Posts Tagged ‘Trust administration’

Challenge to Three-Year-Old Trust Reformation is Dismissed

With the increased emphasis on (and use of) living trusts for estate planning, we lawyers are seeing more and more cases in which an old trust needs modification. Perhaps the tax laws have changed since a parent or grandparent died. Maybe what once made sense is less defensible in light of modern investment thinking, or the cost of living has caught up with what once seemed like a generous bequest. Family dynamics, always fluid, can change the reasonableness of a decades-old estate plan. Everyone knows someone whose family was once considered wealthy, and now is considerably less so. Any of those scenarios — and dozens of others — can be the basis of a desire to change something that seemed set in stone when the plan was adopted.

That’s when lawyers begin talking about trust reformation or modification. In recent years we have begun talking about decanting — pouring the contents of an older trust into the vessel of a new trust document. Not every state permits decanting, though, and state laws vary in how they approach modification of trusts. That can lead to uncertainty, family friction and even litigation.

Take, for instance, the recent Indiana case involving the trust — and the family — of John and Ruth Rhinehart. In 1997 Mr. and Mrs. Rhinehart established an irrevocable trust for the benefit of their daughter, Julie R. Waterfield. They placed $4 million in the trust, and provided that at least $100,000 per year would be paid to their daughter. When she dies her trust will divide into three new trusts — one for each of her children. Each of those trusts will pay $25,000 per year to the grandchild for whom it is set up.

That was certainly a generous gift, and should help provide for the welfare of the Rhinehart’s daughter and grandchildren for decades. In fact, the trust has grown — as of 2009 it was worth about $22 million. What could possibly be wrong with the Rhineharts’ largesse?

Sometime shortly after the trust was created, Julie Waterfield made a pledge to Indiana University – Purdue University Fort Wayne (IPFW). She promised the University $1.5 million so that a new recital hall could be built in the campus’s new music building — a building, incidentally, named after her parents.

There was only one problem with her pledge. By late in 2002, stock holdings she had expected to use for the donation had become worthless. It appeared that the only way for her to meet her pledge would be to increase the annual payments from the trust established by her parents. She would need not $100,000 per year, but more like $275,000.

She and her lawyer approached the trustees about how to reform the trust to permit the larger distributions. Everyone agreed that if she could get the approval of all of the future beneficiaries, the trust could be modified. The trustees engaged Ms. Waterfield’s lawyer to complete the process, and he filed a court proceeding seeking an increase in the distribution. The Indiana court approved the increase, conditional on getting all eighteen potential beneficiaries — current, future and contingent — to sign consents.

At a family meeting in December, 2002, all three of Ms. Waterfield’s children signed the agreement to reform the trust. One of them requested a copy of the full agreement, and the trust’s lawyer sent him a copy a few days later. Ms. Waterfield’s distributions were increased and, presumably, her pledge fulfilled.

Three years later, two of Ms. Waterfield’s children expressed concern about the increase in their mother’s distributions. They argued that their signatures on the agreement to reform the trust had been obtained by fraud, and they brought suit against their mother and the corporate co-trustee of the trust. Ms. Waterfield and the trustee argued that it was too late — that the statute of limitations on such an action ran out two years after the change was approved. In any case, they insisted, there was no injury to Ms. Waterfield’s children: there would be plenty of money available to fund their annual $25,000 distributions. The trial judge agreed and dismissed the lawsuit.

The Indiana Court of Appeals agreed. The appellate judges noted that both sons’ signatures were on the agreement, that they acknowledged they had gotten a letter from the lawyer which claimed it enclosed a copy of the agreement, and that it strained credulity to think that they would have failed to ask for the referenced enclosure if it had not in fact been in the envelope with the letter. In other words, their cause of action — if they had one — was known to them at least by the date of that letter. In Indiana, the statute of limitations on such an allegation of breach of fiduciary duty is two years — the Waterfield children waited more than a year too long before filing their lawsuit.

Furthermore, according to the appellate judges, the growth of the trust to $22 million — despite several years of increased distributions to Ms. Waterfield — adequately protected her sons’ interest so that they were not injured by the trust reformation. The Court of Appeals rejected their argument that the trust itself was injured by what they insisted was fraudulent behavior. The beneficiaries do not have the authority to bring their action on the basis of injury to the trust, but must show injury to themselves, according to the Court. Matter of Waterfield v. Trust Co., December 30, 2011.

