Posts Tagged ‘Trustees’

Court Ruling on Special Needs Trust Does Not Resolve Medicaid Eligibility

APRIL 22, 2013 VOLUME 20 NUMBER 16
This week we bring you a story that is simultaneously simple yet profound. It involves an arcane corner of law — the intersection of trust administration and Medicaid eligibility. Its simplicity is obvious: it results in a court determination that Medicaid eligibility is determined by the state Medicaid agency and not (at least not in the first instance) by courts. Its profundity is a little less obvious.

“A.N.” is a seventeen-year-old girl, living in New Jersey. She suffers from quadriplegic cerebral palsy, and she requires full-time total care. She gets most of that care from her mother and her maternal grandmother. She is the beneficiary of a special needs trust, established in 2000 with the proceeds from a personal injury lawsuit. Her father is employed, and she is therefore covered under his employer’s health insurance plan. Although the trust was intended to allow her to qualify for New Jersey’s Medicaid plan, she has never applied and has not yet received any coverage under Medicaid.

Her mother owned the home where A.N. lives, but she got behind in making payments on the mortgage. At some point the house was about to be foreclosed, and both parents asked the trustee of the special needs trust to begin making mortgage payments. The trustee did, but asked that the home simply be transferred into the trust’s name — there was little equity, and it appeared to be in A.N.’s best interests to make sure that foreclosure would not be a problem in the future.

It also seemed important to get specific authorization to pay A.N.’s mother and grandmother for taking care of her. Normally, that is the responsibility of a parent — but A.N. received her personal injury settlement (in part) precisely because her care is much more extensive than the care required for other minor children, and her mother is unable to work outside the home to support her — and could never make enough income to cover the cost of the care she is already providing.

Thus far the story is familiar. Though we know nothing much about New Jersey cases, we have heard versions of this story many times. Parents faced with extraordinary caretaking requirements for profoundly injured children, large personal injury settlements that could be used to help cover the high costs of care, houses that lost value during the recent downturn in the real estate market, and special needs trusts intended to maintain eligibility for Medicaid and Supplemental Security Income benefits are all too common in our practice. The only thing unusual in A.N.’s story is that Medicaid is not currently in place — but even that does not change the fundamental questions raised by her case.

This is the dilemma faced by so many trustees and families: should A.N.’s trust purchase her mother’s home, and reduce the cost of living there (because there would not be a mortgage for the mother to pay)? If so, should A.N.’s mother be required to pay rent, either for herself, or for A.N., or for any other children or adults who live in the house? And should A.N.’s mother and grandmother be paid to care for her, even though the law imposes a general responsibility on parents to provide care for their minor children? Finally, what effect would any of those decisions have on A.N.’s eligibility for Medicaid, and who gets to decide that effect?

Because the questions are difficult and the dollar amounts significant, the trustee of A.N.’s trust properly asked the court to make the final decision. The court, after all, is responsible for ultimate oversight of trusts, and this trust was already receiving the court’s attention (it had been set up by court order, after all). The court, in turn, appointed an attorney to represent A.N.’s interest; she argued that buying the house, foregoing rent and paying A.N.’s mother were all in A.N.’s best interests. After hearing the evidence and arguments, the court agreed.

The trustee had given notice of the pending court proceeding to the state Medicaid agency. While the court was considering the final language of its order approving the transactions, the Medicaid agency weighed in with its own comment. In effect, it told the court: “go ahead and decide that it’s in the child’s best interests if you like. But don’t think you can make us later agree that there will be no effect on Medicaid eligibility.”

The Medicaid agency pointed to a section of federal law (arguably not applicable to A.N.’s trust or her prospective future eligibility) that requires that trust distributions be for the “sole benefit” of the beneficiary. In this case, said New Jersey’s Medicaid agency, the court might well determine that the distributions are in A.N.’s best interests, but they benefit A.N.’s mother and grandmother, too — and they might run afoul of the “sole benefit” requirement. But we don’t have to decide that right now, said the Medicaid agency. We’ll wait until someone applies for Medicaid and let you know what we think then.

Not wanting to leave the issue dangling, the court specifically ordered that the proposed payments were for A.N.’s sole benefit. Furthermore, ruled the court, the Medicaid agency could not later object to the payments if anyone made an application for coverage for A.N. The Medicaid agency, not wanting to be bound by the court’s order, formally appeared in the case for the first time just to appeal that result.

