DEMYSTIFYING TRUST DISTRIBUTION STANDARDS

DEMYSTIFYING TRUST DISTRIBUTION STANDARDS Stetson University College of Law Fundamentals of Special Needs Trust Administration ~ 2014 Presented by Craig C. Reaves, CELA Reaves Law Firm, P.C. Copyright 2014 - Reaves Law Firm 1

BEFORE WE GET STARTED.. There are two important concepts to summarize: 1. Importance of What the Settlor Intended, and 2. Whether the Trust is Self-Settled or Third Party-Settled Copyright 2014 - Reaves Law Firm 2

INTENT OF THE SETTLOR Intent of the Settlor is Critical Courts will review the four corners of the trust to determine what the Settlor intended And will go to great lengths to carry out the Settlor s intent So should the trustee Copyright 2014 - Reaves Law Firm 3

INTENT OF THE SETTLOR As stated by one court, It is the cardinal rule of will construction that the intention of the testator, as expressed in the language used in the will, shall be controlling if it is not inconsistent with the rules of law. Such intention is to be gathered from everything contained within the four corners of the instrument, read in the light of surrounding circumstances. McNiff v. Olmsted County Welfare Dept. (Minn., 1970) Copyright 2014 - Reaves Law Firm 4

SELF-SETTLED v. THIRD PARTY-SETTLED TRUSTS Who Established the Trust? Settlor is not just person who signs the trust Settlor is also person who puts assets into the trust Copyright 2014 - Reaves Law Firm 5

SELF-SETTLED TRUSTS Settlor and Beneficiary are the Same Person Settlor s assets are in the trust, or Settlor s spouse s assets are in the trust Unless established by the spouse s Will Includes trusts established by the beneficiary s guardian Copyright 2014 - Reaves Law Firm 6

SELF-SETTLED TRUSTS Effect on Medicaid & SSI Eligibility General Rule Assets in self-settled trust that trustee, if exercising maximum favorable discretion, could use for benefit of settlor or spouse are countable resources and disqualify beneficiary from Medicaid and SSI. Copyright 2014 - Reaves Law Firm 7

SELF-SETTLED TRUSTS Effect on Medicaid & SSI Eligibility Exceptions to General Rule Assets in self-settled trust are NOT Countable Resources IF trust complies with OBRA-93 and FCIA-99: d4a (Medicaid Payback) Trust, d4b (Qualifying Income) Trust, or d4c (Pooled) Trust Copyright 2014 - Reaves Law Firm 8

THIRD PARTY-SETTLED TRUSTS Who Established the Trust? NOT the beneficiary, or spouse Does NOT hold assets belonging the beneficiary or spouse Beneficiary and Settlor are NOT the same person Copyright 2014 - Reaves Law Firm 9

THIRD PARTY-SETTLED TRUSTS When Third Party-Settled Trust Used When Someone Establishes a Trust for the Benefit of Someone Else Parent for Child Grandparent for Grandchild Child for Parent, Grandparent or Sibling Copyright 2014 - Reaves Law Firm 10

THIRD PARTY-SETTLED TRUSTS Effect on Medicaid & SSI Eligibility Does NOT have to comply with OBRA-93 or FCIA-99 NOT a countable resource IF correct distribution standard is used Copyright 2014 - Reaves Law Firm 11

SELF-SETTLED v. THIRD PARTY-SETTLED In Summary, Whose Money is in the Trust? If Beneficiary s assets are in the trust it is a Self-Settled Trust (also known as a First-Party Trust) If Not, it is a Third Party-Settled Trust Copyright 2014 - Reaves Law Firm 12

STANDARDS FOUR TRADITIONAL TRUST DISTRIBUTION STANDARDS 1. Pure Discretionary 2. Mandatory Support 3. Discretionary Support 4. Special Needs Strict, or Discretionary Copyright 2014 - Reaves Law Firm 13

STANDARDS 1 DISCRETIONARY STANDARD Trustee has total discretion to make, or not make, any distribution No power to beneficiary (or creditors) to compel distribution Settlor s intent is very important Copyright 2014 - Reaves Law Firm 14