Would the answer have been different in Arizona? Possibly. But it is more likely that the process itself would have been different in Arizona. With adoption of the Arizona Trust Code (a version of the Uniform Trust Code) it has become easier to modify or reform a trust. Some modifications can be done without the court’s involvement at all. Perhaps more importantly, it has become somewhat easier to clearly begin the running of the statute of limitations on claims against trustees under Arizona’s new law.

Court Rule Changes Will Affect AZ Fiduciaries in 2012

Two weeks ago we detailed some of the statutory changes facing guardians, conservators and other fiduciaries in Arizona beginning with the new year. At the same time the legislature was working on those changes, the Arizona Supreme Court was considering changes to the rules and procedures governing probate court. That means more changes affecting guardianship, conservatorship, probate, and trust administration.

The Supreme Court rules changes have been adopted, but they are not effective at the same time as the statutory changes described in our earlier newsletter. Most of the rule changes become effective on February 1, 2012; a few of them will be delayed until September 1, 2012. Since some of the changes require continuing review and modification by the courts, some may be changed or delayed even beyond that later effective date.

Here are some of the probate court rule changes (all effective February 1, 2012, unless otherwise indicated):

  1. Every conservator must file an inventory within 90 days of appointment. That has not changed. What has changed is that (beginning in September, 2012) the inventory must also include a budget (unless the Court in individual cases waives this new requirement). The budget must be updated with each annual account. Expenditures in excess of budgeted amounts are not prohibited, but may require an update to the budget or even prior Court approval. Failure to follow the budget may subject the conservator to higher liability at the time of the annual account.
  2. At the same time that the inventory and each annual account is filed, every conservator of an adult must calculate whether it appears that the conservatorship assets will outlast the person subject to the protective proceeding. The precise calculation does not have to be shared with interested persons, but the result does; the conservator is required to explain what he or she anticipates will happen if the money is not sufficient to take care of the protected person for the rest of his or her life expectancy.
  3. The rules introduce the legal concept of “vexatious conduct.” If a litigant has been found to have filed repetitive pleadings for the purpose of harassing others, the court may enter an order limiting their ability to file future pleadings. Such an order might, for example, require the vexatious litigant to get the court’s approval before filing any new pleadings, or relieve the other litigants of any obligation to file responsive pleadings until the court has made an initial review of the vexatious litigant’s filings. Another new rule permits a party who thinks a given filing is repetitive to respond by simply pointing out that the pleading is repetitive; once that is done, no further response is required until after the court determines whether the filing is in fact repetitive.
  4. When a guardianship or conservatorship is filed, an attorney and a court investigator are normally appointed (to represent the subject of the proceedings and to report to the probate court, respectively). That does not change with the new rules. There are several changes about how those appointments will work, however. First, court-appointed attorneys, court investigators and guardians ad litem must undergo a training program to be devised by the courts (this is one of the requirements that is implemented on September 1, 2012). Second, court-appointed attorneys and guardians ad litem are disqualified from serving in cases where the proposed fiduciary is a client of theirs in other matters, even if unrelated. Third, it is now impermissible for the court appointees to end up serving as the guardian or conservator.
  5. Speaking of guardians ad litem, the new rules spell out in more detail what that position entails and when a GAL may be appointed. The request for appointment of a GAL must detail why special expertise is needed, and any order appointing a GAL must spell out the limits of the appointee’s authority.
  6. When a guardian or conservator is appointed by the judge, that fact alone does not give them any authority to act. The clerk of the court must first issue “letters” evidencing the appointment (which may require that the appointee file additional documents). The new rules imposes several changes involving the “letters.” First, every court order appointing a guardian or conservator must include a warning that the appointment is not effective until the letters have been issued. Second, every conservator must record a certified copy of his or her letters with the County Recorder in the county where the protected person resides and in every other county where the protected person owns real property. Third, a conservator’s letters must include specific language if sale of real property or access to other assets (like bank accounts, for instance) has been restricted by the court.
  7. Every person or entity appointed as guardian, conservator or personal representative must undergo a training program either before or shortly after appointment. This provision is not effective until September 1, 2012 (in order to give the courts time to create an appropriate training program). It does not apply to professional fiduciaries who have been licensed by the Supreme Court (they already have testing, training and continuing education requirements) or banks acting as fiduciaries. It does apply to family members who act as fiduciaries. There are no exceptions for people who have been named as personal representative in a will, for example, or for parents who act as conservator for a minor child whose assets are all in court-controlled bank accounts.
  8. Any lawyer or fiduciary who expects to be paid from a ward’s (or prospective ward’s) funds must first give everyone in the case notice of how his or her fee is to be calculated. The Supreme Court has directed that some sort of fee guidelines be adopted in the future; those guidelines will govern how attorneys may charge in guardianship and conservatorship matters.
  9. Annual accounts must be in the form prescribed by the Supreme Court. That form has not yet been adopted (it is one of the items that will have a September 1, 2012, effective date to give the Court time to finalize the forms), but preliminary forms have been circulated. They are quite different from the accounting forms approved by the Court for the past four decades, and will require significant retooling of accounting practices and software. Details are not yet settled, but will be adopted over the next few months.
  10. Alternative dispute resolution is encouraged. In contested proceedings, the parties are required to notify the Court within 30 days about their efforts to initiate mediation, arbitration or other resolution efforts.
  11. When a guardian has been appointed for a minor, the guardian has an affirmative duty to notify the court on the minor’s reaching majority, getting married or adopted, or upon the minor’s death. If there is no conservator appointed, the guardian’s notification must include a list of any property the guardian believes may belong to the child — and that information must be provided to the Court as well as the subject of the guardianship.
  12. Attorneys for guardians, conservators and other fiduciaries are required to encourage their clients to do as much of the fiduciary work as they can without involvement of the lawyer. Complaints have been made in the past about lawyers overseeing their clients’ work too closely, and at too high a cost. The new rules make clear that the responsibility is the fiduciary’s, not his or her lawyer’s.

