Special Needs Trustee Must Repay Trust for Failing to Seek Public Benefits

In a recent New York case, an institutional trustee has been ordered to pay back a special needs trust almost $180,000 for its failure to make certain that the beneficiary qualified for available public benefits.

In Liranzo v. LI Jewish Education/Research (N.Y. Sup. Ct., Kings Cty., No. 28863/1996, June 25, 2013), Eirol Liranzo received $422,000 in 2003 as the result of a personal injury settlement when he was a child. This was placed in a special needs trust that specifically stated that the trustees must make a good-faith effort to determine whether Medicaid would cover home health care services prior to expending trust funds for that purpose. The trust also required the trustees to take Eirol's eligibility for government benefits into account before making discretionary payments to him or his family.

BNY Mellon, an investment bank, was named as trustee and seems to have ignored these terms of the trust. By 2009, only $3,000 remained in the trust and the bank sought court approval of its accounting for the trust. The court appointed an independent investigator who found that BNY Mellon had paid for $118,064.50 worth of home health care without making an inquiry into whether Eirol could qualify for Medicaid payments for this care. BNY Mellon had also paid for $56,320 worth of cab fares for Eirol's family and had made payments to the family that rendered Eirol ineligible for Supplemental Security Income and Medicaid.

The court finds that "it is apparent that BNY breached its fiduciary duty by authorizing each and every discretionary disbursement requested by the infant plaintiff's mother Gloria Beltres. The court appointed BNY as trustee for the very purpose of prolonging the life of the Trust, and the distributions made by the Trustee ran counter to this purpose because they could have either been avoided or were unreasonable. . . Since almost all of the assets of the Trust have been dispersed (sic.) in less than seven years, the Trustee has clearly breached its fiduciary duty."

As a result, the Supreme Court of New York, Kings County, ruled that BNY Mellon must repay the trust for $176,905.99 that it improperly spent while it was trustee.

This case should serve as a wake-up call for any trustee of a special needs trust, whether an institution such as BNY Mellon or an individual, to consider the availability of public benefits when deciding on what distributions to make. While the trust in this case specifically directed the trustee to make such inquiries, even where trusts are not so specific, trustees should be advised to consider the availability of other resources in order to prevent the depletion of trust assets.

In this case, BNY Mellon may have been justified in forgoing public benefits for Eirol if it had made the decision that doing so would serve his best interests after considering all of the circumstances. But it failed to conduct such an analysis. In virtually all cases, courts will not second-guess the decisions of trustees if they investigate the needs of the beneficiary and the availability of other resources -- whether from public agencies or other sources, and consider the size of the trust fund and the beneficiary's likely future needs. In BNY Mellon's case, the problem isn't simply that it unnecessarily depleted Eirol's trust funds, but that it did so without conducting the proper analysis.

Trustees of special needs trusts can protect themselves from the kind of challenge faced by BNY Mellon by developing systems to make sure that they carefully consider all relevant factors in making distribution decisions, such as semi-annual meetings with trust beneficiaries as well as care providers and advisors. Trustees can inoculate themselves from challenges about public benefits issues by engaging special needs attorneys to participate in these meetings or to advise them separately.