USE OF SUPPLEMENTAL NEEDS TRUSTS
As parents and grandparents, the most precious part of our lives is our children and grandchildren. Parents who have a child or grandchild with special needs, who may be on SSI or Medicaid, now or in the future, whether that child or grandchild is a minor or adult, share many deep concerns about the future of their child or grandchild.
We all understand that no one loves or will care for our child or grandchild more than we do. While parents or grandparents of a child with special needs want to insure that that child's needs are met, they are often uncertain how best to meet those needs after the parents or grandparents have died.
For example, parents and grandparents are concerned about leaving money directly to a child with special needs for three basic reasons:
1. The child may be unable to manage their own financial affairs.
2. Any assets a parent or grandparent leave directly to their special needs child will be considered a resource for many government entitlement programs such as Medicaid, SSI, etc. and will disqualify the child from receiving any of those government benefits until the assets left to the child or grandchild are totally wiped out. In essence, this not only deprives the child with special needs of the benefit of those assets, but also prevents that child's brothers or sisters from getting the benefit of those assets. In other words, no one but the government will benefit from any of the assets you leave directly to a child or grandchild with special needs who is on SSI or Medicaid or may be after your death. No parent or grandparent wants to disinherit their child or grandchild with special needs, but how do we provide assets for a child with special needs so that the child actually gets the benefit of those assets and in the event of the death of that child, his brothers or sisters can inherit those assets as opposed to those assets passing to the government.
3. The child or grandchild may be unable to manage their own personal affairs. How are the parents able to make sure that a responsible person will make regular visits to a child with special needs to make sure that the child has:
1. Regular physical and dental examinations.An evaluation of education and training programs.
2. An evaluation of work opportunity and earnings.
3. An evaluation of recreation, leisure time and social needs.
4. A determination of the appropriateness of their existing residential and program services.
The answer to the above three concerns is very clearly a Supplemental Needs Trust (SNT) for the child with special needs, whether that child is a minor or an adult. The SNT can be set up in your will or can be set up in a Supplemental Needs Trust during your life, even if it's not funded until your death. If it is funded during the parents or grandparents lifetime, the assets can be protected from the parent's or grandparents nursing home costs and uncovered medical expenses.
Under the New York State Estates Powers and Trusts Law, Section 7-1.12, a Supplemental Needs Trust can be established for people with severe and chronic or persistent disabilities and provides that neither the assets placed in the trust or the income from those assets will deemed an available esource under any government benefit or assistance program. Please see the full text of EPTL 7-1.12 below.
There are basically two types of Supplemental Needs Trusts for people with special needs:
1. A third party SNT, which is set up by a person, other than the beneficiary or the beneficiary's spouse, with the funds of that person. Setting up an SNT in a will is the most costly and administratively inflexible way to set up an SNT, because it requires Probate and attorneys fees, Court supervision, annual legal fees for the life of the child and annual Court accountings. The third party SNT set up during the life of usually a parent, grandparent, aunt or uncle for example is the most cost effective and administratively flexible way to set up an SNT. The benefit of the third party trust is on the death of the special needs child, Medicaid gets nothing and the balance of the trust goes to brothers, sisters, grandchildren, etc.
2. A self-settled SNT, as described in Title 42 US Codes Section 1396p (d) (4) (A) must be set up by a parent or grandparent or by Court Order, for a child who is under 65, with the funds of the child with special needs. These are known as "Pay Back" Supplemental Needs Trusts and are primarily used if your child has received an inheritance, settlement of a personal injury case or has excess income or assets over the allowable monthly income or allowable asset tests for SSI or Medicaid. The big negative of the Pay Back SNT is at the child's death, all of the money in the Trust must be used to reimburse Medicaid for the total medical assistance paid on behalf of the child during the child's life and this means brothers, sisters, grandchildren, etc., cant inherit any money from this trust unless and until the state is reimbursed first.
* The child's brothers or sisters are usually the trustee(s) of the SNT.
* Without getting into all of the details of EPTL 7-1.12, the bottom line is that the assets in an SNT are to be used for the benefit of the child or grandchild and to supplement but not supplant government benefits from the federal, state, county, city, or other governmental entity which the child or grandchild may be eligible or which the child or grandchild may already be receiving. The trustees are prohibited from using trust income or principal for the beneficiaries food, shelter or any other expenditure for the beneficiaries basic support or basic maintenance on the theory that these needs are provided for by government benefits.
* The trustees have sole discretion to provide for all of the child's or grandchild's extra and supplemental needs that are not otherwise provided for by government financial assistance and benefits, including any medical, psychiatric, dental, hospital and nursing care to the extent not covered, payable or reimbursable by any government program or insurance.
* The trustees can also provide the child with resources and experiences that will contribute to and make the child's life as pleasant, comfortable and happy as possible. The trustee can pay for vacations, recreational trips away from place of residence, entertainment expenses, supplemental social service expenses, supplemental transportation costs, recreational equipment, games, crafts, books and magazines, television, radio and cable service, musical instruments, stereo, tape recorder, CD player, etc..
In essence, the trustees can make sure that the child gets the full benefit of every dollar the parent or grandparent places in the SNT for the child without losing one dollar of government benefits the child may be entitled to. The parent's or grandparent's money is used to supplement and enhance the child's life style over and above what the government will pay for.
I absolutely advise my clients to set up an SNT for their child or grandchild with special needs during their lifetime, even if it won't be funded until the client passes away, to avoid the probate legal fees and other court costs, expenses, accounting fees and legal requirements incident to the creation and administration of a Court ordered SNT created by a court after the death of the parent.
An SNT a parent or grandparent sets up for a child during the parent's or grandparent's lifetime is just less costly to set up and administer than a Court ordered SNT, meaning more money will be spent on the child and less money on attorney's fees and administration costs required by court supervision of an SNT.
There is a special tax break for a Supplemental Needs Trust that you should be ware of, see Internal Revenue Code Section 642 http://www.law.cornell.edu/uscode/text/26/642
If you are a New York resident, I am available to explore the use of Supplemental Needs Trusts for your child or grandchild with special needs as well as other estate planning matters in greater detail with you. I offer a free initial office conference for New York residents to discuss your particular situation.
Please feel free to give me a call at (315) 733-0417 to schedule an appointment.