Can we generalize about the effect and value of these changes? Not yet — or at least we can not generalize about how much they will actually improve the practice or lower costs. We can make a few educated guesses, though — and we will:

  • It seems likely that the cost of most guardianship and conservatorship matters will increase slightly, as compliance with the new (and more detailed) rules requires more work.
  • We expect fewer family members will be willing to take on what was already a difficult task, and will now become somewhat more difficult. That means more cases moving to professional fiduciaries.
  • Our estate planning clients will be reminded again and again how important it is for them to execute living trusts, powers of attorney and other arrangements to avoid any need for guardianship or conservatorship proceedings. One small irony: even as the process for handling decedent’s estates has been streamlined over the past several decades in response to public and consumer complaints about costs, delays and legal micromanaging, the guardianship and conservatorship process have become more expensive, slower and more subject to Court micromanagement. That may have been necessary to protect a vulnerable population, but it certainly is an example of the doctrine of unintended consequences.
  • Contentious family members and friends will have more access to the Courts, not less. Contested proceedings will likely become somewhat more frequent in guardianship and conservatorship cases. It is likely that the same effect will not be seen in decedent’s estates and trust administration cases, but we could be wrong about those predictions.

Here’s our final (and, we think, safe) prediction: the effect of these changes will be less profound than either practitioners fear or reformers hope. We will all learn the new rules over time, and many of us will refer fondly to the good old days, before 2012, when people just seemed to get along better and the process did not seem to get so bogged down in minutiae and micromanagement. We will be wrong about our glowing, Rockwellesque memories.

Want to read the new rules yourself? It’s a little hard to find and read them. First, the Arizona Supreme Court’s site for proposed rule changes is confusing and impenetrable, and does not distinguish well between recent changes and proposals and those from prior years (or, we assume, prior decades — once the kludgy system gets to be ten years old). Second, as of this writing, the “official” rules page does not show the changes (which admittedly will not be effective for another month). We will give you our best bet for temporary review; we will try to remember to update the online version of this article once the final rules make it to the official rules page. Look at the Arizona Supreme Court’s Rules of Probate Procedure page, and remember that you have to actually open and integrate three PDFs to figure out which rules are effective on what dates and where each change is located.

Remainder Beneficiaries Not Entitled to Trust Beneficiary’s Financial Info

Imagine with us for a moment: you are the trustee of an irrevocable trust created by a now-deceased woman for the benefit of her daughter. The trust says that her daughter is to receive all the income generated by the trust. You are also given the discretion to give the daughter some of the trust’s principal if she needs it. When the daughter dies, whatever is left in the trust will go to her nieces and nephews, the grandchildren of the original trust settlor.

You have just gotten a letter from the daughter, asking you for an additional $3,000 per month to pay for her care. You know that the remainder beneficiaries — the nieces and nephews — might object to that extra distribution. What should you do?

That is essentially the problem faced by Citigroup Trust, which is trustee of just such a trust. It was established by Esther Caplan for the benefit of her daughter, and it is administered in Arizona. After Citigroup began making regular distributions to the daughter, one of her nephews questioned whether the trustee should be giving her additional funds. Eric Bistrow told Citigroup that he wanted more information about his aunt’s finances, and that he wondered whether the trust was funding a too-lavish standard of living.

