Administration Of Special Needs Trusts: Extraordinary Duties For Trustees

Posted on November 22, 2011 by Michael L. Mixell
Corporate trust officers have a great deal of experience determining how to properly exercise their fiduciary duty to make discretionary payments of income and/or principal for the beneficiaries of the trusts they administer. The administration of a special needs trust, and in particular, the determination of what constitutes a “special need” for which expenditures properly may be made, requires an additional layer of knowledge and expertise on a trust officer’s part.

The purpose of a special needs trust is to hold assets for the benefit of a disabled person in a manner that will not jeopardize the person’s eligibility for government benefits. Trust officers thus need to be mindful of appropriate expenditures so that the assets of the trust are not considered “available resources” that would disqualify the disabled person from receiving benefits. Most special needs trusts provide that funds may not be disbursed from the trust if the proposed expenditure is provided as a benefit from any governmental agency. Special needs trusts are not intended to pay for basic support, food or shelter expenses.     

There are two broad categories of special needs trusts: (1) a first party special needs trust, and (ii) a third party special needs trust. A first party special needs trust is funded with the disabled person’s own assets and must meet certain statutory requirements. During the lifetime of the disabled person, distributions from the trust must be used for the sole benefit of the disabled person. First party special needs trusts are often referred to as “payback trusts” because, at the death of the disabled person, funds remaining in the trust must be used to reimburse the Commonwealth of Pennsylvania for benefits paid on behalf of the disabled person.

A third party special needs trust is funded with money from a source other than the disabled person - perhaps a parent or a grandparent. Third party special needs trusts may be created in a parent’s will or as a separate trust document during the lifetime of a parent or other donor, and are sometimes referred to as “supplemental needs trusts.” One key difference between a first party special needs trust and a third party special needs trust is that a third party special needs trust does not need to include a “payback” provision for the Commonwealth of Pennsylvania for benefits paid on behalf of a disabled person. A third party special needs trust typically includes other possible beneficiaries to whom the trustees may make discretionary distributions during the lifetime of the disabled person, as well as remainder beneficiaries. 

Because of restrictions placed upon special needs trusts, and indirectly the trustees, a trust officer administering a special needs trust must have a fundamental understanding of the basic government entitlement programs, including Social Security Disability Income (SSDI), Supplemental Security Income (SSI), Medicare and Medicaid (also known as Medical Assistance or MA). The Medicaid program includes some basic health insurance for disabled persons which becomes a key issue when the trust officer seeks to supplement medical expenses and supplies from a special needs trust.

First party special needs trusts are subject to the scrutiny of the Orphans’ Court and the Pennsylvania Department of Public Welfare (DPW) with regard to expenditures of principal. The trustee of a first party special needs trust generally will seek court approval and will request consent from DPW before making principal expenditures. In some cases, the trustee may obtain blanket approval for ongoing expenses. Third party special needs trusts do not have this limitation, but a thorough understanding of the governmental benefit programs is critical to determine if a desired expenditure, however legitimate, is properly disbursable as a “special need.”

In summary, trust officers need to have additional expertise to properly administer a special needs trust. We at Barley Snyder have extensive experience and expertise in advising trustees of their extraordinary duties as they seek to enrich a disabled person’s life while only paying for expenses that properly qualify as “special needs.”
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Court Decides Issue Of First Impression Regarding Irrevocable Will Agreements

Posted on November 9, 2011 by Paul Minnich
In a case of first impression in Pennsylvania, the York County Orphans’ Court recently clarified the law regarding irrevocable will agreements. Irrevocable will agreements are an estate planning tool through which an individual who makes a will also signs an agreement that the will cannot be subsequently revoked or altered in any respect.

 
In the case of In re: Estate of Charlotte M. Bankert, a husband and wife executed wills leaving the property to nine surviving children, four of whom were children from the husband’s prior marriage and the five children that the husband and wife had together. Subsequent to the husband’s death, the wife made financial gifts to her five children. Following the wife’s death, the four stepchildren challenged the gifts by the wife to her five children as being in violation of the irrevocable will agreement.

 
The Court reviewed the irrevocable will agreement and noted that it did not obtain any prohibition on the use or transfer of assets by the surviving spouse during her lifetime. However, after observing that no Pennsylvania appellate courts had addressed the issue, the Court adopted the standard set forth in the classic treatise Page on the Law of Wills and held that even in the absence of an express restriction on inter vivos transfers, inter vivos gifts could be challenged as violative of the irrevocable will agreement under certain circumstances. Specifically, the Court held that to prevail on their claim, the stepchildren would have to establish by clear and convincing evidence that the wife’s gifts to her children were made to evade performance of the irrevocable will agreement and were in fraud of the husband’s rights. Also, the stepchildren would be required to prove that the gifts were (a) unreasonable in amount or represented a considerable part of the wife’s estate or were substantial gifts made to only some beneficiaries who were to receive equal shares under the will; (b) were received gratuitously; and (c) received by children of the wife who had notice of the contents of the irrevocable will agreement. The Court’s decision is published in the York Legal Record in Volume 125, page 37-41.
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Disappointed after death?