Warmest personal regards
D. Victor Pellegino
<> 12/31/2012 New York County Surrogate's Court sets forth the duties of the Trustee of a Supplemental Needs Trust. Your SNT may not contain the same large amount of assets, but the duties of the Trustees are clearly explained by the Court.
Matter of JP Morgan Chase Bank N.A. (Marie H.)
[*1] Matter of JP Morgan Chase Bank N.A. (Marie H.) 2012 NY Slip Op 22387 Decided on December 31, 2012 Sur Ct, New York County Glen, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and subject to revision before publication in the printed Official Reports.
Decided on December 31, 2012
Sur Ct, New York County
IN THE MATTER OF THE ACCOUNTING BY JP Morgan Chase Bank, N.A., and H. J. P., as Co-Trustees of the MARK C.H. DISCRETIONARY TRUST OF 1995,
Marie H., Grantor.
Counsel for trustee Chase Manhattan Bank: Davidson, Dawson & Clark
Counsel for individual trustee H.J.P.: stat Roy H. Carlin
Kristin Booth Glen, J.
This case raises important questions about the obligations of fiduciaries, including institutional trustees, to beneficiaries, with disabilities, of trusts that seek to provide for the welfare of those beneficiaries. A review of the history of this trust and related proceedings places the issue in sharp perspective.
This history reveals a severely disabled, vulnerable, institutionalized young man, wholly dependent on Medicaid, unvisited and virtually abandoned, despite a multi-million dollar trust left for his care by his deceased mother. It reveals two co-trustees, one who was personally involved with the deceased and who holds himself out as an expert in planning for children with intellectual disabilities, and one which is a major banking institution, neither visiting or inquiring after the beneficiary's needs nor spending a single penny on him.
The history turns brighter after a serendipitous SCPA Article 17-A proceeding, where the co-trustees were called to task, educated about available services, and hired a certified care manager to attend to the beneficiary's needs. That intervention, now after almost four years, has dramatically improved the beneficiary's quality of life and his functional capacity to enjoy what is now a near "normal" existence in the community.
This history, and the legal consequences that flow from it, discussed below, should provide a clarion call for all fiduciaries of trusts whose beneficiaries are known to have disabilities to fulfill their "unwavering duty of complete loyalty to the beneficiary" (106 NY Jur 2d, Trusts § 247) or be subject to the remedies available for breach of their fiduciary obligation.
Will and Trusts
Marie H. died on March 20, 2005 at the age of 85, survived by two adopted children, Charles A.H., and Mark C.H., then sixteen years old. Prior to her death, upon learning of her terminal cancer, Marie searched for an appropriate residential setting for Mark, and ultimately [*2]placed him in the Anderson School in Straatsburg, New York.[FN1] Mark's disabilities are described more fully below.
In her Will, Marie left her entire estate to the Marie H. Revocable Trust of 1995, created by trust agreement dated March 23, 1995 (the Revocable Trust).[FN2] The Revocable Trust provided that, upon Marie's death, after dividing her tangible property between her two children, the balance was to be divided into two equal shares, one for Mark's Trust, and one for Charles's Trust. The Will, also dated March 23, 1995, named her sister Betty as Executor and Guardian of the Person and Property of her minor children. Marie's attorney, H.J.P., was named the successor executor.
The will was admitted to probate on July 5, 2005. Because Betty predeceased Marie, letters testamentary issued to H.J.P.[FN3] The federal estate tax return (the 706) indicated a gross estate of approximately $12 million, of which $2,575,000 was the date of death valuation of Marie's co-op apartment, and $8,973,653.79 was the date of death value of her stocks and bonds. Other miscellaneous property was valued at $471,439,77. According to the 706, the only assets that were transferred to the Revocable Trust during Marie's lifetime were two Citibank accounts totaling $1,390.41.
The 706 estimated the executor's commission at $133,000 and attorneys fees at $300,000,[FN4] with other administration expenses [FN5] shown as $462,717.45. Federal estate taxes were shown as $3,479,561.55.[FN6] [*3]
On the same day that she executed her will and the Revocable Trust, March 23, 1995, Marie entered into two irrevocable trust agreements, one for Charles and one, the Mark C.H. Discretionary Trust of 1995 (the Mark Trust), with herself and Betty as Trustees. H.J.P. was named successor trustee if either of the two named trustees should cease to serve, and, upon Marie's death, the Chase Manhattan Bank, N.A. (Chase) was designated as additional trustee "to serve with the other Trustees in office." The Mark Trust was funded with an initial contribution of $18.00.
It is clear that the Mark Trust is for the benefit of a person with disabilities.[FN7] Article 2.1 provides for distributions of income and principal to Mark for his "care, comfort, support and maintenance," in the trustees' discretion, and further provides: "(ii) In the event such net income shall in any year be insufficient to provide for the support, maintenance, care and comfort of the beneficiary or for necessary medical expenses as determined by the Trustees, in their sole and absolute discretion, the said trustees shall expend out of the principal of said fund such sums as they deem necessary for any such purposes. Before expending any amounts from the net income and/or principal of this trust, the Trustees may wish to consider the availability of any benefits from government or private assistance programs for which the Grantor [sic] may be eligible and that where appropriate and to the extent possible, the Trustees may endeavor to maximize the collection of such benefits and to facilitate the distribution of such benefits for the benefit of the beneficiary. "In Article 2.1, section (iii) continues, authorizing the trustees" to pay or apply. . .to any facility [the beneficiary] may be residing in and/or to any organization where he may be a client or a participant in any program(s) sponsored by them, as the Trustees shall determine, for the general uses of such [*4]facility and/or organization. . . ."[FN8]
Article 2.1, section (v) gives the trustees the right to terminate the trust "as if the beneficiary were deceased" if the existence of the trust causes the beneficiary to be excluded from government benefits.
After probate of Marie's will, in the SCPA Article 17-A proceeding, described below, this court, sua sponte, ordered H.J.P. and Chase to account as trustees of the Mark Trust,[FN9] noting "questions having arisen as to whether the funds intended by Marie H. to benefit Mark . . .had been duly applied by for such purposes by her chosen fiduciaries." The court appointed a guardian ad litem (GAL) for Mark in this accounting proceeding (SCPA § 403).
