Reforming, Amending, Decanting and Administering Special Needs Trusts Under New Jersey s New Trust Code

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1 Reforming, Amending, Decanting and Administering Special Needs Trusts Under New Jersey s New Trust Code Regina M. Spiegelberg, Esq Schenck Price Smith & King, LLP, Florham Park Shirley B. Whitenack, Esq. Schenck Price Smith & King, LLP, Florham Park WEST002316

2 2016 New Jersey State Bar Association. All rights reserved. Any copying of material herein, in whole or in part, and by any means without written permission is prohibited. Requests for such permission should be sent to the New Jersey State Bar Association, New Jersey Law Center, One Constitution Square, New Brunswick, New Jersey The material contained in these pages is for educational purposes only and not intended as a substitute for the professional services an attorney would normally provide to a client, including up to the minute legal research.

3 Regina M. Spielberg, Esq. Shirley B. Whitenack, Esq.

4 The Uniform Trust Code (UTC) is a model which codifies the law on trusts. New Jersey joined 30 other states thus far and the District of Columbia in enacting the UTC.

5 The UTC is codified at N.J.S.A. 3B:31-84, et seq.

6 New Jersey s UTC became effective on July 17, It applies to new and existing trusts It applies to all judicial proceedings concerning trusts commenced on or after July 17, N.J.S.A. 3B:31-84

7 It applies to express charitable or noncharitable trusts, and trusts created pursuant to a statute, judgment, or decree that requires the trust to be administered in the manner of an express trust. N.J.S.A. 3B:31-2

8 The UTC also applies to judicial proceedings concerning trusts commenced before July 16, 2016 unless the court finds that application of a particular provision of this act would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of this act does not apply and the superseded law applies.

9 The UTC does not affect acts taken prior to July 16, N.J.S.A. 3B:31-84

10 The trust instrument terms govern except for: Requirements to create a trust; Duty of trustee to act in good faith; Trust must be for the benefit of its beneficiaries; Trust must be for a lawful purpose that is not contrary to public policy;

11 Power of the court to modify or terminate a trust or bond or to exercise jurisdiction as necessary in the interest of justice; Effect of spendthrift trust provisions and the rights of creditors; Requirement to respond to the request of an over age 35 qualified beneficiary of an irrevocable trust for a copy of the trust or other information reasonably related to trust administration.

12 Effect of provisions that exculpate the trustee of liability for a bad faith breach of trust or if the provision was included as a result of abuse by the trustee of a fiduciary or confidential relationship to the settlor; Rights of a person under N.J.S.A. 3B:31-79 through 81; and Time for bringing a judicial action. N.J.S.A. 3B:31-5

13 Rules of construction or presumptions provided in the UTC apply to trust instruments executed before July 17, 2016 unless there is clear indication of a contrary intent in the terms of the trust. N.J.S.A. 3B:31-84

14 The UTC provides a set of rules for terminating or modifying a trust other than by its express terms. These rules increase flexibility but stay true to the principle that preserving the grantor s intent is paramount.

15 Correction or alteration of a trust document through addition or deletion of terms not found in the instrument. Involves interpretation or construction of terms included in the document. Trust Reformation Resolving Ambiguities

16 Submit to court clear and convincing proof of grantor s probable intent. This was required because the reformation conflicts with the grantor s intent as expressed in the trust document. Pivnick v. Beck, 326 N.J. Super. 474 (App. Div. 1999), certif. granted, 163 N.J. 394, aff d, 165 N.J. 670 (2000).

17 Court approval may or may not be necessary depending on the circumstances.

18 Consent N.J.S.A. 3B:31-27 Unanticipated circumstances N.J.S.A. 3B:31-28a. Inability to administer trust effectively N.J.S.A. 3B:31-28b. Uneconomic trust N.J.S.A. 3B:31-30 Mistakes N.J.S.A. 3B:31-31 Achieve settlor s tax objectives

19 Trustee and all beneficiaries consent Only beneficiaries consent Not all beneficiaries consent

20 Trustee and all beneficiaries consent AND the modification is not inconsistent with a material purpose of the trust. Court approval is not required.

