A supplemental (or special) needs trust is a means to assist a beneficiary with a disability while preserving the beneficiary’s eligibility for public benefits. As of now there is “little legal interpretation of and commentary on special needs trusts.” A California case, McGee v. State Department of Health Care Services, attempted to remedy this deficiency by granting an expansive definition to “special needs.” Although the Department of Health Care Services was the challenger to the trustee’s discretion, it did not appear on appeal.
The trial court interpreted “special needs” to include only “the beneficiary’s special needs as created by the limitations due to her condition,” with all expenses not attributable to this “very limited purpose” surcharged to the trustee. The pertinent portion of the trust instrument stated: “Special Needs include without limitation special equipment, programs of training, education and habilitation, travel needs, and recreation, which are related to and made reasonably necessary by this Beneficiary’s disabilities.” The term “special needs” is defined by the instrument as “the requisites for maintaining the Beneficiary’s good health, safety, and welfare when, in the discretion of the Trustee, such requisites are not being provided by any public agency.” McGee liberally interpreted the instrument.
“Health, safety, and welfare address more than just expenses arising from the beneficiary’s disability, and many of those expenses would not be paid by a public agency,” according to the Court in McGee. McGee interpreted the phrase, “including without limitation” to be equivalent to “including but not limited to.” Furthermore, the trust instrument at issue in this case explained that it is not a support trust. Instead, it functions “to supplement public resources and benefits when such resources and benefits are unavailable or insufficient to provide for the Special Needs of the Beneficiary.” McGee quoted extensively from CEB’s Special Needs Trusts: Planning, Drafting, and Administration to establish that “special needs” include “the very broad range of everything else a human being needs in order to live, thrive, and realize his or her potential in life.” It is “actually quite general” encompassing “the entire universe of a person’s goods and services except for food and shelter (to be covered by SSI) and medical care (to be covered by Medi-Cal).”
McGee implicitly suggested that it might have overruled the trial court’s interpretation due to federal law, even if the special needs trust instrument clearly supported the trial court’s judgment. McGee was heavily influenced by a federal Third Circuit decision preempting a Pennsylvania statute that attempted to limit special needs trusts to the trial court’s definition.[1] Moreover, the Social Security Administration eligibility rules for special needs trust beneficiaries were found to be persuasive. In calculating eligibility, the eligibility rules exclude not “only trust assets and distributions that are related to the disability” but also “household goods and personal effects from the beneficiary’s countable resources regardless of their dollar limit.”
Even with this broad interpretation that the court adopted, the trustee’s discretion is not absolute. Administration must be executed “with reasonable care, skill, and caution under the circumstances then prevailing that a prudent person acting in a like capacity would use in the conduct of an enterprise of like character and with like aims to accomplish the purposes of the trust as determined from the trust instrument.” Specifically, distributions for more than one vehicle, “jewelry that one does not wear or does not hold for family significance,” collectibles, and “animals for investment purposes, such as a horse or dog for breeding, for resale, or investment” are usually “outside the scope of the trustee’s discretion.” Even then, expenditures for such items may be permissible if “they are in the beneficiary’s best interest.”
The trustee in McGee was surcharged $73,000 for expenditures ultimately approved on appeal. However, the trustee did not appeal those sanctions.
If you have questions or concerns about how these news reports may affect you or your estate planning, please contact The Burton Law Firm at: 916-822-8700 or email info@lawburton.com for a consultation.
[1] Lewis v. Alexander, 685 F.3d 325 (3d Cir. 2012).
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California has required employers to “indemnify” employees for “necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer” in substantially the same terms since 1937 under Labor Code § 2802.