The Appellate Division of the New Jersey Superior Court (the intermediate appellate level in New Jersey) agreed with Medicaid. Fine for the trial court to give the trustee directions, said the appellate judges. Fine to decide the payments are in A.N.’s best interests. But you don’t get to decide Medicaid eligibility questions. The agency makes those determinations in the first instance, and if someone appeals, then and only then can the courts get involved. In the Matter of A.N., April 16, 2013.

So what does that mean for Arizonans, for trustees of special needs trusts and for families? A number of lessons can be gleaned from the holding:

  • State Medicaid agencies are not necessarily bound by court interpretations of trust rules, even if they have advance notice of the pending court resolution. The Medicaid meaning of a phrase like “sole benefit” — and, for that matter, its applicability — is first a question for the agency.
  • What is best for a trust beneficiary might not also be the most effective for Medicaid purposes. It’s hard to see how allowing A.N.’s mother to lose her house could ever be in A.N.’s best interests — or even how it could be tolerable. But it doesn’t follow that Medicaid eligibility would be easy to resolve.
  • Medicaid eligibility is typically more restrictive than private insurance. It’s a very good thing for A.N. that her father continues to be covered by his employer’s policy. Time and again we see parents who are locked in to a current job situation precisely because of insurance coverage like A.N.’s father’s.
  • Though unspoken in the New Jersey appellate decision, the effect of the Affordable Care Act (“Obamacare” to both supporters and opponents) will be profound in some special needs trust cases. If A.N.’s trust can purchase insurance equivalent to that provided through her father’s employer, the entire family’s options (and the court’s ability to supervise the trust effectively) will be enhanced. We do not yet know whether that possibility will be completely or even partially realized.

Would the same procedural result be reached by Arizona courts in similar facts? We do not know for certain, but it seems likely that it would. But we are confident that the profound questions — about how to balance parental responsibility for food, housing and care with the availability of significant trust assets in similar circumstances — will continue to challenge us in the administration of special needs trusts.

 

Accounting Requirements for Irrevocable Trusts in Arizona

FEBRUARY 4, 2013 VOLUME 20 NUMBER 5
Arizona adopted a version of the Uniform Trust Code in 2008, to be effective at the beginning of 2009. The UTC has been the subject of much discussion across the country — it has been adopted in about half the states, and soundly rejected in a few others. Despite all that discussion, however, there are relatively few court cases addressing what the UTC provisions actually mean.

One concern commonly raised about the UTC has been its requirement that trust accounting information must be given to beneficiaries, including those who receive no benefit until after the death of a current beneficiary. Take, for instance, a common situation: in a second marriage, a wife establishes a trust for the benefit of her husband for the rest of his life, with the remainder to be paid out to her children (from her first marriage) after the husband’s death. Then the wife dies, leaving her house and brokerage account to the trust. Her surviving husband is trustee. Under Arizona’s version of the UTC, her children are entitled to receive at least annual reports from the husband.

But what should those reports contain? The Trust Code is less than completely explanatory. It says that the wife’s children are entitled to “a report of the trust property, liabilities, receipts and disbursements, including the source and amount of the trustee’s compensation, a listing of the trust assets and, if feasible, their respective market values.”

In a recent Arizona Court of Appeals case, the meaning of that requirement was questioned. The history was slightly more convoluted than the scenario we describe above: the trust had been established by a husband and wife for the ultimate benefit of the husband’s two daughters. First the husband and then the wife died. The trust, by its terms, then divided into two shares — one share outright to  one daughter, and the other share to a local Certified Public Accountant as trustee for the benefit of the other daughter.

To try to make this convoluted story a little clearer, let’s identify the parties. In keeping with our usual attempt to avoid family names popping up in internet searches, and to make it easier to keep track, we’ll give everyone shortened names. We’ll call the combined trust — the original one set up by the husband and wife — the G Trust, and the trustee of that trust Geraldine. We’ll call the trust for the benefit of one daughter the S Trust, and the CPA/trustee of that trust Scott. The other daughter will be Doris.

Doris filed a court action asking for determination of the proper division of the G Trust. She noted that she had been named as beneficiary of an annuity and asked that it be determined that it was not part of the trust. Geraldine, the trustee of the G Trust, filed a proposed distribution schedule for the G Trust. Both Doris and Scott (the Trustee of the S Trust) objected, each arguing that their share should be increased. The probate court found that the annuity belonged to Doris, and that Geraldine should make her own calculation as to how to distribute the G Trust.

