The Luxury Trust-estate Planning for the Elderly Poor and Disabled
| Publication year | 1987 |
| Pages | 2143 |
1987, December, Pg. 2143. The Luxury Trust-Estate Planning for The Elderly Poor and Disabled
The issue this article addresses is whether trusts created for the supplementary needs of incapacitated persons(fn1) can be legitimately considered as available resources by public support creditors.(fn2) Practitioners should be aware that such trusts can be created for their elderly and disabled clients.
This issue of supplementary or luxury trusts remains essentially unaddressed in Colorado by the appellate courts. While State of Colorado v. Trailles(fn3) has been appealed and the district court judgment reversed (August 20, 1987), the appellate decision was rendered on the narrow ground that a valid assessment had not been made under CRS §§ 27-12-103 and 104. At least two Colorado trial courts have, in addition to Trailles, considered aspects of this issue.
In Trailles, the trustee was to disburse principal and income as needed "to properly care for" the beneficiary. The beneficiary was incompetent and received state care and support. Judge Fullerton wrote, ". . . even with a spendthrift trust, the trustee may be required to pay for the costs and expenses of a beneficiary who is a ward of the state."(fn4)
Trailles involved a support trust. Therefore, it is understandable that the district court concluded that if a person has private income with which to pay for his or her own support, care and maintenance, the state and its taxpayers should not have to pay. The court stated that the standard for disbursement set out in the trust "to properly care for" was a declaration of intent by the testator to utilize the trust corpus as the source of primary support for the beneficiary. Whether this same conclusion would have been reached if the trust was clearly intended for purposes other than primary support is not reflected in the opinion.
Trailles was a mentally ill adult. She had been committed to the Colorado State Hospital in 1961. She died in 1979 at the age of 69 prior to any assessment being made by her custodian. The testamentary trust created by the patient's mother provided for trustee discretion to properly care for her mentally ill adult daughter. While the issues of the testatrix's intent and the effect of the trust's spendthrift provisions were raised on appeal, they were not addressed. The appellate court determined that a valid assessment by the Colorado State Hospital had not been made pursuant to CRS §§ 27-12-103 and 104 and based its opinion on that reality.
The court concluded that a trustee has no duty to inform and account to the hospital or to the beneficiary's creditors unless such persons have acquired a lien or until they have encumbered the beneficiary's property by judgment or decree. The question of whether the trust corpus was the beneficiary's property did not arise. Such creditors can reach an interest of a beneficiary by levy. A letter to the trustee who is neither conservator nor guardian does not rise to this level. While the result was positive for the Trailles remaindermen, critical public policy trust issues relating to spendthrift protection and the preservation of express testator intent remain unanswered in Colorado.
In State of Colorado v. Rosier,(fn5) the court held that a trust protective provision specifically absolving the trustee from disbursing funds to a state or federal agency providing support for a beneficiary was void as against public policy. Rosier involved a hybrid trust. The institutional trustees were to provide for the beneficiaries' "welfare, comfort, recreation and support." Further, they were to acquaint themselves with the beneficiaries' special health problems and take into consideration their individual needs. The trustees had complete discretion as to how these special needs could best be met and satisfied. The instrument contained the following instruction:
The Trustee shall not be required to pay any monies whatsoever for the care, maintenance or upkeep for either of [the] children so long as they
are confined to any governmental institution, State or Federal, . . . that is primarily tax supported, especially any institution which detains persons for the "benefit of society."(fn6)
In response to this seemingly protective language, District Court Judge Gallagher wrote:
The court concluded that the settlor's intention that trust property not be used in lieu of state resources is contrary to the purpose and intent of the statute Since a provision that specifically excludes the state as a creditor is contrary to public policy, the court held that such a provision is not binding. It also held that the plaintiff's status as a government agency did not affect its status as a support creditor.(fn8)The legislative purpose underlying 27-12-101 C.R.S. is to relieve the public of some of the costs of caring for the mentally ill and developmentally disabled by permitting the state to seek reimbursement from those patients with private resources.(fn7)
This latter finding is critical to the Rosier decision. Where a trust is determined to be for purposes of support, a government creditor, even in a spendthrift trust, may not be treated differently than a private support provider. However, where a trust is established for purposes other than support, and no duty of support exists or remains with the trust creator, the question remains in Colorado as to whether its corpus may be similarly invaded.
Another Colorado trial court case considering a trust corpus as an available resource affecting a public assistance creditor is Pusch v. Dept. of Social Services.(fn9) In this case, a different conclusion resulted than in both Trailles and Rosier. A defendant in a personal injury suit established a $50,000 trust for the "support, maintenance, health, education, comfort and welfare" of a substantially injured child. The court determined the issues to be (1) whether the trust may be considered an available resource to determine eligibility for medical assistance under Medicaid, and (2) if it were not an available resource, whether such a determination is contrary to public policy.(fn10)
The Denver District Court held that the trust established for the injured child was not an available resource for Medicaid eligibility purposes. Since the funds were not freely available to Pusch, they were not available to his creditors. The trust created by the defendant-settlor was not a support trust. The court observed that the settlor no doubt was indifferent to how the money might be spent, wanting only to avoid further liability. However, the terms of the trust strongly suggest a support purpose since they call for distributions for the beneficiary's "support, maintenance, health, education, comfort and welfare." Notwithstanding these standards, the court found the intent to be for the child's supplemental care.(fn11)
The Pusch court stated that if the sovereign intended public policy to include a supplemental and discretionary trust as an asset of a disabled...
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