On December 7, 2010, the trustees filed an amended accounting covering the period of March 23, 1995 through March 31, 2010. Schedule A of that accounting showed the total amount of principal received as $1,420,343.28. In objections filed by the GAL, he noted his belief that, with a net estate of approximately $10 million, the Mark Trust should have been funded with $5 million. After meeting with Chase's attorney, he concluded, based on her statements to him, that estate taxes of $3,479,561.55 accounted for the diminution of the amount with which the Trust was funded. This, of course, was clearly not the case, as the estate tax would have been paid before distribution of the residuary estate, first to the Revocable Trust, and from there, in equal shares to the Mark Trust and trust for Charles. If, in fact, all the estate taxes were somehow allocated to Mark's share, a major error would have occurred.
Schedule G, "the Statement of Principal Assets on Hand" as of March 31, 2010, showed a market value of $2,733,094.49. The substantial increase over the amount shown as principal received in 2005 is, however, not due to investment strategies but rather, according to a subsequent communication from Chase, the result of under-reporting the initial principal received with many securities incorrectly listed at a $0 inventory value on Schedule A.[FN10]
Schedule C shows commissions paid to the Trustees in amounts of $17,622.53 to H.J.P.[FN11] [*5]and $34,914.61 to Chase.[FN12] Significantly, Schedule G-1 shows income on hand of $248,881.36, while Schedule E-1, distribution of income, shows $0. The statement of administration expenses chargeable to income, Schedule C-2, totals $29,493.49, of which the largest items are the commissions paid to the trustees. Of the total administrative expenses and taxes shown on Schedule C, New York State income taxes (after substantial refunds) constitute $7,158.54; federal income taxes (after substantial refund) were $6,367.70; commissions, as already noted, to Chase ($34,914.61) and H.J.P. ($17,622.53); H.J.P.'s firm's legal fees of $11,500; the fees of the guardian ad litem of $7,375; and the fees of Staver Eldercare Services (the care manager hired for Mark as a result of the 17-A proceeding) of only $3,525.
The almost negligible amount paid to Staver, beginning in February, 2009, is the only money paid out for the benefit of Mark, the disabled beneficiary, in five years. That is 1.4% of the income on hand at the end of the accounting period and 3.6% of all expenses. On an almost $3 million trust, the money spent on the beneficiary, over a five year period — and only because of the court's intervention — was approximately 0.1%.
The 17-A Proceeding
In October 2006, H.J.P. brought a proceeding pursuant to Article 17-A to be appointed as guardian of the person [FN13] of Mark. In support of his petition, he submitted affirmations from two health care providers. One, Robert C. Williams, Ph.D., described Mark as "profoundly mentally retarded, suffering from autism," as well as "non-verbal and engaging in numerous repetitive and self stimulating behaviors." Dr. Lynn Liptay provided a diagnosis of autism and mental retardation, noting that Mark was "nonverbal and requires constant supervision and assistance with all ADL's,"[FN14] and, as well, that he "engaged in frequent aggressive behaviors including spitting, throwing objects and hitting his own head."
Because Mark was living in an institution, he was represented by Mental Hygiene Legal Services (MHLS) (MHL § 81.07[g][vii]). The report of the principal attorney for MHLS in the Second Department, who visited him there, notes that, according to the Anderson School records, Mark "has the receptive communication skills of someone less than two years old and the expressive skills of a three month old." The attorney described her visit to Anderson and her observation of Mark: "Effective communication was not possible, [Mark's] only responses were facial grimaces and attempts to return to his classroom chair. He remained nonverbal, did not make eye contact, and appeared to be responding to internal stimuli."[*6]
At the initial hearing, on September 18, 2007,[FN15] where Mark's presence was excused,[FN16] H.J.P. revealed that, although he was applying for guardianship as a result of a promise to Mark's mother on her death bed, he had not seen Mark since Mark was six years old, when Marie brought him and Charles to H.J.P.'s law office. H.J.P. had never visited Anderson to ascertain Mark's condition nor, more critically, his needs,[FN17] nor had he inquired of the staff about any unmet needs. Also revealing the existence of Mark's trust [FN18] and his position as co-trustee, H.J.P. admitted that he had not expended a single dollar on Mark's behalf in almost three years.
I adjourned the hearing to permit the other co-trustee to appear. Subsequently, a representative of Chase came to court with H.J.P. in response to my instruction; Chase's "excuse" for inaction was its lack of institutional capacity to ascertain or meet the needs of this severely disabled, institutionalized young man. If the bank lacked such expertise, I noted, they should obtain the services of someone who could assess Mark's situation and ascertain his needs. After some initial missteps, H.J.P. and Chase retained the services of a certified care manager with extensive experience with people with intellectual disabilities, Robin Staver, MS, Ed.,
First contacting, and then visiting Anderson, she learned of a list of items the professionals there believed would enhance Mark's quality of life and assist his learning and development. Over the past four years she has, as a representative of the Trustees, been actively involved in Mark's life and care, attending, in person or by phone, planning meetings, arranging medical and other consultations, purchasing equipment, including assistive communication devices, recreational materials, clothing, etc., and providing for Mark's first forays into the community. What follows is a brief snapshot of the extraordinary - and heartwarming - progress Mark has made since the funds his mother left for his care have been well and thoughtfully used [*7]for that purpose.[FN19] The detail included, what anthropologists call a "thick description," is important in understanding how apparently trivial expenditures and interventions can have a huge impact on the progress and quality of life of a person with intellectual disabilities.
This was Staver's first meeting with Mark and the staff at Anderson. She noted that "Mark enjoys swinging and climbing outdoors. However, there is no playground in the vicinity of his residence. [In response to communications about Mark's needs, initiated by the court,] in August a proposal for a play structure with swings and Adirondack chairs was sent to H.J.P. To date, no plans for the structure are in place."
The Residence Manager poignantly told Staver that "as far as she knew, Mark has not had any visitors in the five years she has worked with him nor has he had a vacation. She stated that most of the students leave the school over Christmas vacation, and Mark remains on campus with staff."
