Special needs trusts are usually structured as discretionary trusts.[1] Trust law recognizes the validity of discretionary trusts. Except to the extent trust property was contributed by the beneficiary, the Code provides that a transferee or creditor shall not compel a trustee to pay any amount payable only in the trustee’s discretion regardless of whether the trustee is also a beneficiary.[2] While this Code provision has not been tested in the Medicaid context, it suggests that a third party trust created for the beneficiary enjoys creditor protection even if the beneficiary is the person exercising discretion over distributions.[3]
A distribution standard may restrict access to trust income and assets in a manner similar to a spendthrift provision. Even when discretion is the intended standard, there is no presumption that the trust is a protected discretionary trust; when analyzing trusts, different courts have reached different conclusions.[4] In general, three distribution standards restricting distributions[5] are addressed in the Restatement of Trusts: (a) support trusts,[6] (b) simple discretionary trusts and (c) a typical discretionary trust.[7] The latter two trust types are distinguished because a simple discretionary trust does not include terms like “sole discretion” or “absolute discretion,” while the typical discretionary trust does include those words. Even so, a grant of absolute discretion over distributions still implies a duty of good faith.[8] In the public benefits context, a number of cases have turned (rightly or wrongly) on a court’s determination that a trust was either a support trust or a discretionary trust. Support trusts generally fail to protect assets in the Medicaid context because the risk that planners are seeking to avoid is necessary healthcare.
If the trust is a discretionary trust, a court is not permitted to change a trustee’s decision to exercise or not to exercise a discretionary power unless it determines that the decision was an abuse of discretion.[9]
Notes:
1. Discretion is a secondary method, in addition to the spendthrift provision, of placing trust income and assets beyond a creditor’s reach; the two devices are commonly used together. See J. Eason, supra, at 2629-2630. “The key as to whether or not the trust assets will be held to be available is the discretion of the trustee.” T. Begley, Drafting Special Needs Trusts: What You Need to Know (2007), at 11 (available on the internet). With Medicaid Trusts (other than special needs trusts) discretion is less important because, as elsewhere in this paper, a self-settled Medicaid Trust is subject to the “any circumstance” rule.
2. O.C.G.A. § 53-12-81.
3. The Code does provide, however, that a beneficiary who is serving as trustee only has discretion over distributions if the power is exercised in accordance with an ascertainable standard and that it cannot be exercised to satisfy the trustee’s legal obligations. O.C.G.A. § 53-12-270. The POMS distinguish mandatory trusts from discretionary trusts. “A mandatory trust is a trust that requires the trustee to pay trust earnings or principal to or for the benefit of the beneficiary at certain times… The trustee has no discretion as to the amount of the payment or to whom it will be distributed.” POMS SI 01120.200.B.9. On the other hand, a “discretionary trust is a trust in which the trustee has full discretion as to the time, purpose and amount of all distributions. The trustee may pay to or for the beneficiary, all or none of the trust as he/she considers appropriate. The beneficiary has no control over the trust.” POMS SI 01120.200.B.10. Some attorneys take the position, as the Georgia Trust Code seems to indicate, that the beneficiary may also serve as trustee without this dual role creating an eligibility issue. See, e.g., E. Farr, et al., Trusts for Senior Citizens (Ali-Aba 2009), at 25. Conservative drafters will not test this theory since the POMS indicate that a beneficiary is someone who “does not hold legal title to trust property.” POMS SI 01120.200.B.4. They also indicate that a countable trust is one where the beneficiary can direct the use of trust principal, POMS SI 01120.200.D.1.a, and that where “the trustee has the legal authority to withdraw and use the trust principal for his/her own support and maintenance, the principal is the trustee’s resource for SSI purposes in the amount that can be used.” POMS SI 01120.200.D.1.b.
4. In Henderson v. Collins, 245 Ga. 776 (1980), the Court found that a trust is not a discretionary trust if the beneficiary is ultimately entitled to the whole or a specific part of the trust. In Henderson, citing Restatement (Second) of Trusts, § 155, the court held that the factor preventing the trust from being treated as a discretionary trust was the beneficiary’s right (or lack of a right) to a mandatory distribution when the trust terminated.
5. Former NAELA President, Craig Reaves, writes that there are four trust distribution standards, but only two work in special needs trusts. They are (1) strict special needs, prohibiting the trustee from making any distribution for food, shelter or anything else that would cause a loss of eligibility; (2) totally discretionary; (3) support; and (4) discretionary support. Reaves argues that both the support and discretionary support standards likely make the trust countable for public benefits purposes. C. Reaves, Which Trust Distribution Standard to Use When Drafting a Trust for a Person Who Has a Disability, 20 NAELA News 12 (2008).
6. In the absence of a spendthrift provision, a support trust is nonetheless be beyond the reach of the beneficiary and his or her creditors except as needed for support. See Restatement (Second) of Trusts, § 154; citing Barnett v. Montgomery, 79 Ga. 726 (1888). See Comment “b” of § 154 distinguishing a support trust from a spendthrift trust. See J. Eason, supra, at 2628-2629. It would still be countable for purposes of public benefits eligibility. See Restatement (Second) of Trusts, § 157(b) for exception permitting creditors to reach a support trust where necessary services or supplies are rendered.
7. A discretionary trust is distinguished from a spendthrift trust and a support trust. See Restatement (Second) of Trusts, § 155, Comment b. “In a discretionary trust it is the nature of the beneficiary’s interest rather than a provision forbidding alienation which prevents the transfer of the beneficiary’s interest. The rule stated in this Section is not dependent upon a prohibition of alienation by the settlor; but the transferee or creditor cannot compel the trustee to pay anything to him because the beneficiary could not compel payment to himself or application for his own benefit.” See also J. Eason, supra, at 2627-2628.This limitation does not apply where the beneficiary is the settlor and created the trust for his or her own benefit. See Restatement (Second) of Trusts, § 156(2). There are also situations where drafters attempt to achieve a “blended” solution which is usually not desirable.
8. O.C.G.A. § 53-12-260; P. Tiernan, A Trustee’s Duties and Responsibilities Under Discretionary Invasion Provisions, 79 Florida B. J. 50 (2005). In McPherson, supra, summary judgment in favor of the trustees was affirmed because there was no evidence of bad faith regarding discretionary distributions.
9. O.C.G.A. § 53-12-363(a); Restatement (Second) of Trusts, § 187.