To make sure that they understood the daughter’s needs, Citigroup requested (and got) tax returns and a budget. They decided to keep making the distributions, but also to ask the Arizona courts for direction.

Citigroup filed what in Arizona trust law is called a “Petition for Instructions.” They essentially asked the probate judge to tell them whether they were right to make the discretionary distributions of principal.

In the course of the proceedings, Mr. Bistrow and his attorney asked to look at his aunt’s budget, tax returns and financial information. Citigroup declined, saying that the information was private and should not be shared. How, then, would Mr. Bistrow know that they had properly considered her financial needs? The trustee suggested that it would give the records to the probate judge, and let him review them privately; if there were concerns or questions, the judge could make the decision to share them, or some portion of them.

The probate judge agreed, looked at the records, and approved the past and proposed future distributions to Ms. Caplan’s daughter. It also confirmed that Mr. Bistrow and the other nephews and nieces were entitled to statements showing how much was actually distributed, as well as how much was earned by the trust and what other expenses it incurred.

The nieces and nephews appealed, arguing that they were not being given enough input into the decision to distribute trust principal to their aunt. Their position was that they should be notified before any distributions could be made, that they should be given full financial information, and that they should be given an opportunity to weigh in on their aunt’s need for funds.

Not so, ruled the Arizona Court of Appeals. Mr. Bistrow and the other remainder beneficiaries are entitled to be treated fairly. They are entitled to know what the trustee is doing. They are entitled to ask the courts to intervene if they think the trustee has exceeded its authority. They are not, however, entitled to see their aunt’s financial records, or to vote on whether the trustee should exercise its discretion to make distributions to her. In Re the Matter of Esther Caplan Trust, September 1, 2011.

The Caplan case is focused on a narrow question, but it has broader application. It also raises (but does not answer) a number of interesting questions. It gives important guidance to trustees on how to safely exercise the discretion given by a trust document.

What are some of the lessons of Caplan? A few come to mind:

  1. Asking for court review of decisions which might be challenged should always be considered. It may be that the amount in controversy is too small to justify court involvement, or that the trustee’s decision is simply unassailable, or that the remainder beneficiaries are agreeable. But in any case in which there might be disagreement, the Petition for Instructions is a good safeguard for the trustee.
  2. Remainder beneficiaries are important, and their interests need to be considered in administering a trust. But the income beneficiary’s interest is usually paramount. Remainder beneficiaries are not in charge of trust administration.
  3. Notwithstanding that remainder beneficiaries are not in charge, they are still entitled to sufficient information so that they can determine if their interests are being adequately protected. But “sufficient information” is not the same thing as “complete information.” It may sometimes (rarely, but occasionally) be appropriate for a trustee to withhold sensitive or personal information. Usually, it would be wise to identify the information which is not being shared, so that the remainder beneficiaries can make a reasoned decision about whether to challenge that determination, too.
  4. Creative thinking can come up with solutions that protect everyone’s interests and violate none. Giving the judge a chance to review the financial records in camera (privately) was just such a creative solution.

Trustee Is Not Required To Create Special Needs Sub-Trust

Kenneth Boyd established a revocable living trust in 2002. He named his daughter Carol Boyd as trustee, and directed that the trust be divided, upon his death, into three shares. One share each was to go to Carol, to Kenneth’s mother Elizabeth Boyd, and to Carol’s son Ben Scott. So far nothing is remarkable or unusual about Mr. Boyd’s trust arrangements.

Elizabeth Boyd entered a nursing home in November, 2007. Kenneth Boyd died a month later. When it came time to divide the trust estate among the three beneficiaries, Carol Boyd simply wrote checks to each one, and sent Elizabeth Boyd’s share to her in care of the agent under her durable power of attorney.

The agent refused to cash the checks. Putting the money into an account in Elizabeth Boyd’s name, she argued, would simply make her ineligible for Medicaid assistance with her nursing home costs, and assure that a third of Kenneth Boyd’s estate would go to nursing home care for Elizabeth. If Elizabeth Boyd’s share could stay in trust, it could benefit her during her life, allow her to remain eligible for Medicaid, and assure that there would be something to pass on to her heirs on her later death.

It seemed obvious to Elizabeth Boyd’s attorney-in-fact that the continued trust would be in her best interest. Language in the trust could be construed to permit Carol Boyd to do just that — to turn the distribution from the trust into a “third-party” special needs trust. Elizabeth, through her attorney-in-fact, ultimately filed suit in California, asking the court to compel Carol to continue to hold the funds in trust for Elizabeth but not distribute any proceeds outright to her.