Months later, Scott filed a request that the court order Geraldine to file an “accounting” with the court. Geraldine objected that she had done everything the Arizona UTC required — and that all she was required to provide was a “report” under that statute. Scott argued that he was entitled to a more formal accounting. Ultimately the probate judge denied that request, finding that Geraldine’s reports (consisting of account statements and other documentation) were sufficient for Scott to protect his trust’s interest. Scott appealed.

With that background, the question before the Court of Appeals was straightforward: does the Arizona version of the Uniform Trust Code allow a beneficiary to make a demand for a formal, detailed accounting? No, ruled the appellate court. In fact, the UTC made the accounting requirements less onerous, rather than imposing more detail: the prior Arizona law had required “a statement of the accounts of the trust annually,” but that statute was repealed when the UTC was adopted.

According to the appellate decision, requiring an “accounting” would have included “establishing or settling financial accounts” and “extracting, sorting, and summarizing the recorded transactions to produce a set of financial records” (quoting from Black’s Law Dictionary 9th Ed.). The court also quoted from the commentary prepared by the UTC’s original, multi-state drafters: “The reporting requirement might even be satisfied by providing the beneficiaries with copies of the trust’s income tax returns and monthly brokerage account statements if the information on those returns and statements is complete and sufficiently clear.”

The bottom line: the main concern of the UTC is to assure that beneficiaries have the information they need to be able to protect their interests. Scott had sufficient detail that he could calculate whether Doris had received more than her share of the G Trust, and Geraldine was not required to prepare a more formal report. In the Matter of the Goar Trust, December 31, 2012.

Trustees Are “Owners” of Home for Lien Protection Purposes

SEPTEMBER 19, 2011 VOLUME 18 NUMBER 33
It’s frankly a little hard to explain why trust lawyers get excited about the subject of this week’s article. After all, it seems to be about who will pay for the new doors in a home renovation in a pricey suburb of Phoenix. The bill was large — $8,276.10 — but hardly astonishing. Let’s see if we can convey some of the excitement.

Richard and Kristen Williamson owned their home in Scottsdale, Arizona, just west of McDowell Mountain Regional Park. They had also created a revocable living trust. Just as they should, they had transferred the title to their home into the trust’s name.

But what does that mean? In Arizona, at least, that usually means that the trust “settlors” (the people who create the trust, sometimes also called “trustors” or “trust creators”) sign a deed from themselves as owners to themselves as trustees. So Mr. and Mrs. Williamson had transferred their home by just such a deed — and the Maricopa County Recorder’s office indicated that ownership of the home now belonged to “Richard M. Williamson and Kristen A. Williamson as Trustees of the Williamson Family Trust.”

Then the Williamsons — again quite properly — went about living their lives. In June, 2005, they decided to construct an addition on their home. They hired a contractor, Freedom Architectural Builders, to do the work. Their contract was unremarkable; it spelled out what the contractor would do and how funds would be released, in stages, as work progressed.

Almost two years later the work had progressed to the point that it was time to put doors on the addition. Freedom Architectural Builders sub-contracted with another company, PVOrbit, Inc. (it was doing business as Fountain Hills Door & Supply), to actually provide the doors and hinges. PVOrbit did what it was supposed to do, delivering doors and hinges to the home and sending its invoice to Freedom Architectural Builders.

Before the bill for doors got paid, however, Freedom Architectural Builders got into serious financial trouble. It notified Mr. and Mrs. Williamson that it could not complete the work on their home, and it walked away from the project. The Williamsons ended up hiring a new contractor to finish the work.

The Williamsons had no separate contract with PVOrbit or Fountain Hills Door & Supply, so they ignored demands for payment for the doors. Besides, they argued that they had already paid Freedom Architectural Builders for the doors, that they had to pay over $30,000 more than the total contract price to get the work done, and that PVOrbit’s complaint was with the contractor.

PVOrbit responded by filing a lien against the Williamsons’ home. The lien — often called a “materialman’s” lien or “mechanic’s” lien — can be unilaterally filed by someone who has provided materials used on real or personal property without having been paid. There are some specific rules about how such liens may be filed, and they vary from state to state. In Arizona, there is one important (for our purposes) limitation: such a lien can not be pursued against a home actually lived in by its owner.

