Trusts, Estates and Succession

Dave and Molly have been married for many years.  They have an estate worth $1.5 million which includes their home, bank and brokerage accounts and life insurance.  They have three adult children: Manny, Moe and Jack.  Manny and Moe are successful businessmen who are financially secure.  Jack, though, was born with Down’s Syndrome and is moderately impaired.  Although he is able to communicate with others and can engage in a number of activities, he is unable to work and will never be able to support himself.  In addition to the love of his family, Jack is supported by Supplemental Security Income (SSI) and Medicaid.

Recognizing Jack’s limitations, Dave and Molly execute a will which sets aside a share for Jack in a trust to pay for “his health, education, maintenance and support.”  In order to ensure that he receives enough to provide for his care, they leave one-half of their estate to him and name him as a one-half beneficiary of their life insurance policy.  When they die, Jack’s SSI and Medicaid are jeopardized as he cannot have more than $2,000 in his name.  The receipt of life insurance proceeds alone gives him more than this amount.  The trust is considered his money, too, as it is for his health, education, maintenance and support.   These terms make the trust a support trust and are counted by the government as his own.

Despite the shoddy planning, Jack’s benefits can be saved.  Over the past few decades, the law has developed to allow for what is known as a reformation.  Reformation allows for a “rewriting” after death of wills and beneficiary designations which were not properly established.

In essence, the Court has the ability to reform a will, as well as the beneficiary designation of non-probate assets.  The Court may do so under the doctrine of probable intent. In New Jersey, the seminal case for reformation  is IMO Estate of Branigan, 129 NJ 324, 609 A. 2d 431 (1992). In this case, the Supreme Court of New Jersey stated that the doctrine of probable intent permitted the reformation of a will by dividing a single qualified terminal interest property trust into two such trusts, as the alteration did not change any substantive disposition request under the will, and it effectuated the Testator’s desire to achieve maximum estate tax savings. In doing so, it was noted that “in ascertaining subjective intent of testator under the doctrine of probable intent, the Courts will give primary emphasis to Testator’s dominant plan and purpose as they appear from the entirety of the will when read and considered in light of surrounding facts and circumstances; so far as the situation permits, the Court will ascribe to testator those impulses which are common to human nature and will construe the will so as to effectuate those impulses.” Id at 324.

The principle of reformation, set forth in Branigan, applies to other means of post-mortem distribution as well as to wills. Many courts have previously recognized the doctrine of probable intent as to trusts and other non-testamentary instruments. Moreover, in 2005, the State of New Jersey revised its probate laws to accept relevant and significant portions of the Uniform Probate Code. In this instance, N.J.S.A. 3B:1-1 expanded the definition of the “governing instrument” subject to its control. Specifically, it states, “’Governing instrument’ means a deed, will, trust, insurance or annuity policy, account with the designation “pay on death” (POD) or ‘transfer on death’ (TOD), security registered in beneficiary form with the designation “pay on death” (POD) or “transfer on death” (TOD), pension, profit-sharing, retirement or similar benefit plan, instrument creating or exercising a power of appointment or a power of attorney, or a dispositive, appointive, or nominative instrument of any similar type.”

Thus, after the deaths of Dave and Molly, their Wills can be reformed to convert the support trust into a Special Needs Trust which allows for funds to be set aside in a manner which benefits Jack but preserves his government benefits.  The beneficiary designation of their insurance can be changed so that the share allocated to Jack can be transferred into his reformed trust.  By utilizing this doctrine, deficient estate planning can be rectified to preserve the intent of Dave and Molly, and to protect Jack.

Choosing the Right Fiduciary

Arguably, the single most important task for parents who are planning for the care of a child with special needs after their passing is to ensure that they pick the right trustee to manage the trust established on behalf of such child.  The temptation is to make a sentimental choice of a family member or to accept the recommendation of a bank or trust company based solely on the recommendation of an attorney, accountant or financial advisor.  However, the selection of a trustee for a special needs trust must reflect the unique elements and challenges inherent in managing and administering it.  The failure to select the proper fiduciary can lead to disastrous results for the child with special needs.