21 Court approval is required. Court must conclude that modification is not inconsistent with material purpose of the trust. Spendthrift provision is not presumed to be a material purpose. Trustee s consent is not required.

22 Court approval is required. Court must conclude that the trust could have been modified consistent with the material purpose of the trust if all of the beneficiaries had consented AND The interests of the nonconsenting beneficiary will be adequately protected.

23 Court approval is required. Because of unanticipated circumstances, modification will further the trust s purposes. Modification shall be made consistent with the probable intent of the settlor to the extent practicable. Court can modify administrative or dispositive provisions.

24 Court approval required. Court can modify administrative trust provisions if the existing trust terms would render trust administration impracticable or would result in waste or would impair the trust administration.

25 Trustee may terminate a trust on notice to qualified beneficiaries if the value of the trust assets is less than $100,000 if the value is insufficient to justify the cost of administration. Court can modify or terminate trust or remove and replace the trustee if it concludes that the value of the trust property is insufficient to warrant the cost of administration.

26 A qualified beneficiary on a given date: 1. is a distributee or permissible distributee; or 2. would be a distributee if the interests of the distributees in 1 terminated on that date; or 3. would be a distributee if the trust terminated on that date. If notice to qualified beneficiaries is required, the trustee must also give notice to any other beneficiary who sent a request for notice to the trustee.

27 Made in a manner reasonably suitable under the circumstances and likely to result in receipt of the notice or document. Permissible methods include first-class mail, personal delivery, delivery to the person s last known place of residence or place of business or a properly directed textual electronic message. Need not be provided to a person whose identity or location is unknown or not reasonably ascertainable by the trustee. Notice may be waived by the person to be notified. Notice of a judicial proceeding must be given as provided under the NJ Rules of Court.

28 Court approval is required. Modification is permitted even if trust terms are unambiguous to conform to settlor s probable intent if there is clear and convincing evidence that there was a mistake of fact or law. Mistake could be in expression or inducement.

29 Court may construe trust terms, even if unambiguous, to conform to settlor s probable intent.

30 Court approval is required. Modification must be in accordance with the settlor s probable intent. Modification may have a retroactive effect.

31 To the extent there is no conflict A trustee may bind the beneficiaries A parent may bind his or her minor child N.J.S.A. 3B:31-15

32 Unless otherwise represented, and to extent there is no conflict, may be represented by and bound by another having a substantially identical interest with respect to the particular question or dispute. N.J.S.A. 3B:31-16

33 If the representation is inadequate or nonexistent, court may appoint a guardian ad litem. N.J.S.A. 3B:31-17

34 A vehicle for sheltering resources to benefit individuals with disabilities.

35 Provide assets for the special needs of the beneficiary with disabilities so that the beneficiary can live a more productive and comfortable life Avoid having trust assets count as a resource to the beneficiary Avoid having trust distributions count as income to the beneficiary

36 Special Needs Payback Trust or OBRA 93 Trust U.S.C p(d)(4)(A) Also known as self-settled SNT Funded with the assets of the beneficiary Third Party Special Needs Trust Funded with the assets of a third party Sole Benefit of Trust Transfer of assets from person who needs Medicaid to trust for someone who needs Medicaid Payback provision required or Payments must be on actuarially sound basis

37 Applies to all types of SNTS A creditor: cannot attach an interest in a special needs trust. cannot require the trustee to make a distribution to satisfy a creditor s claim. N.J.S.A. 3B:31-37

38 An SNT is not be required to repay government aid provided to the protected person unless the aid was provided on the basis that the trust would repay the aid when the person dies, the trust is terminated, and the special needs trust instrument expressly calls for such repayment. This provision expressly does not apply to first-party, self-settled special needs trusts. Protected person is defined as an aged, blind, or disabled individual as defined at 42 U.S.C. s.1382c; (b) developmentally disabled as defined in section 2 of P.L.1979, c.105 (C.30:1AA-2); or (c) under age 18, or over age 18 and a full-time student, with serious disabilities that reasonably may prevent the individual from being self sufficient as an adult. N.J.S.A. 3B:31-37

39 New Jersey Medicaid regulations state that [n]either the grantor, the trustee(s), nor the beneficiary shall have any right or power, whether alone or in conjunction with others, in whatever capacity, to alter, amend, revoke, or terminate the trust or any of its terms. N.J.A.C. 10: (g)viii.

