This is the third and final installment of a three-part article published in the NYSBA Journal beginning in March 2019.
The authors wish to express thanks to NAELA Fellow Ron M. Landsman for his willingness to offer insight and comment on the ideas expressed in this article. His piece in the Spring 2014 issue of the NAELA Journal, When Worlds Collide: State Trust Law and Federal Welfare Programs, NAELA Journal Volume 10, No. 1 (Spring 2014), remains one of the most important writings in the area of special needs trust practice in many years.
In Part I we discussed the different standards of review courts use to assess the work of supplemental needs trust (SNT) trustees. In Part II we provided a number of procedural and administrative recommendations, which if implemented would support a finding that the trustees reasonably exercised discretion.
Both of the prior articles referenced two New York decisions that received significant attention within the fiduciary community. Those decisions involved surcharge (or the threat of surcharge) against a trustee for failing to fulfill its responsibilities under the terms of a supplemental needs trust – one for spending too little, the other for spending too much. In this final installment we revisit those decisions to see how the courts approached the standard of review discussed in Part I, and we consider whether the implementation of some of the procedural recommendations outlined in Part II might have led to a different result.
In re JP Morgan
In In re JP Morgan,[i] the court criticized the trustee of a well-funded third party SNT for collecting commissions while trust funds sat dormant. The beneficiary lived at a residential school for individuals with disabilities in upstate New York. The beneficiary’s mother funded the trust upon her death in 2005, appointing her attorney and a bank as co-trustees. The attorney later petitioned to become the beneficiary’s guardian, and in connection with that proceeding the court directed the trustees to petition for judicial settlement of their accounts.
The court learned that in the five years subsequent to the mother’s death, no distributions were made for the beneficiary. Neither co-trustee visited the beneficiary nor contacted staff at the school to inquire of his needs. Neither co-trustee notified school staff of the existence of the trust. The bank co-trustee testified that it lacked the “institutional capacity to ascertain or meet the needs of this severely disabled, institutionalized young man.”[ii] Both co-trustees took their commissions.
The co-trustees satisfied the basic obligations of fiduciary conduct.
The decision suggests that the trustees satisfied their traditional fiduciary responsibilities: they invested the funds in the trust, filed tax returns, and were able to fully account when directed by the court.[iii]
The co-trustees failed to establish a protocol for communication or a plan to assess and review programs and services.
Satisfying the basic responsibilities of fiduciary conduct was not enough. In the words of the court:
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 [the beneficiary’s] benefit and [were] given the discretionary power to apply additional income to [the beneficiary’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 [the beneficiary’s] condition, needs, and quality of life, and to utilize trust assets for his actual benefit.[iv]
The judge directed the trustees to hire a care manager to investigate, report and facilitate distributions for the beneficiary. The care manager visited the beneficiary, attended team meetings, provided the co-trustees with quarterly reports, made purchases, and served as an intermediary between residential staff and the trustees.[v] The care manager made a number of recommendations, including a consultation with a “non-Medicaid neurologist” who recommended medication that was not covered by Medicaid but had fewer side effects, the purchase of computer equipment and software for adaptive communication, recreational equipment, and gift certificates for local merchants so that the beneficiary could experience the outside community. The beneficiary made “extraordinary – and heartwarming – progress”[vi] as a result of these expenditures.
The drafting attorney attempted to limit the trustees’ obligation to account.
The attorney co-trustee drafted the SNT and apparently tried to limit the trustees’ obligation to account to its beneficiaries, something which the court held:
violates public policy and cannot be enforced, where, as here, the beneficiary is a person under a disability, and no one is protecting the beneficiary’s interests.[vii]
The decision does not provide any insight into why the drafting attorney tried to limit the accounting requirement. The provision might have been taken from a standard discretionary trust and intended to limit administrative costs. Regardless, had the trust included a provision requiring the trustees to prepare an informal accounting on an annual basis, it is likely that a representative of the residential program would have become aware of the trust and could have provided the trustees with information on the beneficiary’s needs.
The court clearly articulated a standard of review.
The Court held that the trustees’ actions – or, more specifically, their inaction – constituted an abuse of discretion:
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”).[viii]
In In re JP Morgan, the trustees’ mistake was not necessarily the failure to make expenditures for the beneficiary’s benefit. Rather, the trustees failed to promptly establish a protocol for communicating with the beneficiary’s staff and assessing his needs. Had the trustees retained the private care manager promptly upon being appointed, they would have had the information needed to enhance his quality of life by supplementing the care and support he was receiving at the residential school.