Staver reported on Mark's pharmacological regime at the same time that she recommended an independent neurology consult with a non-Medicaid neurologist and a speech evaluation "to determine appropriate augmentative communication devices and purchase those devices." Significantly for the issues presented here, Staver reported that "Mark currently takes Keppra 500 mg. which is covered by Medicaid. However, this medication causes adverse reactions including physical aggression, agitation, frustration and vocalizations. Keppra SR, which is an extended release medication, causes fewer side effects, but is not covered by Medicaid."[FN20]
Staver also recommended the purchase of a personal computer and computer programs for Mark's room, an electric synthesizer and/or electric keyboard, gift certificates for restaurants and clothing stores, the playground system and outdoor chairs previously requested, a one-week vacation to Disney World with 2 staff members on duty 24 hours a day, and a recliner chair with [*8]massage capabilities.[FN21]
Mark "graduated" from the Special Ed program in June,[FN22] and was being prepared to enter a vocational program and to move to an IRA (Individualized Residential Alternative) residence in the community. He still required assistance with some ADL's (tooth brushing, applying deodorant) but was able to dress himself independently, eat with regular utensils and drink from a cup. He demonstrated "a limited sense of safety and require[d] supervision when out in the community." He had no skills in the areas of money, time-telling or calendar recognition. While he was still engaging in aggressive behavior, he was also enjoying some community activities including playing ball and watching videos. As previously reported, "Mark loves to climb on the playground and go on the swings. He smiles and will reciprocate gestures such as high fives or handshakes."
Staver also reported that Mark was now using the PECS (Picture Exchange Communication System) for communication with others, and had made "significant progress," although the speech pathologist recommended that an augmentative communication device be purchased to further enhance Mark's communication skills.
Mark continued to reside on the Anderson campus, awaiting completion of a new IRA site targeted for December 2010. In January 2010, he transitioned from Anderson's education program to adult day habilitation services. Mark, still entirely non-verbal, continued to use the PECS, but his inability to communicate effectively with others made it "difficult for him to self- regulate when transitioning from one activity to another...[causing him to become] agitated and exhibit aggressive behavior."
Because of frequent signs of aggression, the Residence Manager "requested contact information for Mark's brother. Staff would like him to visit Mark. After Mark's mother died, he no longer had any contact with his brother. [The Residence Manager] believes that it would be beneficial for Mark emotionally to see his brother again."
Finally, Staver reported that she had now been able to purchase gift certificates for a computer and headphones, clothing for Mark, grocery items, and meals in local restaurants. Recommended [*9]items included two air purifiers,[FN23] a portable DVD player, a radio with wireless headphones, a recliner chair, and more gift certificates for restaurants in the community.
Mark was just about to move to his new housing; because he "does not adapt well to change," he was exhibiting more outbursts of aggression, including lunging and throwing items while in the van that takes him to and from his day program. The Behavior Specialist instituted a protocol for use of a safety harness in the van, but also "stated that Mark would benefit from use of enjoyable sensory items in the van. These items will assist in calming Mark and hopefully turn the van ride into a positive experience. [The Behavior Specialist] will consult with . . .the Occupational Therapist regarding items to be purchased for Mark. . .[and] forward all requests to [Staver]."
Staver reported that since her last report, she had purchased a touch screen computer, a computer table, Boardmaker Plus! software, clothing and certificates for dining out in the community, and was planning to purchase additional needed items once Mark moved to his new residence.
November 15, 2010
Staver reports purchasing an iPad, and gift cards to Best Buy for accessories and apps; a trampoline, a recumbent bike, augmentative communication devices, educational puzzles and, as requested, "sensory items."
Mark transitioned well to the Plutarch Residence. He "continues to exercise daily, enjoys taking long walks, brushes his teeth independently, helps with the laundry, and participates in afternoon meetings." He was progressing toward having "40 van rides without lunging out of his seat" so that the safety harness could be discontinued. In addition, "Mark continues to show significant improvement during community integration. He enjoys meals, bowling, haircuts and shopping."
Staver reports that she purchased for Mark's new residence : a laptop computer, a 32" television, a mattress and box spring, headboard and footboard, a rocker/reclining chair with heat and massage; a recumbent bicycle, a trampoline and rubber mats for safety.
Under consideration for purchase were: playground equipment for use at Mark's residence; a trampoline to be used at Mark's day program; Wii and XBox; a hammock; an iPad; and a Mayer-Johnson Tech/Talk augmentative communication system that aids users to communicate using direct selection.
August 26, 2011
Mark was reported to have continuously improved in the tasks and activities of daily life in his new residence, "participat[ing] in household tasks including putting laundry in the washing machine and transferring clean clothes to the dryer; reviewing his daily schedule, [*10]removing his plate from the table after meals, scraping the plate, rinsing it off and putting it in the dishwasher."
The importance of exercise was noted,[FN24] with Mark "playing basketball, walking, sprinting and running, as well as using an exercise ball, recumbent bike, Wii exercises and a trampoline at home." He no longer required the safety harness in the van and, in the classroom "accepts changes in his routine, shortens break time himself, interacts more with staff and is able to sit and complete tasks." The Speech Language Pathologist noted that Mark's use of the recently purchased XBox allowed him to "pair an enjoyable game with work tasks and aid in peer interactions."
Staff requested purchase of a number of items including an iPad with apps for music, communication, labeling and categorization; a Proloquo2Go for augmentative and alternative communication; wireless headphones for music [for self-soothing] at his day program; Boardmaker software for communication pictures and symbols; and sensory items including a compression vest, hand held massager; and neck/shoulder weighted compression.
Staver wrote to H.J.P.: "Staff reports that Mark has benefited from recent purchases [of the items noted in the August 26, 2011 report] on his behalf" and, as well, "I am working to coordinate a visit with Mark's brother. Staff thinks this would be beneficial to Mark."
Mark was now ensconced in his IRA, where he had his own room, and where he was making substantial progress in communicating. He was able to lose the weight he gained over the winter through portion control and exercise, including his trampoline and recumbent bike. He showed "significant progress in the classroom" and "mastered most tasks including attending speech and occupational therapy sessions without staff accompaniment". He participated in preparation for the Special Olympics 50 meter run, though ultimately he was unable to start.[FN25]
The staff had begun planning a vacation for Mark, beginning with an introduction "to an amusement park and/or water park to see how he reacts and how accepting he is to new activities." Options for the vacation include Disney World, as previously suggested by Staver, [*11]Autism on the Seas, a cruise for autistic individuals and their families/residential staff, and autism-friendly Broadway shows.
