Don't Count on Courts to Fix Broken Estate Plans

A recent case from California illustrates what can happen when good intentions go awry and you rely on a generic estate plan to distribute funds to a relative with special needs. Although this case deals with an elderly trust beneficiary, the issues that it addresses are equally important when dealing with a younger trust beneficiary who has special needs.

Kenneth Boyd created a revocable living trust in 2002. According to the terms of the trust, upon Kenneth's death the funds in the trust were to be distributed to several relatives, including Kenneth's mother, Elizabeth Boyd. At the time that Kenneth created the trust, Elizabeth was over 90 years old and in frail health. Although Kenneth was aware that Elizabeth had special needs, he did not include specific language in his trust that would require the trustee to hold his gift to her in a separate special needs trust for her benefit. Instead, Kenneth's trust contained a generic provision that gave the trustee the discretion to amend the trust to allow a beneficiary to continue to qualify for Medicaid benefits if Kenneth's trust failed to protect those benefits.

Kenneth passed away in 2007 and his mother moved into a nursing home and obtained Medicaid benefits shortly thereafter. The trustee of Kenneth's trust consulted with an attorney and decided that there was no guaranteed way to protect the funds that Kenneth left for Elizabeth, so the trustee cut a check directly to Elizabeth and closed the trust. Because she received the bequest directly, Elizabeth was likely to lose her important Medicaid benefits. In order to preserve those benefits, Elizabeth's attorney-in-fact (the person who had power of attorney for her) filed suit against the trustee and asked the court to amend Kenneth's trust to create a special needs trust to hold the money for Elizabeth's benefit.

After years of litigation, a California appeals court recently ruled that the trustee did not have to amend Kenneth's trust because the wording of the trust was permissive and did not require the trustee to hold the funds in trust for Elizabeth. As a result, funds that could have been saved to supplement Elizabeth's special needs will now have to be used to pay for her stay in the nursing home, an expense that was previously covered, in full, by Medicaid.

If Kenneth's trust had explicitly contained a special needs trust for his mother, then the funds would have been held for her benefit and she would not have lost Medicaid eligibility. The same holds true for anyone planning for a relative with special needs. Instead of taking chances on a court's interpretation of a vague trust provision, it makes more sense to address a beneficiary's special needs directly. This problem often occurs because the person creating the trust does not explain to his estate planner that a beneficiary has special needs or is elderly, and it sometimes comes about because the donor does not want to spend the extra money on a separate special needs trust that she doesn't think she will need for a long time. If you are thinking of leaving money to a person with special needs, you need to be proactive and discuss the issue directly with your planner before finalizing your estate planning documents.

To read the full text of the court's decision, click here.