Carol Boyd pointed to the language of the trust, which gave her the power to do what was asked but did not direct her to do so. She insisted that her father would have wanted his money to support his mother until her death (or until the money ran out), and she declined to establish a special needs trust. So the legal question became whether Carol had an obligation to do so.

In an unpublished opinion, the California Court of Appeals ruled that Carol did not breach her duty to Elizabeth by failing to segregate her trust distributions into a separate, third-party special needs trust. It was not completely clear to the appellate judges whether such an action would even be effective; in any event, the opinion makes clear that Kenneth Boyd’s trust gave Carol the power, but not the duty, to modify the distribution terms. Boyd v. Boyd, December 16, 2010.

As is so often the case, there were a number of complicating issues in the Boyd case. They help point up the importance of communicating clearly with the lawyer who prepares your estate planning documents, and keeping those documents updated. Among the complications:

  1. Kenneth Boyd’s trust actually left a larger share to his brother, James, who was scheduled to receive 40% of the remaining funds on Kenneth’s death. James, however, died just a year before Kenneth did, and the trust did not provide that his share would pass either to his surviving wife or his step-daughter. Despite the fact that James’ marriage was of long standing, he had never adopted his step-daughter — if he had, she would have taken his share of the trust as his child. Since he died without any legal “issue,” his share lapsed and was divided equally among the other three beneficiaries (Carol, Elizabeth and Ben).
  2. Carol Boyd was actually the adopted daughter of Kenneth Boyd. That makes no legal difference, and probably was explained to the lawyer who drafted the trust at the time. But the adoption had been completed when Carol was 32 years old, and she had never met Kenneth’s mother Elizabeth, his brother James or his wife.
  3. Kenneth and Carol lived in California. Elizabeth, James and his wife lived in New York. Consequently, the California courts had jurisdiction over the trust interpretation — but they had to consider the effect on New York Medicaid eligibility and trust law. Interstate proceedings often create additional confusion and difficulty.

It is extremely hard to know what Kenneth actually would have wanted in the facts as they developed. That is why estate planning lawyers go through the almost ghoulish routine of asking clients to imagine unusual sequences of family deaths and disability. The reality is that Kenneth Boyd died just a year after his brother’s death, and a month after his mother entered the nursing home (and qualified for Medicaid). If he had discussed the family situation with his lawyer during the year after his brother died, he might have made changes in his trust language. At least he might have clarified his wishes, so that the issue would not have to be decided by court proceedings.

Arizona Court of Appeals Orders Review of Fees in Guardianship

Arizona’s probate court system — and particularly the guardianship and conservatorship arenas — have been embroiled in public controversy for the past year. A series of essays by a prominent Phoenix newspaper columnist has taken the entire system to task over allegations of excessive fees being paid to guardians, conservators and attorneys. A few cases have made particularly compelling reading, with total fees of hundreds of thousands of dollars being charged to individuals caught up in the system.

One of those stories involved R.B. Sleeth of Phoenix. One of his two sons initiated a guardianship and conservatorship proceeding in late 2007. Of particular concern was the possibility that Mr. Sleeth might marry, and his son doubted both his capacity to enter into a marriage and the motivations of the woman with whom his father lived.

Whatever the merits of those arguments, the ensuing proceedings were bitter and protracted. The son seeking guardianship had a lawyer, Mr. Sleeth had a lawyer, and his future wife also retained an attorney. In the heat of the proceedings the probate court appointed another lawyer as Mr. Sleeth’s guardian ad litem, and she reported to the court on what she thought ought to be done.

Contested hearings were held in March and April, 2008, but even after the probate court appointed Mr. Sleeth’s son as his guardian, conservator and trustee the lawyers continued to spar over his proper care, the possibility of his marriage and the management of his estate. Another round of hearings was held in October of that year, and in December, 2008, the judge removed Mr. Sleeth’s son as guardian (leaving him as conservator and trustee) and appointed an independent, professional fiduciary.

By October, 2009, Mr. Sleeth had married, the court had appointed a new conservator and trustee, and Mr. Sleeth’s son had submitted his attorney’s billings for approval by the court. Fees and costs for the nineteen months totaled $270,213.36. The probate judge ultimately approved the billings (though reduced by $5,515.00), over the vigorous objections of Mr. Sleeth and his new wife.

In addition to the fees charged by Mr. Sleeth’s son’s lawyers, fees of $142,499.69 were requested (and approved) by Mr. Sleeth’s own lawyer, and another $38,508.67 (also approved) by the court-appointed guardian ad litem. In total, Mr. Sleeth’s estate was subjected to bills for attorney’s fees and costs of $445,706.72. Since his estate had been valued at about $1.4 million, this meant that about one-third of his entire estate would be paid to lawyers.