Also reported: "The case manager is working with Mark's brother, Charles, to facilitate a visit to Mark."
September 24, 2012
Despite some new physical problems, the most recent communication was positive on many fronts. Mark is reported as "using pleasant table manners" and using PECS, and is able to make his own choices for meals and snacks. He clears the table after meals, rinses and puts dishes in the dishwasher, independently takes his laundry from his room to the laundry room where he places it in the washer without prompts. He "showers independently" though with a staff member nearby due to his seizure disorder. He "has become less prompt-dependent at home" and "will independently leave the living room to go upstairs to his room or to the bathroom and return to the living room alone." As an example of his increasing life skills, Mark is reported to enjoy walking on the rail trail, after which "Mark likes purchasing a drink, and especially likes receiving change from his payment."
Demonstrating the beneficial results of purchases made for him, his "gross motor skills have improved. He enjoys bouncing on the trampoline, using it as a sensory activity..... He likes having meals in restaurants and enjoys dressing up prior to going out for dinner."
His communication skills are also improving, in part because of the devices that have been purchased for him and that are being incorporated into his regimes. According to the report, "Mark uses sign language to communicate the words cracker' and apple.' He uses the Super Talker 8 for dinner and chooses the foods he likes. Mark will start using programs on his iPad at home."
And, as an apparently small, but enormously encouraging, advance, Staver reports that, as she was leaving Mark's classroom, he waived bye' and, although previously entirely non-verbal, said, for the very first time, "buh"!
Finally, as a truly happy ending, Staver reports that she "facilitated a visit and accompanied Mark's older brother Charles to see Mark at his residence on September 22, 2012...[Charles] stated that he was amazed at the progress Mark made in the last 8 years. He also said he felt reassured by the staff's caring, sensitivity and commitment to their clients. He said he knows Mark thrives because of the environment he's in and looks forward to bringing his family to meet Mark in the near future."
As this history demonstrates, once the Trustees were required to make themselves knowledgeable about Mark's condition and his needs, and the availability of services that would [*12]enable them to provide for those needs, they began, and continue to use funds from his trust for the purposes his deceased mother anticipated and so deeply desired.
The history brings into sharp focus the obligations of trustees, both individual and institutional to the beneficiaries of trusts they administer when they know,[FN26] or should know,[FN27] that those beneficiaries have disabilities, and have medical, educational or quality of life needs that can and should be met from trust income.
It is fundamental that a fiduciary takes on obligations beyond those imposed by ordinary relationships or transactions; in the oft-quoted works of Judge Cardozo, her responsibility is "something stricter than the mere morals of the marketplace. . . but a punctilio of honor the most sensitive" (Meinhard v Salmon, 249 NY 458, 464 ). This is no less the case for trustees, who have "an unwavering duty of complete loyalty to the beneficiary of the trust to the exclusion of all other parties (106 NY Jur 2d, Trusts § 247).
The Mark Trust empowers the trustees with "absolute discretion," gives them latitude to withhold or pay out income, and, in the event of an income shortfall, to invade the principal, for the "care, comfort, support and maintenance" of Mark and his descendants. However, the words "absolute discretion" do not insulate the trustees, even trustees of lifetime trusts, as here, from liability.
Article 6.1 purports to absolve the trustees from a duty to account (except for a final account). That violates public policy and cannot be enforced (Matter of Malasky, 290 AD2d 631 [3d Dept 2002]), where, as here, the beneficiary is a person under a disability, and no one is protecting the beneficiary's interests (Matter of Shore, 19 Misc 3d 663 [Sur Ct, New York County 2008]). In an accounting, the court can assess the trustees' failure to take reasonable interest in and action on behalf of Mark.
The trustees left Mark to languish for several years with inadequate care, despite the fact that the Mark Trust had abundant assets. In so doing, the trustees failed to exhibit a reasonable degree of diligence toward Mark. Courts will intervene not only when the trustee behaves recklessly, but also when the trustee fails to exercise judgment altogether ("even where a trustee has discretion whether or not to make any payments to a particular beneficiary, the court will interpose if the trustee, arbitrarily or without knowledge of or inquiry into relevant circumstances, fails to exercise the discretion" (Restatement [Third] of Trusts § 50, Comment b).
That is, sadly, precisely what occurred here.
The plain language of the Mark Trust elucidates Marie's intent in its creation.
Article 2.1, section (iii) authorizes the trustees to pay any income not applied for Mark's benefit [*13]"to any facility he may be residing in and/or to any organization where he may be a client or a participant in any program(s)." This provision reflects both the importance of Mark's quality of life to Marie and the minimum knowledge that Marie expected her trustees to have about Mark and his situation. In order to exercise their discretionary power of expenditure, at the very least they are required to take steps necessary to keep themselves fully informed of Mark's residential situation and ancillary services. It is not sufficient for the trustees to simply safeguard the Mark Trust's assets; instead, the trustees have a duty to Mark to inquire into his condition and to apply trust income to improving it. The trustees abused their discretion by failing to exercise it. H.J.P.'s complicity is exacerbated by the fact as drafter of the Mark Trust, as well as the drafter of Marie's Will, he was aware of Mark's incapacity for years before serving as trustee.
Although New York case law concerning inactive fiduciaries is sparse, the Appellate Division has clearly ruled that executors may not deny a needy beneficiary payment from an estate under circumstances far less compelling than those presented herein. In In re Van Zandt's Will, 231 App Div 381 (4th Dept 1931), the decedent bequeathed his real property to his sons subject to a life estate in the same property to his wife. As in the Mark Trust, the decedent gave his executors discretion over spending, authorizing but not requiring them to invade the trust corpus if the income supplied by the widow's life estate was insufficient for her "care, support and maintenance" (id. at 384). As in the Mark Trust, decedent's will gave the executors wide latitude "to expend so much of the corpus of his estate as, in their opinion, might be necessary" (id. at 382). The executors subsequently refused to pay the widow's health care expenses.