40 The trust can state, however, that the trust may be amended as necessary to conform with the requirements of 42 U.S.C. 1396p and/or state law. N.J.A.C. 10: (g)viii.(1).

41 Amendment to conform to current Medicaid law may not require court approval. Amendments for any other purpose will require court approval.

42 May be amended in accordance with UTC provisions

43 The trustee of a revocable trust may follow a settlor s direction. The trustee of a revocable trust may follow a the written direction of someone other than the settlor if provided in the trust terms, unless the direction is contrary to the trust terms or is a breach of fiduciary duty.

44 Trust may provide the power to direct modification or termination of the trust. The holder of a power to direct must act in good faith as to the purpose of the trust and interests of the beneficiaries. Otherwise, the holder of a power to direct is liable for losses.

45 If the trust instrument provides authority to direct, consent to or disapprove investment decisions to a person(s) are considered investment advisers and fiduciaries when exercising authority unless the governing trust otherwise provides. N.J.S.A. 3B:31-62

46 Trust decanting is the act of transferring assets from an existing trust to another trust. The UTC does not have specific provisions for decanting one trust to another trust. 23 states have decanting statutes.

47 Issues addressed by statutes include whether Trusts with an ascertainable standard may be decanted and, if so, may the receiving trust be a purely discretionary trust; Notice to beneficiaries is required; Mandatory income provision may be eliminated; and Beneficiary s interest may be accelerated.

48 New Jersey does not have a decanting statute. New Jersey estate planning practitioners often rely on Wiedenmayer v. Johnson, 106 N.J. Super. 161 (App. Div.), aff d per curiam, 55 N.J. 81 (1969), for common law decanting authority.

49 The original Wiedenmayer trust provided the trustee with discretionary to make distributions of corpus to a beneficiary who is over age 21 in the best interests of the beneficiary. The Appellate Division affirmed the trustee s authority to distribute trust assets to a new trust the eliminated the contingent remaindermen s interest. The court found grantor s intent was to provide for his son s best interests and the decanting would not defeat that intent.

50 Wiedenmayer does not address all decanting situations. For example, Wiedenmayer does not address if a trustee who does not have a best interest standard or unfettered discretion to make distributions may decant. Similarly, it does not support a decanting that reduces a mandatory income payment to a beneficiary. Practitioners are advised to seek court approval for situations not directly covered by Wiedenmayer.

51 REGINA M. SPIELBERG Regina M. Spielberg is a partner with and a member of the firm s Tax, Trust and Estates Department. Ms. Spielberg concentrates her practice in elder and disability law, estate and trust planning and administration. She is nationally certified as an Elder Law Attorney by the ABA Accredited National Elder Law Foundation. Ms. Spielberg is a member of the National Academy of Elder Law Attorneys (NAELA) Council of Advanced Practioners, an invitation-only nationwide group of elder and special needs attorneys. Ms. Spielberg is a Fellow of the American College of Trust and Estate Council (ACTEC) and past chair of the Real Property, Trust and Estate Law Section of the New Jersey State Bar Association. She is also a member of the Elder Law Section of the New Jersey State Bar Association and National Academy of Elder Law Attorneys. She is a past president of the Greater New Jersey Estate Planning Council and a member of the Estate Planning Council of Bergen County. Ms. Spielberg has been recognized by NJBIZ as one of New Jersey s top Elder Law Attorneys; by New Jersey Monthly magazine as a top attorney in New Jersey; and has been recognized by Martindale-Hubbell as a peer view AV rated attorney, the highest such rating available to any individual lawyer. Ms. Spielberg has co-authored articles for Estate Planning, Volume 36, entitled, The Revival of the Income-Only Trust in Medicaid Planning as well as Matrimonial Settlements A Public Benefits Conundrum, Trusts for the Benefit of Disabled Persons: Understanding the Differences between Special Needs Trust and Supplemental Benefits Trusts for New Jersey Lawyer. Ms. Spielberg has published articles entitled, Special Needs Settlement Planning: Preserving Public Benefits and Enhancing the Injured Party s Quality of Life ; The Powerful Power of Attorney ; Tax Implications of Caregiver Agreements ; A Matter of Trust: Protecting the Disabled ; and Personal Injury Recoveries: Special Needs Trusts and Government Benefits Planning. Ms. Spielberg is a member of the New York and New Jersey Bars. She received her undergraduate degree from Montclair State College, her M.B.A. in Finance from Long Island

52 University and her Juris Doctorate from Rutgers University Law School, Newark. Ms. Spielberg is a regular lecturer on elder and disability law and trust and estate law for both professional and client organizations.