The Arizona Court of Appeals reviewed the approval of the fees of lawyers for Mr. Sleeth’s son. The court noted that no one had appealed the other two attorney’s fees, so they were not before the appellate judges. With regard to the fees charged to the guardian/conservator/trustee, though, the appellate court was clear: the trial judge needed to review them more closely.

Arizona’s probate code governs guardianship, conservatorship and trust administration proceedings as well as decedent’s estates. That code and the rules adopted by the courts to implement it are clear: the fees charged by lawyers in probate proceedings must be “reasonable.” What is less clear is what “reasonable” might mean in particular circumstances.

Although the probate judge had ruled that the fees charged to the guardian were reasonable, the appellate judges ordered him to reconsider, and to particularly pay attention to at least these concerns:

  1. One important element of determining reasonableness, according to the appellate court, is whether the representation ultimately benefits the ward. It is not enough to show that the lawyer was “successful” in the proceedings. Even though his son prevailed (at least temporarily), the probate judge was directed to consider whether the proceedings were “excessive or unproductive.” Both the fiduciary and his attorney have a duty to make a cost-benefit analysis, and to review it regularly, to determine whether it is appropriate to continue the legal proceedings.
  2. The time records included a number of instances of what the appellate judges thought looked like “block billing” which required further review. Although most time records are kept in tenths of an hour, and many lawyers impose a minimum of .1 or .2 hours for most time entries, the appellate judges were troubled by the large number of time records listing a string of activities and posting a .5 or 1.0 hour bill. The failure to separate out multiple activities into individual listings makes it difficult to determine whether those time entries should be approved, according to the court.
  3. Although the court did not find that improper entries were included in the time records, it did direct the probate judge to consider whether charges for such items as copying, faxing, emailing and file maintenance were appropriate for billing, or were really clerical work that would normally be part of the lawyer’s overhead.

Sleeth v. Sleeth, December 9, 2010.

Much has been written about problems with legal fees in court proceedings involving guardianship, conservatorship and trust administration. The Arizona Supreme Court has created a committee to review (among other things) billing practices and rules. Three judges of the Arizona Court of Appeals demonstrated this past week that they don’t need a committee to tell them how to determine the reasonableness of fees — existing probate law gives them (and the probate courts) the tools to regulate fees in contentious probate proceedings.

Distinguishing Two Kinds of Special Needs Trusts

It really is unfortunate that we didn’t see this problem coming. Those of us who pioneered special needs trust planning back in the 1980s should have realized that we were setting up everyone (including ourselves) for confusion. We should have just given the two main kinds of special needs trusts different names. But we didn’t, and now we have to keep explaining.

There are two different kinds of special needs trusts, and the treatment and effect of any given trust will be very different depending on which kind of trust is involved in each case. Even that statement is misleading: there are actually about six or seven (depending on your definitions) kinds of special needs trusts — but they generally fall into one of two categories. Most (but not all) practitioners use the same language to describe the distinction: a given special needs trust is either a “self-settled” or a “third-party” trust.

Why is the distinction important? Because the rules surrounding the two kinds of trusts are very different. For example, a “self-settled” special needs trust:

  • Must include a provision repaying the state Medicaid agency for the cost of Title XIX (Medicaid) benefits received by the beneficiary upon the death of the beneficiary.
  • May have significant limitations on the kinds of payments the trustee can make; these limitations will vary significantly from state to state.
  • Will likely require some kind of annual accounting to the state Medicaid agency of trust expenditures.
  • May, if the rules are not followed precisely, result in the beneficiary being deemed to have access to trust assets and/or income, and thereby cost the beneficiary his or her Supplemental Security Income and Medicaid eligibility.
  • Will be taxed as if its contents still belonged to the beneficiary — in other words, as what the tax law calls a “grantor” trust.

By contrast, a “third-party” special needs trust usually:

  • May pay for food and shelter for the beneficiary — though such expenditures may result in a reduction in the beneficiary’s Supplemental Security Income payments for one or more months.
  • Can be distributed to other family members, or even charities, upon the death of the primary beneficiary.
  • May be terminated if the beneficiary improves and no longer requires Supplemental Security Income payments or Medicaid eligibility — with the remaining balance being distributed to the beneficiary.
  • Will not have to account (or at least not have to account so closely) to the state Medicaid agency in order to keep the beneficiary eligible.
  • Will be taxed on its own, and at a higher rate than a self-settled trust — though sometimes it will be taxed to the original grantor, and sometimes it will be entitled to slightly favorable treatment as a “Qualified Disability” trust (what is sometimes called a QDisT).