Despite the discretion that the words "in their opinion" afforded to the executors, the Van Zandt Court held that the will required the executors to expend estate assets on the beneficiary's behalf. The Court looked to the plain language of the will to determine the testator's intent: "The language of the will ... indicates a design on his part to devote his estate to the support of his wife. It is evident that he regarded her as the first object of his bounty. He makes it clear that, if the income from her property is insufficient for her care, support, maintenance, the corpus is available for that purpose" (id. at 383).
In addition, the Court qualified the executor's discretion, noting that it was not an "arbitrary" power that the executors could refuse to apply altogether: "the executors ... cannot shut their eyes to Mrs. Van Zandt's needs, and neglect to act, or refuse to approve proper and necessary payments which come early within contemplation of the bequest. The testator's intent to devote his entire estate, if need be, to the support of his wife must not be lost sight of" (id. at 384).
Rather, the Court suggested that trustees had an affirmative duty to exercise their spending power on expenses that fell within the parameters set forth in the will: "Where a trustee has been given freedom to act according to his own judgment in matters pertaining to another, and he fails, in the opinion of the court, to exercise such discretion, he may be compelled to do that which the trust fairly requires him to do" (id.).[*14]
By not spending, the executors obstructed the testator's intent.
As in Van Zandt, it was not sufficient for the trustees merely to prudently invest the trust corpus and to safeguard its assets. The trustees here were affirmatively charged with applying trust assets to Mark's benefit and given the discretionary power to apply additional income to Mark's service providers. Both case law and basic principles of trust administration and fiduciary obligation require the trustees to take appropriate steps to keep abreast of Mark's condition, needs, and quality of life, and to utilize trust assets for his actual benefit.
While the accounting in this trust is not yet complete,[FN28] their failure to fulfill their fiduciary obligations should result in denial or reduction of their commissions for the period of their inaction.
The current accounting leaves many questions unanswered, particularly since an accurate statement of the opening principal received depends on the administration under both Marie's will and the somewhat inexplicable [FN29] Revocable Trust. Without expressing a view, or making any negative assumption, whether or not the estate and Revocable Trust were appropriately administered affects the amount of assets the Mark Trust should rightfully have received.
There is no question that this court has the power to order such accountings sua sponte (SCPA 2205). The power, and, indeed the obligation to do so is especially important where, as here, the only interested person, the sole beneficiary, is under a disability, and there is no one but the court to protect his interests.
Accordingly, H.J.P. is ordered to account as executor of the will of Marie H., and he and Chase are ordered to account as co-trustees of the Marie H. Revocable Trust of 1995 within 90 days of the order to be entered following this decision. Further, the co-trustees of the Mark Trust are ordered to file and serve a supplemented and revised accounting herein for proceedings through December 31, 2012, reflecting the proper values of the assets with which the trust was funded, by that same deadline.
S U R R O G A T E
Dated: December 31, 2012.
Footnote 1:Charles is Mark's biological brother, and is one year older. He had no contact with Mark from the time Mark was placed at the Anderson School.
Footnote 2:Marie was named Trustee, with Section 9(c) of the Revocable Trust providing that, upon her incapacity, her sister Betty and H.J.P. should become Successor Trustees. Section 9(b) provide that, upon Marie's death, the Chase Manhattan Bank, N.A., should become a Successor Trustee with Betty and H.J.P. or the survivor of them.
Footnote 3:According to the guardian ad litem's report, H.J.P. reported that he specializes in estate planning and trusts and estates, and has long been involved in issues around people with intellectual disabilities, having served, inter alia, as co-chairperson of the New York State Association for Retarded Children Trust (NYSARC) and on the Board of the Association for the Help of Retarded Children (AHRC). He has lectured on planning for families who have children with intellectual disabilities, and, in fact, met Marie H. after one such lecture.
Footnote 4:According to a letter from H.J.P., his fees are "charged on a flat fee basis," and not on time spent. Accountant fees were estimated at $10,000.
Footnote 5:These expenses related primarily to the sale of Marie's co-op apartment.
Footnote 6:According to an affidavit in response to the report of the guardian ad litem in this accounting, discussed below, a federal audit increased the estate tax due by $38,496.44, plus interest of $5,584.65, while there was a refund of NYS Taxes of $16,048.87. The affidavit continues "the attorney fees for the estate were increased by $100,000"; expenses are shown on the 706 totaling $917,217.45.
Footnote 7:Much later, H.J.P. argued that the trust should not disqualify Mark from Medicaid eligibility as it was, and was intended to be an "Escher Trust." A precursor to the statutory supplemental needs trust (EPTL 7-1.12 [eff. July 26, 1993]) was established in New York law by Matter of Escher (94 Misc 2d 952 [Sur Ct, Bronx County 1978], affd on opn below, 75 AD2d 531 [1st Dept 1980], affd sub. nom Matter of Gross, 52 NY2d 1006 ). There, the trustee with absolute discretion as to principal distributions could not be directed to transfer the trust corpus to the government entity providing for the life beneficiary's care (id.).
Footnote 8:Notably, these provisions do not appear in the trust for Mark's brother, Charles, established on the same day.
Footnote 9:It was the court's intention, at the same time, to order an accounting in the state of Marie H,, but, inexplicably, that order was never signed.
Footnote 10:It is difficult, if not impossible, to ascertain the amount with which the Mark Trust was funded, and thus also to compare that amount to the closing balance for purposes of evaluating the trustees' prudence as a manager of trust funds. A rough calculation of the net value of Marie's estate based on the 706 suggests that the Mark Trust would have received approximately $2.5 million. In a phone communication, the attorneys for Chase have agreed to file corrected schedules, but as reflected in the conclusion herein below, the trustees will be ordered to do so.
Footnote 11:According to H.J.P., the commissions to him were computed in accordance with SCPA § 2309.
Footnote 12:Pursuant to Article 5.7 of the Mark Trust, a corporate trustee is authorized to receive commissions in accordance with their published rates of compensation in effect when such compensation is payable (see SCPA § 2312).
Footnote 13:The original petition sought appointment both as guardian of the person and of the property, but in communications with the Guardianship Clerk, H.J.P. made clear that he was not, at that time, applying for the latter.
Footnote 14:ADL's are activities of daily living and include bathing, feeding oneself, toileting, dressing, etc. Mark was, according Anderson's records, unable to perform any of these activities.
