In a recent Michigan Court of Appeals case, In re Special Needs Trust for the benefit of Talonda Moss, Docket No 357836, 2022 WL 2760235 (Mich Ct App Jul 14 2022), the court ruled on whether a trust created for a disabled beneficiary should have been terminated when the beneficiary recovered from her disability.
As a teenager, Talonda was in a car accident, suffered a traumatic brain injury, and became disabled. Using the funds received for Talonda’s benefit as the result of the accident, her family created a discretionary special needs trust. Talonda’s mother, Wanda, was named as trustee of the trust. Paragraph 1.2 of the trust agreement described that the purpose of the trust was to make assets available to “supplement the quality of life of [Talonda] while she is alive.” That paragraph also provided that the trust was intended to qualify as a trust for a disabled person for purposes of 42 USC 1396p(d)(4)(A) and therefore be exempt from Medicaid cost recovery liens.
Over time, Talonda experienced a remarkable recovery from her brain injury. Her recovery was such that she was able to graduate from high school and university, obtain gainful employment, marry and handle her own financial affairs. Despite her recovery, the discretionary special needs trust continued to exist. Talonda therefore petitioned the probate court to terminate the trust, which Wanda as trustee opposed. The probate court found that termination of the trust was proper under MCL 700.7412(2): “The court may modify the administrative or dispositive terms of a trust or terminate the 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.” Specifically, the probate court found that the settlor had not anticipated Talonda’s recovery. Wanda as trustee appealed.
The Michigan Court of Appeals affirmed the probate court’s ruling, finding that Talonda was no longer disabled and that the purpose of the trust therefore no longer existed. Moreover, terminating the trust and distributing the assets to Talonda would serve the other stated purpose of “supplement[ing] the quality of life of [Talonda] while she is alive.” Wanda as trustee alleged that termination would be contrary to a number of asserted trust purposes, but the appellate court rejected this argument, finding that the putative trust purposes were not included in the terms of the trust agreement and that it would be improper to look outside the four corners of the trust document given the lack of any ambiguity.
This ruling has somewhat narrow application because of the type of trust involved. The trust was created to qualify for a Medicaid exemption, and as a result the trust was drafted on the assumption that the beneficiary would be disabled for life. So, this case does not mean that a trust beneficiary’s recovery from a disability will justify termination of a standard estate-planning trust. Instead, the real takeaway is the importance of clearly specifying within the trust agreement all of the intended purposes of a trust. If those purposes are stated narrowly, then it is more likely the trust may be found to be unnecessary and subject to termination if future circumstances render the stated purposes obsolete.
If you require assistance with a trust, estate or probate dispute, contact David Skidmore at dskidmore@wnj.com or 616-752-2491.