So what is the difference? It is actually easy to distinguish the two kinds of trusts, though even the names can make it seem more complicated. A self-settled trust is established with money or property that once belonged to the beneficiary. That might include a personal injury settlement, an inheritance, or just accumulated wealth. If the beneficiary had the legal right to the unrestrained use of the money — directly or though a conservator (or guardian of the estate) — then the trust is probably a self-settled trust.

It may be clearer to describe a third-party trust. If the money belonged to someone else, and that person established the trust for the benefit of the person with a disability, then the trust will be a third-party trust. Of course, it also has to qualify as a special needs trust; not all third-party trusts include language that is sufficient to gain such treatment (and there is a little variation by state in this regard, too).

So an inheritance might be a third-party special needs trust — if the person leaving the inheritance set it up in an appropriate manner. If not, and the inheritance was left outright to the beneficiary, then the trust set up by a court, conservator (or guardian of the estate) or family member will probably be a self-settled trust.

That leads to an important point: if the trust is established by a court, by a conservator or guardian, or even by the defendant in a personal injury action, it is still a self-settled trust for Social Security and Medicaid purposes. Each of those entities is acting on behalf of the beneficiary, and so their actions are interpreted as if the beneficiary himself (or herself) established the trust.

Since the rules governing these two kinds of trusts are so different, why didn’t we just use different names for them to start with? Good question. Some did: in some states and laws offices, self-settled special needs trusts are called “supplemental benefits” trusts. Unfortunately, the idea didn’t catch on, and sometimes the same term is used to describe third-party trusts instead. Oops.

We collectively apologize for the confusion. In the meantime, note that the literature about special needs trusts sometimes assumes that you know which kind is being described and discussed, and sometimes even mixes up the two types without clearly distinguishing. Pay close attention to anything you read about special needs trusts to make sure you’re getting the right information.

Want to know more? You might want to sign up for our upcoming “Special Needs Trust School” program. We are offering our next session (to live attendees only) on September 15, 2010. You can call Yvette at our offices (520-622-0400) to reserve a seat.

DNA Test Might Be Useful To Establish Decedent’s Paternity


Despite being cloaked in arcane terms and arguments, the legal system usually makes sense in the real world in which it operates. Sometimes, however, it may take the legal system a few years — or a few centuries — to catch up with that real world. One illustration: the difficulties that can arise in trying to answer the deceptively simple question of paternity, especially after the death of the putative father.

Five (or so) centuries of common law developed before DNA testing for paternity became possible. During that long period courts frequently focused on the importance of protecting the family — a child born to a married woman was presumed (and almost conclusively so) to be the child of the woman’s husband.

Another important development in that long history centered on the privacy rights of all the interested parties. It became extremely difficult to force any contesting person to submit to medical testing to determine paternity. Of course, there were no particularly precise tests available until quite recently.

Today, of course, genetic testing is much more precise and useful in determining parental relationships. Does that mean that the legal system has embraced DNA tests as a means of settling disputes about paternity? Not yet.

Consider Adrian Doe, Jr.’s trusts. Mr. Doe set up a series of trusts which, upon his death, divided into equal shares for his children. At the time of his death he had two children born while he was married to their mother — Adrian III and Evelyn. He also left behind two possible children from Costa Rica, whose respective mothers both asserted that he was the father. What was the trustee to do about Maria and Madelin?

Maria’s birth certificate named Mr. Doe as her father, but Madelin’s was silent about paternity. Should the trustee assume that the records were correct, and create a trust share for one of his possible daughters but not the other?

The trustee asked the Florida probate court what it should do, and the court appointed an attorney to represent the interests of the two minor girls. One filed a request that Evelyn and Adrian III be ordered to submit to cheek swabs in order to determine whether they shared DNA with the girls. The probate court agreed with the request.

The Florida Court of Appeals, citing some of the history of paternity and privacy laws, disagreed and quashed the DNA testing order — for the moment. It did, however, note that with slightly better-developed facts Madelin’s lawyer might be able to procure a new testing order. The appellate court even went so far as to suggest some of the evidence that might demonstrate the need for the testing.

If Madelin’s mother were to explicitly state that Mr. Doe was the father, evidence before the court showed that testing the two acknowledged children would be likely to establish Madelin’s and Maria’s paternity (or prove that they were not Mr. Doe’s children), and there were an explanation as to why Mr. Doe’s DNA could not be obtained (there was some indication that he might have been cremated), then the court might approve the testing. It also would want, however, to give Evelyn and Adrian III a chance to explain any particular privacy concerns they might want the probate court to consider. Doe v. Suntrust Bank, January 29, 2010.