Footnote 15:The proceeding was delayed for almost a year as a result of H.J.P.'s health-related issues.
Footnote 16:The health care professionals at Anderson wrote that Mark's aggressive and self harming behavior would be seriously exacerbated by the changes accompanying a trip from the institution in Straatsburg to the court in Manhattan.
Footnote 17:According to the guardian ad litem, the Director of Corporate Compliance at Anderson, Linda Geraci, "stated that she is concerned that [H.J.P.] has not inquired into Mark's needs nor has he purchased anything for him - - [despite the fact] that Mark's residence manager has recommended purchasing the following for Mark's benefit : an acoustic synthesizer and other musical equipment, furniture, clothing, adult swings, slides, climbing equipment, a stereo system and a computer with game software."
Footnote 18:Because Mark was placed in Anderson before his mother died, Anderson was not aware of the trust, and H.J.P. never informed them of its existence. This raised substantial concerns about Mark's Medicaid eligibility, which were ultimately favorably resolved.
Footnote 19:The information comes primarily from the quarterly reports prepared for formal team meetings at Anderson which Staver attends, in person or by phone, and which she has supplied to the Court, as well as her invoices and communications with H.J.P. and Chase. In accordance with the appointing order, H.J.P. now files extensive yearly reports which include the notes of the quarterly meeting and some additional, usually medical, information (see Matter of Mark C.H., 28 Misc 3d 765, 783 [Sur Ct, New York County 2010] [requiring annual reports in the form described by MHL § 81.31])
Footnote 20:That is, had funds been made available for Mark's "medical needs" from the Mark Trust, he could have avoided the serious aggression and exacerbating effects of the only medication covered by Medicaid.
Footnote 21:Staff utilized massage and soft touching to deal with Mark's agitation, and the chair was intended to give him the ability to "self soothe."
Footnote 22:This is automatic, upon a Special Ed student's reaching the age of 21, and does not necessarily suggest any particular level of scholastic achievement. It is, however, the transition from one set of government funded benefits to a different and separate system.
Footnote 23:Mark suffers from numerous allergies causing red and itchy eyes, and the air purifier was recommended by staff both for use in his residence and at the day habilitation program.
Footnote 24:Because Mark's medications have weight gain as a side effect, exercise is critical to maintain him at a healthy weight and BMI.
Footnote 25:According to the Residence Manager, there was a long wait between trials, and Mark removed his sneakers, behavior he engages in when frustrated. As a result, he was disqualified from the race, but staff "looks forward to Mark's participation next year and is hopeful there will be environmental accommodations for the participants."
Footnote 26:Through his 10 years of work with her, and the planning he did, H.J.P. unquestionably knew of Mark's severe disability, and the circumstances which had caused Marie to institutionalize him. Further, H.J.P. holds himself out as an expert in the legal needs of children with disabilities, and, in fact, first met Marie after giving a lecture on the subject at AHRC.
Footnote 27:Presumably Chase had conversations with its co-trustee H.J.P. But the language of the Trust itself, quoted supra, was more than enough to put them on notice that this was, as H.J.P. characterized it, an Escher trust for a person with disabilities (see n 7, infra).
Footnote 28:Many questions are left open by the accounting as it now stands, and they cannot be fully resolved without accountings in Marie's estate and the Revocable Trust, ordered below. The guardian ad litem may also wish to amend his objections to more clearly include commissions paid out in light of the abrogation of fiduciary duty.
Footnote 29:It is difficult to understand the use of this Revocable Trust, created on the same day as the execution of Marie's will and as the Mark and Charles Trusts, and like the latter, only nominally funded, as a planning device. Marie's estate could, as easily and without any negative tax consequences, simply have poured directly into the Mark and Charles Trusts. Without an accounting, it is impossible to know if commissions, appropriate or otherwise, were taken, or what expenses, if any, were charged to the Revocable Trust.
§ 7-1.12 Supplemental needs trusts established for persons with severe and chronic or persistent disabilities (a) Definitions: When used in this section, unless otherwise expressly stated or unless the context otherwise requires: (1) "Developmental disability" means developmental disability as defined in subdivision twenty-two of section 1.03 of the mental hygiene law. (2) "Government benefits or assistance" means any program of benefits or assistance which is intended to provide or pay for support, maintenance or health care and which is established or administered, in whole or in part, by any federal, state, county, city or other governmental entity. (3) "Mental illness" means mental illness as defined in subdivision twenty of section 1.03 of the mental hygiene law. (4) "Person with a severe and chronic or persistent disability" means a person (i) with mental illness, developmental disability, or other physical or mental impairment; (ii) whose disability is expected to, or does, give rise to a long-term need for specialized health, mental health, developmental disabilities, social or other related services; and (iii) who may need to rely on government benefits or assistance. (5) "Supplemental needs trust" means a discretionary trust established for the benefit of a person with a severe and chronic or persistent disability (the "beneficiary") which conforms to all of the following criteria: (i) The trust document clearly evidences the creator's intent to supplement, not supplant, impair or diminish, government benefits or assistance for which the beneficiary may otherwise be eligible or which the beneficiary may be receiving, except as provided in clause (ii) of this subparagraph; (ii) The trust document prohibits the trustee from expending or distributing trust assets in any way which may supplant, impair or diminish government benefits or assistance for which the beneficiary may otherwise be eligible or which the beneficiary may be receiving; provided, however, that the trustee may be authorized to make such distributions to third parties to meet the beneficiary's needs for food, clothing, shelter or health care but only if the trustee determines (A) that the beneficiary's basic needs will be better met if such distribution is made, and (B) that it is in the beneficiary's best interests to suffer the consequent effect, if any, on the beneficiary's eligibility for or receipt of government benefits or assistance; (iii) The beneficiary does not have the power to assign, encumber, direct, distribute or authorize distributions from the trust; (iv) If an inter vivos trust, the creator of the trust is a person or entity other than the beneficiary or the beneficiary's spouse; and (v) Notwithstanding subparagraph (iv) of this paragraph, the beneficiary of a supplemental needs trust may be the creator of the trust if such trust meets the requirements of subparagraph two of paragraph (b) of subdivision two of section three hundred sixty-six of the social services law and of the regulations implementing such clauses. Provided, however, that if the trust is funded with the proceeds of retroactive payments made as a result of a court action and due the beneficiary under the federal supplemental security income program, as established under title XVI of the federal social security act, the creation of a supplemental needs trust by the beneficiary under this subparagraph shall not impair nor limit any right under applicable law of a representative payee to receive reimbursement out of such proceeds for expenses incurred on behalf of the beneficiary pending the determination of the beneficiary's eligibility for such federal supplemental security income program, nor any right under applicable law of any state or local governmental entity which provided the beneficiary with interim assistance pending the determination of the beneficiary's eligibility for such federal supplemental security income program to be repaid out of such proceeds for the amount of such interim assistance. (6) A "beneficiary" means a person with a severe and chronic or persistent disability who is a beneficiary of a supplemental needs trust.
