A New York Appeals court recently affirmed the State’s Medicaid division’s decision to deny Medicaid eligibility to the beneficiary of a trust, arguing that the trust gave the trustee too much discretionary authority. The case underscores the need to have an experienced attorney familiar with local Medicaid rules, draft trust documents where protecting Medicaid eligibility is a major concern.
In this instance, the applicant’s son was trustee of a living trust established for the benefit of the applicant. As trustee, the son took out a home equity loan using trust assets as collateral, and used the loan proceeds to pay for his father’s living and caregiving expenses. Once the trust assets were depleted, the father applied for Medicaid benefits but was denied because the State ruled that the trust assets were available to the applicant, and imposed the required “look-back rule” in denying eligibility.
In upholding the State’s determination, the Appeals Court stated:
Because the trust instrument gave the trustees broad discretion in the distribution of the trust principal, including for petitioner’s benefit, the agency did not err in concluding that the principal is an available resource for purposes of petitioner’s Medicaid eligibility determination
So, your parents have a trust, and you’ve just found out that you are the trustee. Do you thank them or did they reward you with the booby prize? A trustee is held to a high standard of accountability and must act in accordance with an established standard of care as outlined below. To fail in one or more of these – called a breach of fiduciary duty – is to invite litigation and sometimes results in broken family relationships where a family member is also the trustee. Professional trustees, like banks with trust departments, or corporate trustees will be given very little leeway if they fail in any of these duties, but untrained family members or individuals who find themselves in this unenviable position are often not excused for lack of knowledge either.
Duty of loyalty. A trustee has a fundamental duty to administer a trust solely in the interests of the beneficiaries. A trustee must not engage in acts of self‐dealing.
Duty of administration. The trustee must administer the trust in accordance with its terms, purposes, and the interests of the beneficiaries. A trustee must act prudently in the administration of a trust and exercise reasonable care, skill, and caution, as well as properly account for receipts and disbursements between principal and income.
Duty to control and protect trust property. The trustee must take reasonable steps to take control of and protect the trust property.
Duty to keep property separate and maintain adequate records. A trustee must keep trust property separate from the trustee’s property and keep and render clear and accurate records with respect to the administration of the trust.
Duty of impartiality. If a trust has two or more beneficiaries, the trustee must act impartially in investing, managing, and distributing the trust property, giving due regard to the beneficiaries’ respective interests.
Duty to enforce and defend claims. A trustee must take reasonable steps to enforce claims of the trust and to defend claims against the trust.
Duly to inform and report. A trustee must keep qualified trust beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.
Duty of prudent investment. A trustee who invests and manages trust property has a duty to “invest and manage trust property as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust.
Much like the position of Executor, the role of Trustee is not to be accepted lightly and can often be a lifetime of responsibility. If you are not comfortable serving in this capacity, discuss this with your parents now so that alternate plans can be made.
Trusts are excellent vehicles for protecting an estate from creditors, transfer taxes, or misbehaving heirs. Their operation may be simple or complex, but it is incumbent upon you to talk to your parents about their trusts, and especially who the parties are if you are in the role of financial caregiver.
It is a well established principle of trust law that trustees are fiduciaries who owe specific duties to the beneficiaries of a trust. These duties can be grouped into duties of loyalty and duties of care.
But what if a trust has beneficiaries with adverse interests to one another? It is not uncommon for a trust to have two kinds of beneficiaries – a current beneficiary as well as a remainder beneficiary. That is, the current beneficiary may have rights to the income from the trust, and perhaps even discretionary rights to the trust’s assets (also known as the trust principal or corpus); whereas the remainder beneficiary may have rights or equitable interest in what is left in the trust (the remainder) after a period of years or upon the death of the current beneficiary. These adverse interests can test the mettle of most individual or family trustees as both beneficiaries are owed duties of loyalty and care.
Suppose Mike Brady created a trust to take effect at his death. His trust includes the following (summarized) instructions:
At my death, my trustee shall pay to my surviving spouse the net income from my trust for as long as my spouse shall live.
In addition to the net income, my trustee may also pay to my surviving spouse from the trust’s principal, as much as my trustee shall deem necessary to maintain my spouse in [her] accustomed standard of living.
Upon my spouse’s death, my trustee shall distribute my trust to my surviving children (Greg Brady, Peter Brady, and Bobby Brady) in equal shares.
Now supposed that when Mike Brady dies, Carol Brady is appointed to serve as trustee of Mike’s trust. Or, perhaps Mike’s oldest son, Greg, is appointed as trustee. This is not only permitted but done frequently, presumably to avoid paying a professional trustee. The conflicts to the Duty of Loyalty are obvious.
For example, if Carol Brady is trustee, it stands to reason that she would want to maximize current income from the trust while minimizing principal growth. Likewise, if Greg is trustee, he would want to maximize his ultimate share of the trust by investing for growth rather than income. In addition, asking either party to objectively define “accustomed standard of living” puts them both in awkward, if not conflicting positions. Should Alice’s services as a live-in housekeeper continue to be paid after everyone has moved on? Carol could certainly argue that the expense met the accustomed standard of living test, but would Greg require Carol to pay for it herself, or would he deny it saying it wasn’t necessary any longer?
Perhaps when Mike and Carol were in the attorney’s office, their response to these hypothetical situations was typical. “Oh our kids would never argue over this.”
It is possible to be loyal to both beneficiaries even if there are adverse interests. However, doing so requires a great deal of objectivity, scrutiny, and immunity to emotional persuasion. A wise trustee will establish clear expectations and open communication early in the relationship to avoid favoring one beneficiary over the other and risk breaching the duty of loyalty.
An Indiana Court of Appeals opinion underscores the importance of accountings in trust administration, but also raises questions about why families place siblings in adversarial positions to begin with.
According to an article posted by the Indianapolis law firm of Faebre Baker Daniels, the original case involved three siblings, Scott, Jeff and Stacey – and arose after Scott and Jeff began to question some of Stacey’s actions as trustee of their respective trusts – specifically, her handling of the trusts’ joint ownership of multiple parcels of real property. Shortly after the siblings executed a mediated settlement agreement and partitioned the properties, Scott sued Stacey, as trustee of his trust, alleging she failed to provide an accounting and had misused trust assets. Scott also alleged misappropriation of $107,000 of trust assets, which were characterized as trust expenses – which were in fact legal fees Stacey had incurred “years before the most recent trust-related litigation,” apparently with other family members.
One of the duties of a trustee (known as fiduciary duties) is to keep trust property separate and to maintain – and make available to trust beneficiaries – adequate records, which Stacey admitted she had failed to do. Unfortunately for Scott, he did not bring his complaint until after the two-year statute of limitations had expired, and the trial court found Stacey did not commit a breach of trust as to the accountings.
Scott also demanded reimbursement for his attorney’s fees for bringing the complaint against Stacey, which after being denied by the trial court was reversed by the Indiana Court of Appeals and Stacey was ordered to pay Scott’s legal fees.
While the crux of the case deals with a trustee’s responsibility to maintain adequate records and provide them to a trust’s beneficiaries, the real story in this case is the human one – that of a family of siblings now divided – at least partly – because one was put into an adversarial position with the others. I wonder if the trustee fee savings was worth it?