Posted on June 23, 2009 by Whitney Krosse

Disappointed beneficiaries attempt to attack a will on numerous grounds. Among those that are commonly targeted are the attorneys who drafted the testamentary documents. Although an action for legal malpractice is prohibited in the Commonwealth for those not in privity with the attorney, a seemingly related cause of action for breach of contract by an intended third party beneficiary is allowed in extremely limited circumstances. Such a cause of action dates back to 1983 where it was recognized in the Guy v. Liederback, 459 A2d 744 (Pa. April 29, 1983) decision.

           

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The Gift that Kept on Giving

Posted on September 4, 2008 by Barley Snyder LLC

What happens when a gift to a charity remains unfulfilled during the life of the donor? The factual scenario is common. A couple are devoted to and passionate about the mission of a charity. During life, each makes pledges and gives gifts to the charity in support of the mission. A pledge of $1.5M is made during life but is not paid in full during life. The executors and the charity cannot agree on what should happen to the pledge when the surviving spouse dies.

The gift was made via a letter of understanding, pledging 6 annual payments of $150,000 each, followed by a $600,000 payment in the 7th year. Three years into the agreement, an amended letter of understanding was executed; the amended agreement reduced the annual payment and extended the number of years for payment. Payments were made during life, but upon testatrix’s death, her executors took the position that specific bequests in the will and other smaller gifts made during life satisfied the remaining obligation to the charity.

The executors did not argue that the pledge was invalid or non-binding on the estate; they argued that the pledge had been satisfied. Their argument was bolstered by the fact that the letter of understanding specifically stated that the testatrix would make provision in her will for the payment of the pledge.

The Westmoreland County Orphans’ Court disagreed with the executors.  The Court summed up the matter eloquently

It should come as no surprise that a person imbued with a generous attitude and affection toward an institution may make numerous gifts at different levels of giving, each intended to address a specific and timely need, and that such a pattern of giving is likely to continue even in the presence of a particularly large gift…[H]uman nature suggests that regular gift giving will persist contemporaneously with the larger contribution. Rather than confining their generosity, a person of means is more likely to continue donating in order to meet existing needs where it is within their ability to do so.

Charities can breathe a sigh of relief. The Court ordered the fulfillment of the pledge in addition to the payment of specific bequests in the will. 

Brownfield Estate v. St. Vincent Archabbey, 28 Fiduc. Rep.2d 231 (Westmoreland Co. 2008).

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Joint Inter Vivos Trust Issues Clarified by PA Supreme Court - Was the Problem Really a Form-book Document?

Posted on August 13, 2008 by Barley Snyder LLC

Our Supreme Court reminded us recently of the pitfalls of joint inter vivos trusts, particularly where revocation is concerned. Scalfaro v. Rudloff, 934 A.2d 1254 (Pa. 2007) slip op (http://www.aopc.org/OpPosting/Supreme/out/J-31-2007mo.pdf). Consider the case of parents who place their home in a revocable inter vivos trust, naming their 3 adult children as beneficiaries. Mom dies; Dad revokes the trust and then deeds the property to 2 of the 3 children.

In a 5-2 decision reversing the Superior Court 884 A.2d 904, slip opinion available (http://www.aopc.org/OpPosting/superior/out/a10018_05.pdf ), the Supreme Court (per retiring Justice Cappy) dissected the terms of the joint inter vivos trust document and upheld the trial court’s decision that Dad had no power to revoke the trust. While the opinion focused on the exact language of the “form-book” deed of trust, are the implications more far reaching?

The dissent slip op available (http://www.aopc.org/OpPosting/Supreme/out/J-31-2007do.pdf ) was penned by Justice Saylor and joined by Justice Eakin. Justice Saylor found the form-book deed of trust (that was executed without the benefit of counsel) to be “poorly drafted and materially ambiguous.” Justice Saylor would have focused on Mom and Dad’s intent.

Both the majority and dissent engage in an interesting discussion of document interpretation that will be of benefit to (or haunt) many of us who practice in this area. Pennsylvania’s new Uniform Trust Act doesn’t completely resolve the issue. 20 Pa. C.S.A. §7752(b) which addresses revocation of joint trusts doesn’t address the situation where one settlor/spouse dies and hence cannot notify the other spouse.

Practitioners should note that, like the Weidner case, Scalfaro is another instance where the Supreme Court differed sharply from the Superior Court in the area of trusts and estates. Both cases involved a pre-printed, “form book” document.

A burning question remains - will the two siblings who lost the property sue the form-book company??

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Supreme Court - AGAIN - reverses Superior Court on Power of Attorney Case

Posted on July 2, 2008 by Barley Snyder LLC

            Once again, the Supreme Court has checked the Superior Court in a decision involving powers of attorney. In In re: Weidner, 2007 WL 4555334, the Supreme Court confirmed its long-held stance that powers of attorney must be read broadly to confer powers on those who are appointed as agents. The Court again struck down the Superior Court’s inexplicable penchant for restricting agents and placing interpretative limitations on power of attorney documents.