STANDARDS - Discretionary Example Trustee may, in its sole, absolute and unlimited discretion, at any time and from time to time, distribute some, all or none of the trust estate to or for the benefit of the beneficiary. The Trustee shall be under no duty to distribute any of the trust estate to or for the benefit of the beneficiary no matter what may be the circumstances of the beneficiary. Copyright 2014 - Reaves Law Firm 15

STANDARDS - Discretionary How Courts Describe A discretionary trust gives the trustee complete discretion to distribute all, some, or none of the trust income or principal to the beneficiary, as the trustee sees fit. In the Matter of Leona Carlisle Trust The terms of a discretionary trust grant the trustee complete and unfettered discretion in determining if any of the trust's income or principal should be distributed to the beneficiary. Strojeck ex rel. Mills v. Hardin County Bd. of Supervisors Copyright 2014 - Reaves Law Firm 16

STANDARDS - Discretionary Effect on Creditors Not Available Under a true discretionary trust, the trustee may withhold the trust income and principal altogether from the beneficiary and the beneficiary, as well as the creditors and assignees of the beneficiary, cannot compel the trustee to pay over any part of the trust funds. Lineback by Hutchens v. Stout, Copyright 2014 - Reaves Law Firm 17

STANDARDS - Discretionary Effect on Medicaid Not Available Because the ability to compel distributions from the trust is not available to the beneficiary of a discretionary trust, only those distributions of trust income or corpus actually made by the trustee may be taken into account by the Department." Hecker v. Stark County Social Service Bd. Copyright 2014 - Reaves Law Firm 18

STANDARDS - Discretionary Exception Self-Settled Trust The general rule that creditors cannot compel the trustee of a discretionary trust to make a payment of income or principal applies only in those cases where the settlor of the trust is an individual different than the beneficiary of the trust. In re Johannes Trust Copyright 2014 - Reaves Law Firm 19

STANDARDS - Discretionary Exception Self-Settled Trust - Policy A person ought not to be able to shelter his assets from his creditors in a discretionary trust of which he is the beneficiary and thus be able to enjoy all the benefits of ownership of the property without any of the burdens. In re Johannes Trust Copyright 2014 - Reaves Law Firm 20

STANDARDS - Discretionary Exception Self-Settled Trust - Statute Codified in OBRA 93 42 USC 1396p(d)(3)(B)(i) if there are any circumstances under which payment from the [self-settled irrevocable] trust could be made to or for the benefit of the individual [who established the trust], the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources available to the individual [for Medicaid eligibility purposes] Copyright 2014 - Reaves Law Firm 21

STANDARDS - Discretionary Third Party-Settled Trust If trust is third party-settled Trust assets are Not available resource and do not disqualify beneficiary from Medicaid or SSI EXCEPT in Kansas Copyright 2014 - Reaves Law Firm 22

STANDARDS 2 SUPPORT STANDARD Requires Trustee to support beneficiary Ascertainable Standards: Health, Education, Maintenance and Support Combined with shall Typical minor s trust language Copyright 2014 - Reaves Law Firm 23

STANDARDS Support Example Trustee shall distribute a sufficient amount from the income and principal of the trust estate to provide for the support, maintenance, health care and education of the beneficiary. Copyright 2014 - Reaves Law Firm 24

STANDARDS Support How Courts Describe "The terms of a support trust require the trustee to pay or apply so much of the trust's income or principal as necessary for the beneficiary's care or education." Strojek ex rel. Mills v. Hardin County Bd. of Supervisors Copyright 2014 - Reaves Law Firm 25

STANDARDS Support Effect Beneficiary Can Force Trustee to Distribute The beneficiary of a support trust can compel the trustee to make a distribution of trust income or principal merely by demonstrating that the money is necessary for his or her support, maintenance, education, or welfare." Chenot v. Bordeleau Copyright 2014 - Reaves Law Firm 26

STANDARDS Support Effect on Medicaid Eligibility Available Trust assets are deemed available resources and disqualify beneficiary from Medicaid and SSI Does not matter if trust is self-settled or third party-settled Copyright 2014 - Reaves Law Firm 27

STANDARDS Support Effect on Medicaid Eligibility "Courts usually conclude a support trust is an available asset,*** This is because a beneficiary of a support trust can legally compel the trustee to distribute trust assets to him or her," In Leona Carlisle Trust Copyright 2014 - Reaves Law Firm 28

