January 19, 2023
Court Created Special-Needs Trusts
Take-Away: While the Michigan Trust Code contains several provisions with regard to the modification or termination of a trust, the purpose of the trust, and the settlor’s intent in creating the trust, will limit the probate court’s authority to modify or terminate the irrevocable trust.
Background: The Michigan Trust Code provides probate courts extraordinary powers. One such power is the ability to enter protective orders. A recent Michigan Court of Appeals decision explains why a protective order was entered by the probate court and also why the probate court later refused to terminate the special needs trust that it created under its own protective order authority. It is an interesting case in which the appellants were representing themselves, and the Court of Appeals felt compelled in its first footnote to remark “Appellants’ brief on appeal is muddled. Reading the brief in the most generous light possible, it appears that appellants raise two overarching issues: (1) whether the trial court abused its discretion by denying their petition to terminate the trusts at issue; and (2) whether the trial court erred by awarding appellees trustee and attorney fees.”
In re Chandu Mansharamani Living Trust, Michigan Court of Appeals, No. 356780, October 20, 2022
Facts: Chandu created a revocable trust in 2008 in which he named several beneficiaries of the trust. Chandru died in 2013. By 2018 the probate court was active in the administration of Chandu’s the trust. A co-trustee was appointed at that time to assist the named trustee in the administration of Chandu’s trust. A guardian ad litem was also appointed for two trust beneficiaries- Rita and Karuna. In 2019, the probate court ordered the distribution of Chandu’s trust assets. However, because Chandu’s former spouse and his daughter were then receiving federal benefits (the origin or nature were not fully described in the court’s decision) the probate judge entered protective orders to establish special-needs trusts on behalf of the ex-wife (Rita) and the decedent’s daughter (Karuna.) Apparently, Rita was then receiving Social Security Disability Income, but had not filed for Medicaid for several years. Karuna received Social Security Income benefits and Medicaid. Accordingly, when the trust assets were distributed to the named beneficiaries, Rita and Karuna’s distributive shares were deposited in their special-needs trusts created under the probate court’s protective order. The probate court appointed Rita’s conservator as the trustee of both special-needs trusts. Shortly after the creation and funding of these two special-needs trusts, Rita and Karuna promptly started filing petitions in the decedent’s trust administration proceeding to terminate their special-needs trusts with the distribution of the trust assets directly to Rita and Karuna. Rita and Karuna both claimed that they did not need a trustee to handle their financial affairs, and that the court-appointed trustee had failed to communicate effectively with them.
Probate Court: The probate court refused to terminate the special-needs trusts. The judge’s order explained that if Rita or Karuna needed a distribution from their special-needs trust they could contact the court-appointed trustee by email, whose email address was in the court order. Thus, the probate judge found that there was no legal basis to terminate the two special-needs trusts.
Court of Appeals: The Court held that the probate court did not abuse it discretion in denying the petition to terminate the two special-needs trusts.
Initially, the Court found that due to the court order to distribute all of the assets of the decedent’s revocable trust, no further action needed to be taken with respect to that trust. As such, the sole focus of the appeal was on the petition to terminate the probate court ordered special-needs trusts. With regard to those two special-needs trusts, the Court noted the following:
Unanticipated Circumstances: Rita and Karuna did not provide the Court with any statutory basis to support their claim that the special-needs trusts were required to be terminated. The Court found that the most plausible ground to terminate the special-needs trusts was MCL 700.7412(2), citing an earlier but similar court decision with respect to the termination of a special-needs trust, In re Special Needs Trust for Moss (2022.) MCL 700.7412 governs the modification or termination of a trust because of unanticipated circumstances or an inability to administer the trust. That statutory section applies to revocable and irrevocable trusts:
“The court may modify the administrative or dispositive terms of a trust if, because of circumstances not anticipated by the settlor, modification or termination will further the settlor’s stated purpose or, if there is no stated purpose, the settlor’s probable intention.”
Court Discretion-Stated Purpose Still Exists: The Court concluded that the probate judge did not abuse any discretion in deciding not to terminate the special-needs trusts under MCL 700.7412(2), or any other provision of the Michigan Trust Code. In evaluating a claim of abuse of discretion, the Court looks to the purpose and intent of the trust; the intent of the settlor is to be carried out as nearly as possible, to be determined from the trust document unless the language used is ambiguous.
“The language of the Special-Needs Trusts is clear that the Trusts were intended to serve as discretionary, supplemental sources of personal funds while ensuring that appellants continued to qualify for federal benefits. Rita’s Special-Needs Trust also stated that she was a legally incapacitated individual, whereas Karuna’s Special-Needs Trust designated her as a disabled person under state and federal law.
While both Rita and Karuna claimed that there was no court order for their health care and that both were able to handle their own finances, neither provided to the probate judge any evidence that their disability had ended, or that they were able to handle their own financial affairs. Instead, the Court noted that both Rita and Karuna were protected by a medical guardianship and both were receiving federal benefits. Consequently, the purpose of the special-needs trusts continued to exist.
As almost and afterthought, the Court made the final observation (perhaps with some tongue-in-cheek): “Finally, we note that appellants’ unsubstantiated allegations in the probate court and in this Court that appellees [trustees, guardians, and attorneys] engaged in ‘extreme body touching torture’ and had ‘spy terminals’ sending ‘dangerous signals’ appear to underscore the need for the Special-Needs Trusts. They have also raised unsubstantiated claims that Karuna experienced ‘breast damage’ and ‘menses stop’ because of appellees’ alleged misconduct. Under the circumstances, we conclude that the probate court properly exercised discretion by denying appellants’ petition to terminate the Trusts”
Observation: The supposition, but not stated in the court decision, is that both Rita and Karuna were to receive outright distributions from Chandu’s trust on his death. Hence, the entry of protective orders by the probate judge withholding those distributions to them from Chandu’s trust. What is a bit surprising in the Court’s decision is that it only makes passing reference to the probate judge’s decision to enter protective orders that ‘wrapped’ Rita and Karuna’s inheritances in special-needs trusts. While protecting their governmental benefits was the obvious reason for the entry of the protective orders, there is no real discussion on why that was appropriate and a reasonable exercise of the probate court’s unilateral authority. Then, when citing the standard for the possible termination of Chandu’s irrevocable trust as ‘furthering the settlor’s stated purpose or probable intent’ there was no mention that it was actually the probate judge’s intent, not Chandu’s, to protect Rita and Karuna’s governmental benefits. Nor was there any mention of the protective orders being Chandu’s ‘probable intention.’
Conclusion: There were other issues raised in the decision, e.g. awarding reasonable trustee and attorney fees, but the primary focus was the Court’s refusal to terminate irrevocable special-needs trusts. It is pretty clear that the Court had to deal with confusing and ambiguous pleadings and perhaps some wild and/or unreasonable demands of Rita and Karuna. As such, this decision might not have much weight as precedent, but more as a reminder that it may not be as easy as some folks think, to terminate a trust under the Michigan Trust Code.