            In Weidner, the power of attorney document - a form-book document - granted the agent all powers set forth in “Chapter 56 of Title 20 of the Pennsylvania Consolidated Statutes Annotated, (20 Pa.C.S.A. 5601 through 5607)…as amended from time to time”. The Superior Court said that the document was inadequate and did not expressly grant the agent the power to change the beneficiary designation of a life insurance policy. The Superior Court stated that without more - such as attaching a copy of the statute - the document was insufficient to apprise the principal of what powers he or she is granting. The Superior Court would have required notice to the principal in some form and recommended attaching a copy of the statute to the POA document. 

            In a unanimous decision (with 2 justices filing concurring opinions), the Pennsylvania Supreme Court upheld its long standing analysis of POA documents as set forth in the Reifsneider case, 610 A.2d 958 (Pa. 1992). The Court, per Justice Eakin, held that [d]ecedent’s power of attorney expressly incorporated the Powers of Attorney statute, and expressly granted Rhodes the power and authority to do any act therein.

            The Supreme Court remanded the case to the Superior Court for disposition of remaining issues. On remand, in a non-precedential decision, the Superior Court upheld the trial court’s determination that the power of attorney was sufficient to permit the change in beneficiary on life insurance policies.

            This is a recurring theme vis-à-vis our Supreme and Superior Courts, particularly in the area of trusts and estates and powers of attorney. Attempts to interpret power of attorney documents in such limited ways have been litigated repeatedly with the Superior Court applying very limited interpretations of documents and the Supreme Court confirming time and time again that power of attorney documents must be interpreted broadly. Kudos to the Supreme Court for grasping the implications of this issue, as it effects all of those, and there are many, who act under these power of attorney documents.

            slip opinion http://www.aopc.org/OpPosting/Supreme/out/J-35-2007mo.pdf   and concurring opinion available http://www.aopc.org/OpPosting/Supreme/out/J-35-2007co.pdf

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Just because you can --Doesn't mean you may

Posted on May 10, 2007 by Bob Dennison

Most people think, mistakenly, that “joint bank accounts” held with others creates equal ownership interests of funds deposited within the accounts. As a result, most people think, mistakenly, that they possess equal rights to the use of funds within the accounts. As a practical matter, one party’s misuse of funds most frequently does not result in litigation because: folks willing to create joint accounts with others typically open joint or multi-party accounts because of a close relationship built on trust and even where one party may abuse that trust, there may often be reluctance to bring a legal action because of the relationship. 

There are, however, a myriad of scenarios that would give rise to one aggrieved party’s desire to bring a legal action to recover monies used improperly from the account by another ranging from the amount of money at issue, a falling out of the relationship, use of money in manner not contemplated by the parties, i.e., money earmarked for the present or future care of a loved one but used for another’s personal gain--and the list goes on and on. 

When a legal action is instituted to recover monies improperly used from a joint account, Pennsylvania’s Multiple Party Account Act, 20 Pa.C.S. § 6301 et seq., provides the answers to important questions, and the most important question of all, who does the money really belong to? The Multiple-Party Account Act provides that: “A joint account belongs, during the lifetime of all parties, to the parties in proportion to the net contributions by each to the sum of the deposit, unless there is clear and convincing evidence of a different intent.”

The answer to the $64,000 question of “who’s money is it” is, simply provided by the Act--each party, in the amounts of their contribution to the account, over the life-time of the account. So, just because a party can use the money in a joint account, remember, they may not be able to.  

    

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Ashes to Ashley, Dust to Dustin

Posted on March 17, 2007 by Eric Suter
If you are anything like me, when you hear the phrase "custody battle" you first think of two people who used to love each other now locked in a grim struggle over children and, occasionally, pets.  True, but only so far as it goes.  The Superior Court (.pdf) has reminded us that custody battles can also arise in connection with disposition of the dead -- in this case, cremated remains:
The Superior Court has ruled that trial courts have the authority to order the division of cremated remains where the loved ones are in a dispute, in what appeared to be an issue of first impression for the court.

But in the case over the disposition of a divorcing couple’s deceased son’s remains, the court found that the Court of Common Pleas of Schuylkill County had abused its discretion in ordering the division of ashes in Kulp v. Kulp.

As a result, the court remanded the case back to the trial court.

“Given the extremely sensitive nature of this issue, and husband’s opposition to division of the remains, we conclude that the trial court abused its discretion in using its equitable powers to override the desires of one of the next of kin as to the division of son’s remains,” Judge John L. Musmanno wrote for the panel.

. . .

When the trial court ordered that the ashes be placed in two separate urns with each party keeping their urn at the place of their choosing, David Kulp Jr. appealed to the Superior Court.
Hmmm.  Could there be a more clear cut candidate for application of the maxim "Equity is not for the squeamish?"  (h/t How Appealing).  And don't think for a minute this is the only custody battle involving the Dead.  It is not.
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