(b) A supplemental needs trust shall be construed in accordance with the following: (1) It shall be presumed that the creator of the trust intended that neither principal nor income be used to pay for any expense which would otherwise be paid by government benefits or assistance for which the beneficiary might otherwise be eligible or which the beneficiary might be receiving, notwithstanding any authority the trustee may have to make distributions for food, clothing, shelter or health care as provided in clause (ii) of subparagraph five of paragraph (a) of this section; (2) Section 7-1.6 of this article shall not be applicable to the extent that the application or possible application of that section would reduce or eliminate the beneficiary's entitlement to government benefits or assistance; (3) Neither principal nor income held in trust shall be deemed an available resource to the beneficiary under any program of government benefits or assistance; however, actual distributions from the trust may be considered to be income or resources of the beneficiary to the extent provided by the terms of any such program; (4) The trustee of the trust shall not be deemed to be holding assets for the benefit of the beneficiary for purposes of section 43.03 of the mental hygiene law or section one hundred four of the social services law; and (5) If the trust provides the trustee with the authority to make distributions for food, clothing, shelter or health care as provided in clause (ii) of subparagraph five of paragraph (a) of this section, and if the mere existence of that authority would, under the terms of any program of government benefits or assistance, result in the beneficiary's loss of government benefits or assistance, regardless of whether such authority were actually exercised, then: (i) if the trust instrument expressly provides, such provision shall be null and void and the trustee's authority to make such distributions shall cease and shall be limited as otherwise provided; or (ii) the trust shall no longer be treated as a supplemental needs trust under this section and the trust shall be construed, and the trust assets considered, without regard to the provisions of this section.
(c) (1) Paragraph (b) of this section shall not apply to the extent that the trust is funded, directly or indirectly, by the beneficiary, except as provided in clause (v) of subparagraph five of paragraph (a) of this section, by someone with a legal obligation of support to the beneficiary, or by someone with another financial obligation to the beneficiary to the extent of such obligation, at the time the beneficiary is receiving or applying to receive: (i) Government benefits or assistance for which an income and resource calculation is made; or (ii) Services, care or assistance for which payment or reimbursement is or may be sought under section 43.03 of the mental hygiene law or section one hundred four of the social services law. (2) To the extent that said paragraph (b) does not apply, the trust shall not be treated as a supplemental needs trust under this section, and the trust shall be construed, and the trust assets considered, without regard to the provisions of this section.
(d) The provisions of paragraph (b) of this section shall not apply to bar claims by government against persons with an interest in or under the trust other than the beneficiary.
(e) (1) The following language may be used as part of a trust instrument, but is not required, to qualify a trust as a supplemental needs trust: 1. The property shall be held, IN TRUST, for the benefit of (hereinafter the "beneficiary") and shall be held, managed, invested and reinvested by the trustee, who shall collect the income therefrom and, after deducting all charges and expenses properly attributable thereto, shall, at any time and from time to time, apply for the benefit of the beneficiary, so much (even to the extent of the whole) of the net income and/or principal of this trust as the trustee shall deem advisable, in his or her sole and absolute discretion, subject to the limitations set forth below. The trustee shall add to the principal of such trust the balance of net income not so paid or applied. 2. It is the grantor's intent to create a supplemental needs trust which conforms to the provisions of section 7-1.12 of the New York estates, powers and trusts law. The grantor intends that the trust assets be used to supplement, not supplant, impair or diminish, any benefits or assistance of any federal, state, county, city, or other governmental entity for which the beneficiary may otherwise be eligible or which the beneficiary may be receiving. Consistent with that intent, it is the grantor's desire that, before expending any amounts from the net income and/or principal of this trust, the trustee consider the availability of all benefits from government or private assistance programs for which the beneficiary may be eligible and that, where appropriate and to the extent possible, the trustee endeavor to maximize the collection of such benefits and to facilitate the distribution of such benefits for the benefit of the beneficiary. 3. None of the income or principal of this trust shall be applied in such a manner as to supplant, impair or diminish benefits or assistance of any federal, state, county, city, or other governmental entity for which the beneficiary may otherwise be eligible or which the beneficiary may be receiving. 4. The beneficiary does not have the power to assign, encumber, direct, distribute or authorize distributions from this trust. (2) (i) If the creator elects, the following additional language may be used: 5. Notwithstanding the provisions of paragraphs two and three above, the trustee may make distributions to meet the beneficiary's need for food, clothing, shelter or health care even if such distributions may result in an impairment or diminution of the beneficiary's receipt or eligibility for government benefits or assistance but only if the trustee determines that (i) the beneficiary's needs will be better met if such distribution is made, and (ii) it is in the beneficiary's best interests to suffer the consequent effect, if any, on the beneficiary's eligibility for or receipt of government benefits or assistance. (ii) If the trustee is provided with the authority to make the distributions as described in subparagraph (2) (i), the creator may elect to add the following clause: provided, however, that if the mere existence of the trustee's authority to make distributions pursuant to this paragraph shall result in the beneficiary's loss of government benefits or assistance, regardless of whether such authority is actually exercised, this paragraph shall be null and void and the trustee's authority to make
such distributions shall cease and shall be limited as provided in paragraphs
two and three above, without exception.
(f) Nothing in this section shall affect the establishment, interpretation or construction of trust instruments which do not conform with the provisions of this section, nor shall this section impair the state's authority to be paid from or seek reimbursement from any trust which does not conform with the provisions of this section or to deem the principal or income of such trust an available resource under any program of government benefits or assistance.
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