carolina Bar Association Elder Law Section; charter Advisory Board member of the Academy of Special Needs Planner; charter Advisory Board of Elder Counsel; charter associate of the Society of Settlement Planners; charter Board member of the National Guardianship Association.

[2] COPYRIGHT © 2009 ALL RIGHTS RESERVED by A. Frank Johns, BS ’68, JD ‘71 Florida State University, and LLM – Elder Law ’08 Stetson University College of Law, CELA (certified by the National Elder Law Foundation); charter partner in Booth Harrington & Johns of NC PLLC Charlotte and Greensboro; past President and Fellow National Academy of Elder Law Attorneys (NAELA); fellow in the American College of Trust and Estate Counsel (ACTEC);past chair of NAELA Council of Advanced Practitioners; charter chair of the North Carolina Bar Association Elder Law Section; charter Advisory Board member of the Academy of Special Needs Planner; charter Advisory Board of Elder Counsel; charter associate of the Society of Settlement Planners; charter Board member of the National Guardianship Association.

[3] For the simplicity of this outline, reference will be made to guardians since that term is used most often among the states.

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