53 Shirley B. Whitenack is a partner at with offices in Florham Park, Paramus, and Sparta, New Jersey and co-chairs the firm s Elder and Special Needs Law Practice Group and the Estates and Trusts Litigation Practice Group. Ms. Whitenack devotes a substantial portion of her practice to elder and special needs law, estate planning and administration and trust and estate litigation. She is on the State of New Jersey roster of approved mediators. Ms. Whitenack is the Immediate Past President of the National Academy of Elder Law Attorneys (NAELA), a NAELA Fellow, and a member of NAELA s Council of Advanced Practitioners (CAP), an invitation-only group of elder and special needs planning practitioners. She was an adjunct professor of law in the J.D. and LL.M. in Elder Law Programs at Stetson University College of Law. She is a Trustee of the New Jersey State Bar Association (NJSBA) and serves on its Advisory Committee on Continuing Legal Education and Legislative Committee. She is a past chair of the NJSBA s Elder & Disability Law Section. Ms. Whitenack is a member of the New Jersey State Bar Foundation s Program Development Committee. Ms. Whitenack is a member of the Special Needs Alliance (SNA), an invitation-only nationwide alliance of special needs planning attorneys, the American Bar Association (Litigation and Real Property, Trusts & Estates Sections), the Morris County Bar Association s (MCBA) Estates & Trusts and Elder Law Committee and previously served as chair of MCBA s Elder Law Committee. Ms. Whitenack publishes and lectures extensively on topics related to guardianship, elder and special needs law, estate and trust litigation and probate mediation. She is quoted in publications such as the Wall Street Journal, Money Magazine, Barron s, Market Watch, Kiplinger s Personal Finance Magazine and the AARP Bulletin. Ms. Whitenack received the NJSBA s Legislative Service Award in September 2003 for her contribution in drafting and promoting revisions to New Jersey s guardianship statutes and the NJSBA s Amicus Curiae Award in Ms. Whitenack received GANJI s Recognition Award in October 2003 for her contribution in advocating for the civil rights of incapacitated individuals. She received NJICLE s Distinguished Service Award in 2007 and the Distinguished Service Award from the NJSBA s Elder & Disability Section in Ms. Whitenack received the Community Health Law Project s Ann Klein Advocate Award in 2011 for improving the lives of people with disabilities and was recognized in 2011 by the Senate and General Assembly of the State of New Jersey in a Joint Resolution for service to those with special needs. In 2012, she was honored by the NJSBA for her long service as a trustee of the New Jersey Institute for Continuing Legal Education and received the NJSBA s Distinguished Legislative Service Award for her contribution to New Jersey s enactment of the Uniform Adult Guardianship and Protective Proceedings Jurisdiction Act. Ms. Whitenack received the Morris County Bar Association s Civil Practice Award in She is A-V rated by Martindale-Hubbell and has been recognized in New Jersey Monthly magazine as one of New Jersey s top 100 Super Lawyers, one of New Jersey s top 50 women Super Lawyers as well as a top Elder Law Super Lawyer. * She also has been selected by her peers for inclusion in The Best Lawyers in America for Trusts and Estates. Ms. Whitenack is admitted to practice in New Jersey, the United States District Court for the District of New Jersey and the United States Court of Appeals for the Third Circuit. She received her undergraduate degree cum laude from the State University of New York at Stony Brook and attended Seton Hall University School of Law, where she held the position of Notes and Comments Editor of the Seton Hall Law Review. * The Super Lawyer and Best Lawyers in America designations are peer ratings based upon criteria identified at and They are not state certifications.