Mr. and Mrs. Williamson sued, asking that PVOrbit be ordered to remove the lien and pay their attorneys fees and costs. At about the same time, PVOrbit sued the Williamsons and Freedom Architectural Builders for the doors they had installed. The two lawsuits were consolidated. Freedom Architectural Builders filed bankruptcy and was dismissed as a party in the consolidated lawsuits.

PVOrbit argued that the Williamsons were not owner/occupants of their home. The home, according to the door supplier, actually belonged to the Williamson Family Trust, not Mr. and Mrs. Williamson. Besides, said PVOrbit, the Williamsons shouldn’t be allowed to get away with not paying for the $8,276.10 worth of doors and hinges — to allow that would be to unjustly enrich them. The trial judge was not impressed with either argument; he dismissed the PVOrbit lawsuit and granted the Williamons $6,000 in fees and costs against the door company.

Admittedly, trust lawyers tend to be easily excited, at least when it comes to arcane issues like this question: who actually owns property titled to a trust? The Arizona Court of Appeals has probably raised the level of excitement (and agitation) among trust lawyers by upholding the trial judge in the Williamson/PVOrbit litigation, but with a slight twist. The appellate court has decided that because the deed says “Richard M. Williamson and Kristen A. Williamson,” the Williamsons are in fact owners of their home — even though the rest of the title qualifies their ownership interest: “…as trustees of the Williamson Family Trust.” It is a technical reading of the relationship of the Williamsons as individuals to the Williamsons as trustees. Williamson v. PVOrbit, Inc., September 1, 2011.

There is actually a perfectly good basis on which the Court of Appeals could have relied. Trust law has for centuries allowed for a distinction between the “legal” ownership of property (what the Williamsons as trustees held) and the “equitable” ownership of the same property (what the Williamsons held as trust beneficiaries). The appellate court could have decided that the statute protecting owner/occupants of homes was satisfied if the ownership interest is a beneficial one. That would have solved the problem.

What difference does it make? Well, what if Mr. and Mrs. Williamson — for whatever reason — decided to let their successor trustees take over. Now ownership might be held as “Skip and Marcy Jackson as Trustees of the Williamson Family Trust.” (Note: we don’t actually know who is successor trustee of the Willaimsons’ trust, and we don’t know anyone named Skip and Marcy — we just like the sound of it.) Would that mean that Skip and Marcy would have to move in with the Williamsons to protect against materialman’s liens? That would be silly — so long as Mr. and Mrs. Williamson are beneficiaries of the trust they created, they have the equitable ownership interest and the right to be, well, owner/occupants.

One other thing about the Williamson case strikes us. It may work to the advantage of people who worry about buyers’ title insurance policies. Some have suggested that transferring your home into a living trust could arguably be a transfer that voided your title insurance coverage. If the Williamson decision is valid, that argument would be a lot easier to strike down.

All right — can you see why we got excited?

Remainder Beneficiaries Not Entitled to Trust Beneficiary’s Financial Info

SEPTEMBER 12, 2011 VOLUME 18 NUMBER 32
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.

Failure to Distribute Estate On Time Leads to Damages Award

JULY 5, 2011 VOLUME 18 NUMBER 24
Family members sometimes assume that an estate will be ready for distribution within days or weeks of a death. Those familiar with the probate process usually appreciate that it is more likely that distribution will be between six months to a year after death — and sometimes longer. When the decedent established a living trust, though, survivors often expect the final distribution to be faster. Everyone has gathered for the funeral, including out-of-town children and grandchildren — shouldn’t there be a check ready to hand out while the whole family is together?

The reality is that administration of an estate, even when a trust is involved, can take much longer. A good rule of thumb: it may still take six months to a year to prepare final income tax returns, gather trust assets, liquidate those which need to be sold (and not all will need to be sold in most cases), make calculations and actually complete the distribution. If there are more complicated issues, like estate tax liability, it may take even longer.

Delay in distribution of a trust estate was the issue involved in a recent Indiana Court of Appeals case. Harrison Eiteljorg’s will had provided a trust for his widow, Sonja Eiteljorg. When she died in 2003, the trust was to be divided into two shares — one each for Harrison’s sons Nick and Jack. Nick, a stepson and Harrison’s accountant were the co-trustees.

The trust was large — it held about $13 million of assets. That meant that an estate tax return had to be filed, and taxes totaling $6.2 million paid (remember that in 2003 tax was imposed on estates greater than $1 million). That was accomplished by late 2004, but the trustees were worried about closing out the estate and distributing the remaining assets. What would they do if the IRS disagreed with their calculations of values and imposed an additional tax liability.