The core qualification of any proposed trustee for a special needs trust mirror those for other financial based estate planning documents such as an executor under a will or an agent under a general durable power of attorney.  These fiduciaries needs to be trustworthy and have the common sense to properly manage money, as well as to seek professional assistance when necessary for the performance of his, her or its duties.  For the most part, these qualifications will suffice for a will or power of attorney, as the job of the fiduciary is to properly invest assets and make mandated disbursements and distributions.

In order to administer a special needs trust, however, there need be two additional qualifications.  The first is to have a knowledge of the laws effecting needs-based public benefits and the changes which are frequently being made to same.  The second is to be ready, willing and able to have an ongoing and meaningful relationship with the beneficiary so that his or her needs are properly ascertained and met.  Far too often these qualifications are not considered.

One potential trustee is a sibling or other family member.  The thought is that a family member, especially a brother or sister, will do what is right for the beneficiary.  However, there are numerous pitfalls with this choice:

1. The sibling is typically a remainder beneficiary of the trust, which means that he or she will often inherit part or all of what is left from the trust when the child with special needs dies.  This poses at the very least a potential conflict of interest, as the more spent on the beneficiary the less the trustee will receive upon the beneficiary’s death.
2. The sibling and beneficiary do not see eye-to-eye on how the funds should be distributed.
3. The sibling inadvertently gives cash to the beneficiary jeopardizing needs based benefits.
4. The sibling, unaware of the intricacies of this area of law, makes expenditures which disqualify the beneficiary from his or her benefits.
5. The sibling mismanages or steals the funds.
6. The sibling predeceases the beneficiary.

An alternative to an individual is a corporate trustee.  A corporate trustee may merge with another entity but it will never die.  A corporate trustee can arguably mismanage the trust assets but it will not steal.  However, not all corporate trustees are qualified to be trustees of a special needs trust.  Although most should be able to invest and manage trust assets prudently, there are far too many banks and trust companies who do not understand this area of law, and will make distributions that lead to the loss of public benefits for the beneficiary.

Even worse, the corporate trustee will have no relationship to the beneficiary.  This point was highlighted in 2012 with the decision know as In The Matter of the Accounting by J.P. Morgan Chase, N.A. v. Marie H.  Marie H. died in 2005, leaving behind a net estate of $8,000,000 to be divided equally between her two children, one of whom, Mark, was an adult with profound disabilities.  Inexplicably, his trust was funded with less $1,500,000, rather than approximately $4,000,000.  Despite helping themselves to commissions and fees, the co-trustees, J.P.Morgan and the attorney who drafted the trust, had never visited Mark in the years which followed his mother’s death, nor had they spent a penny of the trust money on him.

In all, the right trustee has to possess all of the qualities mentioned herein.  More often than not, the trustee should be an organization which specializes in these trusts, of which there are a few.  To insure that the funds are properly distributed, the trustee can work with a distribution director, which is a group that handles personal contact with the child with disabilities, and guides distributions to reflect the beneficiary’s needs while preserving his eligibility for benefits.  If family is to be involved, it can be in the role of a trust protector.  A trust protector can monitor the actions of the trustee and remove and replace it when necessary.

A special needs trust can be of great benefit to a child with disabilities.   However, the trust is only as effective as the people or financial institution managing it.  When preparing a special needs trust, remember that the selection of the trustee is of paramount importance and must be undertaken with great care and diligence.

For the Children

Parents who have a child with special needs often undertake estate planning to insure that any inheritance left for that child will be preserved for his or her benefit.  Proper planning will preserve eligibility for needs based government programs such as SSI and Medicaid while allowing the child’s inheritance to flow into a trust that can enhance his or her standard of living.  Yet prudent planning recognizes not only the distribution and management of an inheritance, but also the handling of the personal, medical and financial issues that will arise in the life of that child.

