Recent Case Proves "Sole Benefit" Rule Is by No Means Cut and Dried
If you are administering a first-party special needs trust, pay attention to who is benefiting from items purchased by the tr...Read more
It can be very easy for untrustworthy people to steal from a trust designed to benefit a child with special needs, as a recent case from Rhode Island illustrates.
Matthew Goodness was born with cerebral palsy and later received a deferred annuity as part of the settlement of a lawsuit. The annuity payments began on Matthew's 18th birthday, and were deposited into a special needs trust established by his parents for his sole benefit. His parents, Mary and Francis, were named as co-trustees of the trust, and Fleet Bank (now Bank of America) was named as successor trustee along with friends of the family who were no longer in contact with Mary and Francis.
As soon as the annuity payments began, both parents, who were by then separated and seeking a divorce, started withdrawing the payments from the trust and placing the funds into their separate bank accounts. Mrs. Goodness, who lived next door to Matthew, used funds from the trust to pay for her rent and grocery bills, while Mr. Goodness spent the money on beer. Neither parent coordinated Matthew's care with the other (although Mrs. Goodness admitted that she used drugs with Matthew's personal care attendant). Nevertheless, they did succeed in paying Matthew's necessary expenses. Mrs. Goodness eventually asked a court to remove Mr. Goodness as co-trustee, and Mr. Goodness asked the same court to remove Mrs. Goodness. At a hearing, both parents testified that they had not kept records of the trust's activities.
The Rhode Island Superior Court removed both parents as trustees and appointed Bank of America as the successor trustee. The court concluded that "both Francis and Mary have (1) breached their duty of loyalty to the Trust; (2) impermissibly co-mingled Trust funds with their personal funds; (3) wasted and depleted Trust fund assets; and (4) breached their fiduciary duty to the Trust."
While the Goodness case presents an extreme example of commingling trust funds with personal funds, it should also serve as a warning for more reliable parents who are the trustees of a special needs trust. Trustees of these trusts have what is called a "fiduciary duty" to manage the trust in the best interests of the beneficiary. One of the key aspects of a special needs trust (or any trust, for that matter) is the separation of trust assets from the beneficiary's and the trustee's personal property. In this sense, the trust serves as a separate entity. A trustee who takes the funds intended for the beneficiary and uses them for his own personal gain without approval has not only violated his fiduciary duty, but has also broken the law by stealing trust funds.
Busy parents who are also trustees can commingle funds accidentally, especially if they are using their own money to pay for most of the goods and services their child with special needs requires. The easiest way to avoid even the appearance of impropriety is for the trustee to maintain a separate trust account and to never transfer trust funds into a personal account for any reason. In the Goodness case, however, both parents were stealing funds from the separate trust account. One solution to this problem is to establish a committee of trust protectors or trust advisors, who suggest treatment options for the beneficiary and also monitor the trustees. Having an independent trustee serve alongside a family member could also lessen the risk of mismanagement. In any case, the best remedy is for the trustee to always keep the best interests of the beneficiary at heart and to work with a qualified special needs planner to monitor and manage the trust.
To read the full text of the Goodness decision, click here.