At a heated meeting between the co-trustees and the two sons, Nick demanded a partial distribution of $2 million (half each to himself and Jack). The other trustees declined, saying that they worried that additional tax of up to $2 million might be imposed, and a distribution as large as Nick wanted would leave the trust with too little cash if that happened. They proposed instead to distribute $1 million to the two sons. Nick and Jack left the meeting without agreeing, and both sides hired new lawyers to battle out the timing and amount of a distribution.

A few months later Nick and Jack filed a petition with the Indiana probate court asking for removal of the co-trustees and entry of a judgment against them. Their argument: there was no reason not to distribute the requested $2 million when demanded, and failure to do so breached the trustees’ duty to the beneficiaries. The trustees answered, arguing that they needed to retain substantial liquidity until the IRS finally accepted the estate tax return (or imposed additional tax liability, if that was to be the outcome).

About a year after their original demand for partial distribution, Jack and Nick secured an order from the probate judge requiring that $1.5 million be divided between them. The co-trustees complied. The court proceedings then shifted gears to address a two-part question: did the delay in distribution amount to a breach of fiduciary duty, and (if it did) what were the damages due to Nick and Jack?

The probate judge found that the delay did amount to a breach of fiduciary duty. Nick testified that he would have put his distribution into two mutual funds, and that it would have grown significantly during the months he was deprived of its use. Jack testified that he had planned to purchase real estate in Texas, and that it would have appreciated. In addition, Nick and Jack had incurred attorneys fees totaling $403,612.81.

Based on the damages testimony, the probate judge awarded Nick $156,701 in “lost” profits from the funds he could not invest in. Jack was awarded $112,046.77 in missed real estate gains. The remaining co-trustees were ordered to pay those amounts from their own pockets, as well as all but $50,000 of the attorneys fees.

The Indiana Court of Appeals had a different take on the case, and significantly reduced the damages award. First, two of the three appellate judges agreed with the trial judge that failure to distribute the funds earlier was a breach of fiduciary duty. Rather than giving Nick and Jack the profits they said they would have earned, however, the two judges limited their damages to the interest that the $1.2 million would have earned during the nine months it was delayed — and even that damage award was to be reduced by the amount of interest the money actually earned in the trustees’ hands. The appellate court also reduced the attorneys fee award to a total of $150,000 — what they called “a more appropriate assessment.” In the Matter of Trust of Eiteljorg, June 27, 2011.

One appellate judge would not have gone even that far. According to the dissenting opinion he authored, there was no breach of fiduciary duty. After all, he reasoned, the co-trustees offered to distribute almost exactly what was ordered a few months later, and Nick and Jack rejected the partial distribution plan. Retaining at least $2 million in liquid assets until the estate tax return had been accepted was a reasonable and prudent course, according to the dissenting opinion.

What lessons can we draw from the Eiteljorg case? Several come to mind:

  • Even with a trust, it may take months or years after a death to complete the administration and make final distribution. That is not the usual circumstance, but it can happen.
  • Although avoidance of litigation is one common goal of trust planning, it is not always effective. And the cost of probate or trust litigation can be significant — note that Nick and Jack incurred legal fees of about one-third of the total amount they sought as distribution, and that the question was not whether they were entitled to the money, but only when.
  • In addition to increasing cost, litigation can slow down the process. Here, the co-trustees were ready to make a significant distribution at the first meeting, but the court-ordered distribution (of almost exactly the same amount) was delayed for nine months.
  • Acting as trustee can sometimes be costly. The co-trustees in this case will be liable for at least $150,000 out of their own pockets. We can anticipate that Nick and Jack will object to any attempt to pay the trustees’ own lawyers from trust assets, or to pay any fees to the co-trustees.

What Is a Trust Protector? Do You Need One In Your Trust?

JUNE 27, 2011 VOLUME 18 NUMBER 23
We have written before about Arizona’s new Trust Code, and the Uniform Trust Code on which it is based. The “new” law (it became effective on January 1, 2009, so it’s not that new any more) included a number of changes to the way trusts have worked in Arizona for decades. One of the minor, but interesting, provisions is the formal creation of a position called “trust protector.”

To be clear, there was nothing prohibiting inclusion of a trust protector before the new law. So far there are no court cases to help flesh out the powers and duties a trust protector may be given. But we do now have a statute — Arizona Revised Statutes section 14-10818 — which gives clear authority for inclusion of this unusual beast.