Alternatively, the care manager’s report might have reflected that the beneficiary was thriving, that the beneficiary’s mother (who died just a few years earlier) had already purchased many items to enhance her son’s quality of life, and that – at the moment – the beneficiary needed for nothing. On these facts the accounting might have looked substantially the same, but the trustee would have been able to document that it met all of its traditional fiduciary obligations, and it would also be able to show that its decision not to spend funds over the past few years was not an abuse of discretion, but rather an informed decision made after a comprehensive review.
In re Liranzo
In In re Liranzo,[ix] a bank serving as corporate trustee of a first party supplemental needs trust funded with litigation proceeds sought to settle its account and terminate the trust. The trust was initially funded with just over $420,000. Six years later, the trust had approximately $3,200 remaining. The accounting showed that the largest expenditures were for private caregivers and taxi service for the beneficiary.
The trustee failed to satisfy some basic obligations of fiduciary conduct.
There did not appear to be any credible analysis of the long-term financial impact of the level of spending undertaken by the trustee.[x] Additionally, the trustee authorized “each and every discretionary disbursement requested by the infant plaintiff’s mother”[xi] rather than exercising independent judgment on the propriety of those distributions.The trustee maintained communication with the beneficiary’s family member.
In In re Liranzo there was an involved parent – the beneficiary’s mother – and the trustee was in regular communication with her.[xii]
The trustee did not adequately assess the availability of Medicaid-funded services.
Regarding the private caregivers, a representative from the bank trustee testified that an “advocate for the [beneficiary]”[xiii] communicated with the local Medicaid agency about the availability of Medicaid-funded staff and informed the trustee that Medicaid funded aides were unavailable. The trustee also testified that it “consulted with [the beneficiary’s mother] and social workers that concluded private caregivers were in the best interest of [the beneficiary].”[xiv]
While there were a number of hearings and conferences, the decision does not reference testimony from the “advocate for the [beneficiary]” or any of the social workers upon whom the trustee relied in deciding to pay privately for caregivers. The decision suggests that the trustee communicated primarily with the mother and did not retain its own professional to corroborate the information that the mother was providing.
Similarly, the court held that the trustee should have “further investigated” the mother’s representation that riding in a taxi helped ease the beneficiary’s stress before agreeing to spend more than $50,000 on the expense over a six-year period.[xv]
The court did not clearly articulate a standard of review.
In Part I of this article we reviewed the various explanations that the court used in finding that the trustee breached its fiduciary duty to the beneficiary. The decision begins with the statement that the trustee breached its fiduciary duty by “failing to make decisions based on the long-term needs of the beneficiary that would extend the life of the Trust for as long as possible.”
In surcharging the trustee for payments made to the taxi service, the court found that such payments “do not appear to be a responsible use of Trust fund monies consistent with prolonging the life of the Trust.”
Later in the decision the court criticizes the trustee for making distributions which “could have either been avoided or were unreasonable” or reflected a failure to administer the trust in the “sole interests of the beneficiary.”
At no point did the court clearly articulate the standard it was applying in assessing the trustee’s conduct. As a result, the decision does not provide any practical guidance beyond the specific (and admittedly concerning) facts of the case.
An abuse of discretion analysis would provide the same result with better guidance.
If the court applied an abuse of discretion analysis, it could have reached the same conclusion, but with better guidance for SNT trustees.
The trustee’s failure to consider the long term impact of paying for private caregivers and taxi rides would support a finding that it abused its discretion under the basic rules of fiduciary conduct which require a trustee to balance the immediate needs of the beneficiary with probable future needs.[xvi]
The trustee’s blind reliance on representations made by the beneficiary’s mother would support a finding that it abused its discretion by failing to independently investigate its beneficiary’s needs.[xvii]
The trustee’s failure to thoroughly investigate Medicaid-funded alternatives would support a finding that it abused its discretion by failing to follow the terms of the governing document, which require consideration of public benefits and services before expending trust funds.[xviii]
The trustee’s biggest mistake was the failure to promptly obtain an independent assessment of its beneficiary’s needs.
Upon being appointed, the trustee should have promptly investigated the availability of Medicaid-funded goods and services and determined whether they were adequate, or whether they should be supplemented by expenditures from the trust. Had the trustee retained a private care manager to conduct an independent assessment, it might have learned that there were indeed Medicaid funded home care programs that would have provided aides for its beneficiary, and it might have learned of other, less expensive but equally effective therapeutic alternatives to riding in a taxi to calm the nerves.
