Judges: DUSTIN McDANIEL, Attorney General
Filed Date: 12/17/2008
Status: Precedential
Modified Date: 7/5/2016
The Honorable David Johnson State Representative 1704 North Harrison St. Little Rock, AR 72207-5324
Dear Representative Johnson:
I am writing in response to your request for an opinion on how a "special-needs trust" established by a third-party, with the third-party's assets, impacts the beneficiary's eligibility for Medicaid.1 You present the following question:
Specifically, is a third party grantor special needs trust a countable resource of a Medicaid applicant if (1) the trust is funded with assets that are not the applicant's, (2) the trust is created and funded by an individual, other than applicant, who is not authorized to act on behalf of the applicant and is under no legal duty to act for the applicant, and (3) the trustee has discretionary authority to distribute funds in very narrow circumstances so as not to supplant or impact the applicant's benefits?
Before explaining the basis for this conclusion, I will need to clear up some terminology. I will then address the controversy surrounding portions of the Uniform Trust Code (UTC), which Arkansas has largely adopted. The controversy centers around whether the UTC has altered the rules Medicaid relies on to determine whether a trust is counted as part of Medicaid-applicants' financial resources. This matters because if an applicant has too many financial resources, the applicant is ineligible for Medicaid benefits.2
There are two key differences between the two terms, which will inform their use in this opinion.4 First, the phrase "special-needs trust" is a narrow term of art referring to a specific type of trust permitted by federal and state law.5 Second, *Page 3 special-needs trusts are usually self-settled, which means the beneficiary is also the person who established and funded the trust. Supplemental-needs trusts, on the other hand, are usually established and funded by a third-party for the benefit of someone else.
The distinction is important because the eligibility rules are very different for trusts funded with Medicaid applicants' own assets. If the trust is self-settled, and the beneficiary wants to remain eligible for public benefits, he or she must comply with the federal and state requirements for self-settled special-needs trusts.6 The common characteristic among these requirements is that the trust contains a payback provision, 7 which gives all assets in the trust to Medicaid when the beneficiary dies.8
This opinion deals solely with supplemental-needs trusts (SNTs) because that is the type of trust your question describes. Although you have used the term "special needs trust," you have also referred to a "third party grantor." If a trust is funded by a third-party, a much different set of rules applies in determining whether the trust is a countable resource for Medicaid purposes. If the beneficiary may demand a distribution from the trust, the trust is consideredavailable to the beneficiary, which renders it a countable resource for Medicaid. To determine whether a beneficiary may demand a distribution, courts look to trust law.9 *Page 4
[T]he UTC and the Restatement (Third) are a companion set, the former for legislative adoption and the latter for judicial adoption on a case-by-case basis. In Arkansas, the Restatement (Second) of Trusts, promulgated in 1957, has long been followed by the Arkansas Supreme Court. The Restatement (Third) is so new that the Supreme Court has not taken any position on it as a whole, although there is no reason to doubt that most, if not all, of it will be followed by the court.12
The debate. The debate about the UTC and SNTs centers on two UTC provisions — which Professor Foster briefly notes.13 In general, thedebate is about whether the UTC alters the old rules for determiningwhether a trust is available to the beneficiary, and therefore countablefor Medicaid purposes. To understand the debate, we will examine the pre-UTC law and then briefly survey the issues concerning the relevant UTC provisions and see what law applies today. *Page 5 Pre-UTC. The first issue in the debate centers on the distinction between "discretionary" and "support" trusts. At common law, a beneficiary's ability to compel a distribution depended on whether the trust was a "discretionary" or "support" trust, which courts determined by evaluating the trust's terms. Discretionary trusts gave the "trustee complete discretion to distribute all, some, or none of the trust income or principal to the beneficiary, as the trustee [saw] fit."14 At common law, beneficiaries of discretionary trusts generally had no right to compel a distribution.15 Support trusts required the "trustee to distribute the trust income or principle as necessary for the support and maintenance of the beneficiary."16 Unlike discretionary trusts, support trusts gave the beneficiary an enforceable right to a trust distribution.17 This is referred to as the discretionary-support continuum. The second issue in the debate is the standard to which trustees were held as they carried out their responsibilities. The debate in this regard centers on precisely what the common law required. I will deal with that in subsection B, below.