So what is a trust protector? The person establishing a trust is permitted to include someone who would have the authority to make changes to the trust even after it becomes irrevocable — even, in fact, after the death of the original trust creator. That means you could name your sister (or your father, or your best friend from college, or your lawyer or accountant) to be the person who could make changes to the trust after your death, to protect the beneficiaries from unintended consequences — or from themselves.

There are no very serious limitations on the trust protector’s possible authority. The Arizona statute gives a handful of illustrations of the powers you might give the protector, but it doesn’t limit you to those ideas. Here are the powers the legislature thought you might want to consider:

  1. The power to remove the trustee and appoint a new one. Worried that the bank might become too bureaucratic, or too expensive? A trust protector can help take that worry off your plate. Worried that your son might not be equipped to really handle the trust after your death? Trust protector to the rescue.
  2. The power to change the applicable state law. Do you think Iowa, or Oregon, or Georgia might be a better state to allow your trust’s purposes to be carried out (or reduce state income taxes, or extend the time for the trust to continue after your death)? We suggest those states precisely because they are not now noted for especially trust-friendly rules — but who knows what might happen in the future? A trust protector could monitor those developments and make a change when it makes more sense.
  3. Ability to change the terms of distribution. What if your daughter is embroiled in a messy divorce just at the time your trust is scheduled to dissolve and pay out to her? Or if your son is just about to declare bankruptcy? Or your grandson has just been diagnosed as mentally ill, and really needs a special needs trust to handle the inheritance you have left him? A trust protector could be given the power to change the date of distribution, or to establish a special needs trust, or whatever needs to be done.
  4. Amend the trust itself. You can even give a trust protector the power to amend the trust’s terms. That might include taking advantage of future tax alternatives, or giving a larger share to a grandchild who really needs help, or reducing the inheritance of a child who doesn’t need a full share.

These powers are illustrative, not mandatory. In other words, you can tailor your trust protector’s powers and duties to your own situation and your personal comfort level.

A trust protector can be very powerful, very helpful and very dangerous. It should be obvious that not everyone will want to establish such a super-powerful position in their trust. For those concerned about the difficulty of planning for an uncertain future, however, the trust protector might just be a very comforting and useful tool.

That all begs the question asked in our headline. Do you need a trust protector? Perhaps. We think maybe the first question should be: is there someone (other than your trustee) whom you completely trust to “get” exactly what you want done with your estate after your incapacity or death? If not, your trust is probably not a good candidate for inclusion of a trust protector. But if you do have that person in mind, then let’s talk about how to use them.

Decanting: It’s Not Just for Fine Wines Anymore

JUNE 20, 2011 VOLUME 18 NUMBER 22
Imagine this tragic scenario: your 33-year-old son has a serious illness, and requires extensive medical treatment. The good news is that the treatment may well effect a cure. The bad news is that it will be horribly expensive. Right now he qualifies for government assistance with that expense — after all, he hasn’t been able to work for several years. But that eligibility is about to change.

Your mother set up a trust for each of her grandchildren before her death five years ago. Each trust provided that the grandchild would receive his or her share outright at age 35. In two years, your son will be eligible to receive about $250,000 from his trust — and you think it will probably be spent immediately on medical care that otherwise would be provided at no cost to him.

Arizona (and a number of other states — but we’re not in the business of giving advice regarding state laws we don’t know about) now allows the trustee to do something about your son’s problem. It is possible to “decant” an irrevocable Arizona trust into a new trust, so long as a few basic principles are not violated. The new trust could, for example, be a “special needs” trust, allowing your son to still qualify for medical assistance.

The Arizona law is found at Arizona Revised Statutes section 14-10819. If you read it, you won’t find the word “decant” anywhere. That’s because the term is favored among trust lawyers, but not in the law itself. No matter — “decanting” is a pretty good description of what the trustee is doing. Basically, the trust’s assets are being poured from one bottle (the old trust) into a new, similar-but-different bottle (the new trust) and gaining new vigor and complexity in the process.

Your scenario might be different. It might be your daughter who is a chronic spendthrift. Perhaps one of your children married a spendthrift. You might even be the trust beneficiary interested in extending the period of the trust, perhaps for creditor protection purposes.

The amount of money might be more or less than the story we have sketched out here. You might be the trustee, or a bank or private fiduciary might have that position. None of that makes much difference — the trustee of an irrevocable Arizona trust can, unless the trust explicitly prohibits it, usually decant to solve real-world problems that have arisen since the trust was initially created.