Parents frequently are under the misimpression that they have the legal right to always make decisions on behalf of a child if he or she has disabilities.  Understandably, many rationalize that such a child is always a child, never truly an adult, and thus will always need their oversight and protection.  The law, however, states any individual, regardless of the existence of a disability, is considered emancipated at the age of eighteen (18).  Thus, parents who undertake estate planning for themselves need to undertake the same on behalf of their children.

This planning can come in two forms.  The first is known as a guardianship.  A guardianship is a process where a court declares a child to be mentally incapacitated.  In doing so, the court finds that this child is unable to make personal, financial and medical decisions on his or her own behalf.  The court thereby appoints one or both of the parents to make these decisions on their behalf.  In doing so, it can establish a plenary guardianship, which allows parents to make any and all decisions.  An alternative is a limited guardianship, which allows the child to retain the right to make certain decisions, typically of a nominal nature.

The second form of planning is voluntary estate planning.  Just because a child has disabilities does not mean he or she dos not have the mental capacity to execute his or her own estate planning documents.  If a child knows what she owns and to whom she wants to leave it when she dies, she can execute a Will.  If she knows that she is executing a document which provides authority for her parents, or anyone else of her choice for that matter, to assist her in making medical, personal and financial decisions, she can execute an advance directive (i.e. a living will and health care power of attorney) and a general durable power of attorney.  If this option is viable, it is often preferable as it is far less costly to establish and maintain than a guardianship.  Moreover, it avoids the need to publicly declare a child as mentally incapacitated.

In all, planning is necessary for children with special needs, as well as their parents, as it ensures such children’s well being when they become adults.  Proper counsel can help guide parents in establishing the best possible plan for their, and their child’s, particular circumstances.

Joint Tenancy With a Right of Survivorship (JTWROS) is a manner by which many of us hold bank and other financial accounts with others.  It is a traditional method of account ownership that has many benefits.  It commonly reflects the unity between spouses.  It avoids probate when one party dies.  It can be used for administrative convenience when one party ages and requests the help of another party, typically a child, in managing his or her financial affairs.

Unfortunately, many perils have arisen in using these accounts.

Peril #1

Estate Taxes:  Mike and Julie have been married for 50 years.  They have approximately $1,300,000 in assets.  As New Jersey residents, they know that when they die, any assets over $675,000 are subject to an estate tax.  In their case, this tax will be approximately $50,000.  To avoid this tax, they each execute a Will with a Disclaimer Trust, which will shield $675,000 each, of $1,350,000.  However, all of their accounts are owned jointly; thus, when the first spouse dies, everything goes to the survivor and the Disclaimer Trust is never funded.

Lesson:  Jointly held accounts can lead to unnecessary taxes.

Peril #2

Nursing Home Costs:  Jenny, who is single, has had her mother, Harriet, as a joint owner of her bank accounts for years, so that Harriet can take care of managing her money if Jenny ever becomes incapacitated.  Unfortunately, Jenny’s father, George, has a stroke and needs to enter Happy Acres Nursing Home for permanent nursing care.  After George and Harriet have spent down their funds to pay for part of George’s care and retain some assets for Harriet, Harriet applies for Medicaid on behalf of George.  During the application process, Jenny’s account is discovered.  The Medicaid office takes the position that those accounts need to be spent as the legal presumption is that they are the property of Harriet, and spouses must spend down their assets even on behalf of their husbands or wives.

Lesson: Your assets can be exposed to the liabilities of a joint account holder. 

Peril #3

Theft of Inheritance:  Frank has four children whom he loves very much and his Will treats them equally.  Due to a decline in health, he puts the name of his daughter, Mary, on his financial accounts as a joint holder so she can manage his finances and pay his bills.  He fully expects that any balance in these accounts will be divided equally among his children when he dies.  However, when he dies, Mary tells her siblings that the money is all hers.  The law supports her as it states that there is a presumption that jointly held accounts pass to the surviving owner.

Lesson:  A joint account holder can thwart one’s estate planning goals.

Certainly, there is a time and place for the establishment of jointly held accounts.  However, one must evaluate the disadvantages that can arise when setting them up. Prudent legal advice can anticipate and avoid the scenarios detailed above, as well as other perils.