Suit Against Bank for Allowing Trust Amendments Dismissed

APRIL 17, 2006  VOLUME 13, NUMBER 42

June Miller once told the trust officer at her bank that she loved her son Warren Miller but that she didn’t like him very much. That might have been her motivation for making a number of changes to her estate plan in the last few years of her life. After she died her son sued the bank for letting her make those changes.

When Ms. Miller’s husband (and Warren Miller’s father) died in 1995 he left a trust for Ms. Miller’s benefit. When she died, the trust was to go to their only child, Warren Miller. Ms. Miller had significant assets of her own, and she also established a trust with Key Bank in Ohio. At one point her trust gave Warren the right to approve all investment decisions and trust amendments in the event that Ms. Miller became incapacitated. In 2001, without telling Warren, she changed that provision and deleted his power to review trust activities.

At about the same time Ms. Miller exercised her power to withdraw some of her husband’s trust assets, saying that she intended to benefit her grandchildren at her son’s expense by shifting them to her estate. She also made a series of transfers to a caretaker and family, helping them to buy a home and making outright gifts of about $120,000.

Even as those changes were being undertaken, Ms. Miller was first diagnosed as suffering from mild dementia. When she died in 2002, her son Warren sued the bank, the caretaker and her family members.

Mr. Miller argued that the bank had a duty to watch out for Ms. Miller’s finances and to prevent exploitation. He claimed that the caretaker had in fact exploited his mother. He also insisted that the changes to her trust were made at a time when she was already demented, and that the bank was required to let him review those changes before accepting them.

A trial judge dismissed Mr. Miller’s claims against the bank and the caretaker, and the Ohio Court of Appeals agreed. Whatever duty the bank owed was to Ms. Miller and not to her son, said the appellate judges. Furthermore, the mere diagnosis of dementia was not enough to establish that she could not amend her trust, or make gifts to her caretaker. In fact, the gifts were made not from her trust, but from an account which the bank did not control. Mr. Miller had failed to carry his burden of proof to show that the bank had made any mistake, and the case was properly dismissed.

The appellate court decision also approved dismissal of the claims against Ms. Miller’s caretaker and family members. The judges specifically noted that Mr. Miller didn’t seem to have had any questions about his mother’s competence when she paid off his mortgage, arranged a monthly allowance for him and made other large gifts to him. Miller v. KeyBank National Association, April 6, 2006.

Fleming & Curti Offers Seminar For “Special Needs” Trustees

MARCH 1, 2004 VOLUME 11, NUMBER 35

When a recipient of Supplemental Security Income (SSI) or Medicaid benefits receives money, the benefits may be reduced or even terminated. That is why most parents of children with a disability should consider establishing a “special needs” trust to handle any inheritance or gifts. Making the decision to establish such a trust is not enough, though—the parents must carefully select a trustee, and the trustee must understand the unique problems associated with administering a special needs trust.

Some special needs trusts are funded not with gifts or inheritances, but with the beneficiary’s own money. An SSI/Medicaid recipient might have received a settlement from a personal injury lawsuit, for instance, or a cash inheritance from a relative who did not plan carefully. The trustee of that kind of special needs trust must also understand the complicated rules governing public benefits and special needs trusts.

Parents, trustees and interested family members should know the limitations and requirements for special needs trusts, but there is little help in the community to provide them with the necessary information. Case managers, advocates and others working in the disability community may have tried unsuccessfully to locate resources to enhance their own understanding of the obligations and opportunities.

To help provide more information about special needs trusts, the law firm of Fleming & Curti, PLC, has scheduled its first-ever training session on administration of special needs trusts. The free two-hour seminar will be held on the morning of April 19, 2004, near the Fleming & Curti offices in downtown Tucson. Attendance will be limited by the space available, and reservations are required.

The session will address:

-Basic eligibility rules for SSI and Medicaid (in Arizona, AHCCCS / ALTCS).

-The key difference between special needs trusts established with the beneficiary’s own money and those set up by family members for inheritance purposes.

-Rules for trust administration, including accounting and tax requirements.

-Permissible trust expenditures and those which disrupt government benefits.

-Techniques for using special needs trusts to provide housing, food, and necessities of life for the trust beneficiary.

Parents and other family members considering establishment of a special needs trust, family members of individuals for whom a special needs trust has been set up, family and professional trustees and case managers should all consider attending. Reservations can be made by calling Bonnie at the Fleming & Curti office (520-622-0400).

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