Trust beneficiary graduates

Disabled Beneficiary Graduates; Trust Terminated

It’s not too often that a special needs trust beneficiary “graduates” from their disability. But a heartwarming Michigan case gave us a chance to reflect on the possibility this week.

A little background: a special needs trust can be established for a beneficiary who is “disabled” by Social Security standards. It can even contain funds — like an inheritance, or a personal injury settlement — that belonged to the beneficiary. But then the trust (called a “self-settled” special needs trust) must be irrevocable. So what happens if the beneficiary graduates from their disability? Does the trust continue?

Some special needs trusts do not contain the beneficiary’s money. A parent, for example, might set up a “third-party” special needs trust. The parent can put their own money into the trust. Then it doesn’t have to be irrevocable — at least until the parent’s death.

But what happens when a disabled beneficiary graduates — that is, recovers from their disability? It’s not terribly common, but it does happen. Then what happens to the special needs trust?

An injury at 16 starts our story

Talonda Mulgrew was sixteen years old when she suffered a traumatic brain injury in a car crash. Her family mobilized to provide care. Ms. Mulgrew qualified for Medicaid in her state (Michigan), and Medicaid even paid her mother and other family members as caretakers.

In 2010, after settling a personal injury claim arising from the auto accident, her mother set up a self-settled special needs trust. She added personal injury proceeds, plus some of the family money that had been saved from government assistance.

But then, remarkably, Ms. Mulgrew began to improve. She worked hard. She got an important job (she’s Director of Operations for Habitat for Humanity Capital Region in Lansing!). And she got married. This beneficiary graduated from her disability — and also from high school and then college.

At age 34, Ms. Mulgrew asked the Michigan courts to terminate her special needs trust. That would mean paying a $44,000 claim to Michigan Medicaid. Then the rest of the trust — including Ms. Mulgrew’s home — could be given to her outright.

Why not terminate the trust?

We do need to point one concern. Terminating a self-settled special needs trust almost always means paying back the state Medicaid agency. That can mean termination is unattractive in many cases.

But in Ms. Mulgrew’s case, Medicaid had “only” paid $44,000 in benefits. That could mean that freeing up the money could give her considerable autonomy and self-determination. So she decided she’d like to be a beneficiary who graduates — that is, a former beneficiary.

Her mother (the trustee of the trust) objected. She argued that the trust still benefitted Ms. Mulgrew. It provided management of the funds, and protection from bad decisions. Besides, the trust was for Ms. Mulgrew’s sole benefit — handing the proceeds over to her could benefit others (like her husband, for example). And if she ever needed Medicaid again, she’d be ready.

The Michigan probate judge agreed with Ms. Mulgrew. He noted the remarkable story of a trust beneficiary’s graduation, and directed that the trust’s assets be given to Ms. Mulgrew.

The Michigan Court of Appeals agrees

The Michigan Court of Appeals applauded Ms. Mulgrew for being a beneficiary graduate. They noted that the circumstances had changed since the trust was established, and it was no longer necessary.

The reported decision does seem to get a little confused about terminology. They describe Ms. Mulgrew’s mother as the “settlor” of the special needs trust. But under tax and public benefits law, Ms. Mulgrew was actually the settlor and “grantor” of the trust, since it was composed of her money. Her mother was simply acting on her behalf. But ultimately, the distinction made no difference to the appellate judges. Ms. Mulgrew, that rare beneficiary who graduates, was able to terminate her trust. In re Special Needs Trust for Moss, July 14, 2022.

Would an Arizona case end up the same way?

It’s rare that a special needs trust beneficiary graduates — but it’s not unheard of. We have closed out self-settled special needs trusts, and there’s no doubt that it can be done under Arizona law, as well. Of course, there is the problem of having to repay Medicaid (AHCCCS, in Arizona) for care they’ve provided, but in a case like Ms. Mulgrew’s we’d expect to be able to do the same thing.

Not every beneficiary graduates from their special needs trust — even when their condition improves. One common work-around, for example, is to keep the trust going, but possibly change the trustee. Or a beneficiary might forego Medicaid coverage; the trust might then be more flexible.

Ms. Mulgrew’s trust was a self-settled special needs trust. The rules governing a third-party special needs trust might be very different. The first concern in such a case is to read the trust’s terms. Termination might be easy — or impossible.

But we do love to see the “problem.” A special needs trust beneficiary who graduates is a wonderful problem to work on! Congratulations to Ms. Mulgrew, and all others in her position.

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