The idea is not brand-new, nor unique to Arizona. New York adopted a similar law as early as 1992, and almost a dozen states now explicitly permit decanting. Arguably, the power to decant is not dependent on a state law — though trustees from states where there is no statute might be hesitant about testing that theory.

One requirement for Arizona’s decanting statute to be available: the trust must be an Arizona trust. That usually means that one trustee must be in Arizona, though even that might not be necessary in every case. Another requirement: the trustee must have the discretion to make a distribution to or for the benefit of the beneficiary. In other words, if Grandma’s trust required the distribution of all income directly to Junior but did not permit the trustee to ever reach the principal, decanting might not be an option.

Could you force an Arizona trustee to decant if you were the beneficiary’s concerned parent? Probably not. What if you were the beneficiary and desperately wanted the trustee to exercise its power to decant? Probably not again. Could you decant a trust if you were the trustee and the beneficiary? Oops — we’ve run out of space and time (that’s lawyer talk for “it depends”).

Decanting trusts is an interesting and useful idea. It can help “fix” problem trusts, especially where circumstances have changed since the trust was first established. If you know of a current or looming problem with distributions from an Arizona trust, you might want to talk to an experienced trust and estates lawyer about the options available.

How Should Special Needs Trust Funds Be Invested?

Here’s a question that comes up frequently in our practice: how should the funds held in a special needs trust be invested?

The answer should be obvious: a good investment plan for a special needs trust — just like a good investment plan for an individual — should consider the amount available to invest, the beneficiary’s likely needs in the short and long term, the cost of maintaining the investments and other factors affecting the beneficiary’s quality of life. All of that is part of the process of figuring out the trust’s (and the beneficiary’s) tolerance for risk. That, in turn, leads to an appropriate asset allocation — an estimate of what portion of the trust should be held in stocks, what portion in bonds or other fixed income investments, and what portion in other kinds of holdings.

Does all that sound confusing and complicated? It isn’t, really, but one way to get the proper allocation and investment portfolio is to trust the decision to qualified professionals. One would think a bank trust officer would be a good resource for this job. One might be less certain about a judge’s qualifications for the job — at least without looking at the judge’s professional training and background.

What happens when a judge orders a bank trust department to liquidate all its investments and hold an entire special needs trust in federally-insured certificates of deposit because of recent market swings? Well, you can read about a recent Washington State case in the weekly newsletter of our friends at the Hook Law Center, a Virginia law firm.

Conservator May Be Able To Act As Successor Trustee

AUGUST 16, 2010 VOLUME 17 NUMBER 26
Let’s say you have created a revocable living trust, and you have named yourself as trustee. You also name your two children as successor trustees, to act together upon your death or incapacity. Two years later you become incapacitated; because of a dispute between your two children about who should handle assets outside the trust, the probate court names a local bank as your conservator. Now who handles your trust — the bank, or your children?

Before we answer that question, let us complicate it. You are also the beneficiary of a trust set up by your late husband — and you are trustee of that trust, as well. About half of the assets the two of you owned are included in each of the two trusts. Your husband’s trust names you as trustee (now that he is deceased) and names the two children as successor trustees if anything should happen to you. Does your conservator have any authority over that trust?

Those were precisely the questions faced by a probate judge in South Dakota when Evelyn Didier became incapacitated. The bank appointed as her conservator asked the court to clarify that it had control over both trusts as well as Ms. Didier’s non-trust assets. The judge agreed, and Ms. Didier’s daughter Barbara Didier-Stager appealed.

Court appointment of a conservator does not amount to appointment of a successor trustee, argued Ms. Didier’s daughter. In fact, appointment of a conservator proves the incapacity that triggers a change in trustees — resulting in the son and daughter taking over as successor trustee of their mother’s trust. As to their father’s trust, the successor trustee provisions are triggered by the conservatorship in the same way — though our simplified version of the facts described above fails to clarify that the successor trustees of that trust were actually Ms. Didier-Stager and another local bank — different from the bank acting as Ms. Didier’s conservator.

South Dakota, like Arizona, has adopted the Uniform Probate Code — though South Dakota’s version has been updated more recently and is more current. The Code includes provisions about guardianship and conservatorship (though now those sections have been set aside as a separate uniform law, the Uniform Guardianship and Protective Proceedings Act). Those uniform laws permit the judge in a conservatorship proceeding to enter orders related to the protected person’s estate plan.