STANDARDS 3 DISCRETIONARY SUPPORT STANDARD Gives Trustee discretion whether or not to distribute for the support of the beneficiary Courts have difficult time deciding whether trust assets are available resources or not Intent of Settlor is critical Copyright 2014 - Reaves Law Firm 29

STANDARDS Discretionary Support Example Trustee may distribute to or for the benefit of the beneficiary any portion of the trust estate that the Trustee, in its discretion, may deem necessary or appropriate for the beneficiary s support, maintenance, health care, or education. Copyright 2014 - Reaves Law Firm 30

STANDARDS Discretionary Support How Courts View Most Courts do not recognize this concept Instead courts often struggle to classify the trust as either support or discretionary Copyright 2014 - Reaves Law Firm 31

STANDARDS Discretionary Support Effect on Medicaid Unpredictable This results from courts struggling to determine if the trust is support or discretionary Often depends on whether trust is self-settled (available), or third party-settled (exempt) Copyright 2014 - Reaves Law Firm 32

STANDARDS Discretionary Support Restatement (Third) of Trusts and Uniform Trust Code - Reinterpret the Law Abandon distinction between support and discretionary distribution standards Call the traditional distinction arbitrary and deceptive Copyright 2014 - Reaves Law Firm 33

STANDARDS Discretionary Support Restatement (Third) of Trusts and Uniform Trust Code Treat all trusts as continuum of discretionary trusts with distribution standards ranging from objective (pure support ), to open ended (e.g., happiness ), or vague ( benefit ) of standards, or even with no standards manifested at all Copyright 2014 - Reaves Law Firm 34

STANDARDS 4 SPECIAL NEEDS STANDARD Discretion to Trustee to distribute for special needs of the beneficiary Special needs are anything not paid for by public benefits Sometimes called supplemental care trust Copyright 2014 - Reaves Law Firm 35

STANDARDS Special Needs Example Trustee shall pay to or apply for the benefit of the beneficiary such amounts from the principal or income as the Trustee, in it s sole and absolute discretion, may from time to time deem necessary or advisable for the satisfaction of the beneficiary s special needs. Copyright 2014 - Reaves Law Firm 36

STANDARDS Special Needs Two Types Strict Prohibited from distributing for any food, shelter, or anything provided from public benefits The Trustee shall only distribute from the trust in such a manner that there is no reduction or loss of any public assistance the beneficiary may be receiving or entitled to receive. Copyright 2014 - Reaves Law Firm 37

STANDARDS Special Needs Two Types Discretionary Trustee has discretion to distribute for food, shelter, or items provided by Medicaid if the trustee deems it in the beneficiary s best interest, even if causes reduction in public benefits Copyright 2014 - Reaves Law Firm 38

STANDARDS Special Needs Two Types Discretionary Example It is preferred that the Trustee not make distributions from the trust that cause a reduction or loss of any public assistance the beneficiary is receiving or entitled to receive. However, if the Trustee, in its sole discretion, determines that any distribution from this Trust will benefit the beneficiary and is in the beneficiary s best interest, then the Trustee may make such distribution even if doing so will cause a reduction or loss of public assistance benefits the beneficiary would otherwise receive or be entitled to receive. Copyright 2014 - Reaves Law Firm 39

STANDARDS Special Needs Effect on Medicaid and SSI Not Available Trust assets NOT deemed to be Available Resources and do NOT disqualify the beneficiary from public assistance Does not matter whether trust is self-settled or third party-settled Copyright 2014 - Reaves Law Firm 40

STANDARDS Special Needs A Caution for Trustees Be very careful that you Confirm all public assistance programs the beneficiary is participating in, Know the rules regarding eligibility for each public assistance program, and Make distributions only after carefully considering all of the important factors Copyright 2014 - Reaves Law Firm 41

IN SUMMARY A Trustee Should 3. Determine what distribution standard is in the trust: A. Pure Discretion B. Mandatory Support C. Discretionary Support D. Special Needs 1) Strict 2) Discretionary Copyright 2014 - Reaves Law Firm 43