Alternatively, the trustee might have decided to spend money in the same way. For example, the care manager’s report might have disclosed that the beneficiary was approved for Medicaid-funded staff but was unable to find aides willing to work at the Medicaid payment rate. The report might have disclosed that the beneficiary had unique and complicated behavioral issues, and that the privately paid aide (who did not accept Medicaid) was the only one capable of managing those behaviors. The report might have disclosed that taxi rides did indeed calm the beneficiary, but without the debilitating side effects caused by the anti-anxiety medication he would otherwise have to take. Finally, the report might have disclosed that the beneficiary had a shortened life expectancy and the mother wanted him to have the best quality of life possible in his final years.
Based on the care manager’s report, the beneficiary’s limited life expectancy, and the support of the mother, the decision to aggressively apply income and principal to pay for private caregivers and taxi services rather than rely on Medicaid funded supports would not necessarily be an abuse of discretion, notwithstanding the fact that it depleted the trust in a short period of time, [xix] and notwithstanding the fact that the Court might have made a different decision on the same set of facts.
A petition for advice and direction would have insulated the trustee from liability.
Even with a comprehensive assessment from a private care manager and the support of a parent, a prudent trustee should be concerned about spending so much in such a short period of time. To mitigate risk, the trustee could seek prior court approval of its proposed distribution plan.
A court might refuse to consider the application, as it is essentially a request to substitute the court’s judgement for that of a trustee with full discretion under the terms of the governing document. But in such a case, the trustee would have a record of its attempt to secure court approval. While not binding in a subsequent proceeding for settlement of its accounts, it would buttress the argument that the trustee’s exercise of discretion was encouraged by the court and should be upheld over later objections.
The need for professional advocates for individuals with disabilities will continue to grow with each passing year. With aging parents increasingly unable to provide support to their sons and daughters with disabilities, and with disability service providers stretched thin by cuts in government funding, professional caregivers and fiduciaries will be asked to take on greater responsibility in serving the needs of those who cannot care for themselves.
In recent years many otherwise capable financial institutions have declined to administer supplemental needs trusts, in large part because of the uncertainty over how their conduct will be measured after the fact. Cases like In re JP Morgan and In re Liranzo reinforce these concerns.
The well-established body of law governing discretionary trusts is more than capable of accommodating the unique aspects of supplemental needs trust administration. The failure to apply the abuse of discretion standard has discouraged the development of commonly accepted “best practices” which, if followed, would better serve beneficiaries of supplemental needs trusts, and help insulate trustees from the risks associated with this type of administration.
[i] In re JP Morgan Chase Bank N.A. (Marie H.) (“In re JP Morgan”), 38 Misc. 3d 363 (Sur. Ct., N.Y. Co. 2012).
[ii] Id. at 370.
[iii] While the trustees were able to account for funds held in the SNT, the court questioned the accuracy of the accounting for the prior estate and the initial SNT funding amount. In re JP Morgan at 379.
[v] Id. at 371. It is important to note that the beneficiary resided in a Medicaid-funded residential program with round the clock staffing and related support. The court nonetheless directed the co-trustees to retain and pay a private care manager to monitor those supports, and in some cases provide services that would otherwise have been provided by Medicaid-funded staff, such as scheduling doctors’ visits or consulting with specialists. The case illustrates the difference between the baseline or “floor” provided by public benefit programs and the optimal level of services and support that might be available through the proactive expenditure of funds from an SNT. See Foote v. Albany Med. Ctr. Hosp., 71 A.D. 3d 25 (3d Dep’t 2009), aff’d, 16 N.Y. 3d 211 (2011).
[vi] In re J.P. Morgan, 38 Misc.3d at 370.
[vii] Id. at 377, citing In re Malasky, 290 A.D. 2d 631 (3d Dept 2002), and In re Shore, 19 Misc. 3d 663 (Sur. Ct., N.Y. Co. 2008).
[viii] Id. at 377, quoting Restatement (Third) of Trusts, § 50, comment b.
[ix] Liranzo v. L.I. Jewish Ed./Research (“Liranzo”), No. 28863/1996 ( Sup. Ct., Kings Co., June 25, 2013).
[x] Id. at 4.
[xi] Id. at 5.
[xii] The decision does not say whether the mother was also a court-appointed guardian.
[xiii] Liranzo, supra n.9, at 5.
[xiv] Id. at 6.
[xv] Id. at 7.
[xvi] Estate of T. Harry Glick, 2005 N.Y. Misc. LEXIS 7336 (Sur. Ct., Kings Co. 2005).
[xvii] In re Hammerschlag, 2001-3772, NYLJ 1202597358371 (Sur. Ct., N.Y. Co. 2013).
[xviii] New York Estates Powers & Trusts Law (EPTL) 11-1.1(a)(2).
[xix] New York’s supplemental needs trust statute makes clear that the trustee may exhaust trust principal “even to the extent of the whole” for the benefit of the beneficiary. EPTL 7-1.12(e)(1).