So, reasoned the South Dakota court, the probate court could permit Ms. Didier’s conservator to do anything that Ms. Didier herself could have done before becoming incapacitated. Her own trust was revocable and amendable — if she had wanted to do so, she could have changed the successor trustee at any time. She could have named the bank that was ultimately appointed as her conservator. Consequently, the court could allow her conservator to assume the powers of successor trustee over that trust.

The late Mr. Didiers trust was a different matter, however. Ms. Didier herself did not have the power to change the trustee, and so her conservator could not exercise that power on her behalf. That trust would have to be dealt with separately, and the Supreme Court ordered the case remanded to the probate judge to determine what to do about Mr. Didier’s trust. Conservatorship of Didier, June 30, 2010.

Does this mean that Mr. Didier’s successor trustees automatically take over, instead of Mrs. Didier’s conservator? Probably not. Other provisions of the Probate Code give the probate judge authority over trust administration, and if it appears that there is some reason not to allow the named successors to become trustee there will presumably be an order to that effect. But it does change the discussion from a choice between blindly following the document or giving Mrs. Didier’s conservator power to do anything she could do. Instead, the probate court will have to determine which approach is most consistent with the trust, with proper administration, and with the best interests of the trust’s beneficiaries.

The Uniform law actually goes quite a bit further today than the 1974 version originally adopted in Arizona (though Arizona has updated portions of the law several times). Reviewing the statute in the context of the Didier case highlights some of the changes. Among the powers given to conservators by the “new” Code (as adopted in South Dakota, for instance) is the power to “make, amend, or revoke the protected person’s will.” (See Section 411(a)(7) of the Uniform Guardianship and Protective Proceedings Act.) Court approval is required, but the very notion of a conservator changing the protected person’s estate plan might strike some as dangerous.

Late Request Does Not Prevent Fee Award to Trustee’s Lawyer

JUNE 28, 2010  VOLUME 17, NUMBER 21
Mesa, Arizona, lawyer Donald C. Galbasini first began representing members of the Tremble family in 1998. That was when he filed a notice that he would be the attorney for Vernice Tremble, who was serving as conservator for Edward Tremble, Jr., her grandson.

Nine years later Vernice Tremble was removed by the probate judge as conservator — and also as trustee of a special needs trust that had been set up for Edward Tremble. A professional trustee was appointed to take over management of the special needs trust. A year and a half after that, Edward Tremble died and another family member was appointed to finalize the trust administration and distribution. Mr. Galbasini filed a notice that he would be representing the new trustee in connection with wrapping up the trust.

A month after stepping in as the new trustee’s lawyer, Mr. Galbasini filed a request for approval of a $46,736.65 fee — for his representation dating back to 1998. The state Medicaid agency (which would receive most of the balance of Edward Tremble’s trust under the rules governing self-settled special needs trusts) objected, arguing that it was too late for Mr. Galbasini to be filing his bill for approval and payment.

The trustee who had been handling the trust in the interim joined in the state’s objection, adding other arguments. Because of Mr. Galbasini’s long involvement and representation of a conservator who had been removed, argued the trustee, it would be impossible at this late date to figure out whether his representation had benefited Edward Tremble or other family members. The trustee pointed out that Mr. Galbasini had billed at his regular attorney rate for ministerial actions like writing checks out of his client trust account. Furthermore, the trustee was concerned that none of Mr. Galbasini’s reported time was for contact with Vernice Tremble, his client — all of his contacts had been with Edward Tremble’s parents, Mr. Galbasini’s client’s son and daughter-in-law.

The probate judge agreed, and denied Mr. Galbasini’s fee request as untimely. The Arizona Court of Appeals, however, disagreed — it reversed the fee denial and sent the matter back to the trial judge for further hearings. The question wasn’t whether the fee request was late, ruled the appellate court — instead, the important question was whether the fees were reasonable and for the benefit of Edward Tremble’s trust and conservatorship estates.

The appellate court did not rule that Mr. Galbasini’s fees were reasonable, but only that he needed to be given a chance to explain and defend them. If the court finds that the fees were incurred during times when he did not actually represent the conservator or trustee, for instance, the Court of Appeals agreed that those fees should be denied. The mere lateness of the application, however, was not enough to justify a complete denial of Mr. Galbasini’s fees. Conservatorship of Tremble, June 10, 2010.

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