UTC Changes? The debate about the UTC is whether it alters the common-law rules such that beneficiaries of discretionary SNTs may compel a distribution. If beneficiaries can compel, the trust is available, and therefore countable for purposes of Medicaid. The first issue in debate is whether the UTC's abolition of the discretionary-support continuum means all beneficiaries can compel a distribution. The second issue is whether the common law held trustees to something less than good faith when trustees carried out their trust duties. Section 81418 requires all trustees to act in good faith, regardless of the level of discretion the settlor grants them.19 *Page 6
A. Does the abolition of the discretionary-support continuum adversely affect the ability of beneficiaries of third-party SNTs to qualify for Medicaid?
In my opinion, "no." This first flash-point appears to have subsided because the UTC's comments were amended to clarify the issue. UTC critics once argued that because the UTC abolished the distinction between support and discretionary trusts, all beneficiaries of discretionary trusts might now be able to compel a distribution.20 In response to the critics, the UTC was amended in 2004 to specifically note that the discretionary-support continuum was abolished only with respect to creditors: "The affect of this change is limited to the rights of creditors. It does not affect the rights of a beneficiary to compel a distribution." The comment goes on to note that to determine whether beneficiaries can demand distributions, we must look to the old common-law rules: "Whether the trustee has a duty in a given situation to make a distribution depends on factors such as the breadth of thediscretion granted and whether the terms of the trust include asupport or other standard."21 The critics still argue that such a clarification should be in the UTC's text, not its comments.22 Regardless, Arkansas courts view comments as "highly persuasive."23 Therefore, I believe an Arkansas court would likely cite the comments and commentators to clarify this issue and hold that the answer to the above question is "no." *Page 7
B. Does UTC § 814's requirement that trustees act in good faith — regardless of the extent of discretion granted to the trustee — alter the common law?
In my opinion, "no." Critics argue that this changes the common law, under which courts policed trustees' conduct for either bad faith or one of three undesired acts: acting dishonestly; acting with an improper motive; or failing to act.24 Then they argue that holding trustees to an affirmative standard of "good faith" raises the bar for trustees, which gives beneficiaries greater rights than they had at common law. Increasing beneficiaries rights from common law might permit them to demand a distribution.25 Several commentators have attempted to rebut these claims by arguing that the common law has always held trustees to a duty of good faith.26
Professor Newman — one of those commentators — makes two key points that decide this debate, in my view. Newman concludes that the common law has always required good faith in this context. First, he notes that many jurisdictions have cases specifically stating the good-faith requirement.27 Second, he explains why some cases describe the trustee's duty without specifically using good-faith language. Those cases usually provide that the "trustee's exercise of its discretion will not be disturbed absent one or more [] factors such as bad faith, dishonesty, an improper motive, or a failure to use the trustee's judgment."28 But, Professor Newman explains, the "different language likely does not reflect substantively different standards."29 On the contrary, requiring trustees to avoid these bad acts and bad mental states "is another way of expressing the fundamental requirement *Page 8 that the trustee must act in good faith. . . ."30 He then illustrates his argument by examining cases from five states and citing the two authoritative trust treatises.31
The respondents' arguments, illustrated by Professor Newman, seem most persuasive. A review of Arkansas's cases appears to support Professor Newman's analysis. Since at least 1883, the Arkansas Supreme Court has described the standard to which trustees are held by specifically referencing good faith. A representative example32 of this language is the following: "[T]he dealings of a trustee with the trust property are narrowly scrutinized by courts of equity. If impugned, they cannot stand unless characterized by the utmost good faith and candor."McNeil v. Gates,
In summary, in my opinion, the UTC does not appear to alter the common-law rules regarding the discretionary-support test or the common-law rules regarding trustees being held to good faith. Therefore, the UTC relies on (and to some extent codifies) the common law regarding whether a discretionary-trust beneficiary can compel a distribution.
Assistant Attorney General Ryan Owsley prepared the foregoing opinion, which I hereby approve.
Sincerely,
DUSTIN McDANIEL, Attorney General
*Page 1
In Re Appeal of Decision of Commissioner of Human Services ( 2006 )
Cranfill v. Union Planters Bank, N.A. ( 2004 )
Bailey v. Delta Trust & Bank ( 2004 )
In Re Leona Carlisle Trust Created Under the Trust ... ( 1993 )
Thorson v. Nebraska Department of Health & Human Services ( 2007 )