Is modification of a special needs trust possible? Even if the trust is irrevocable, and its terms are clear?
The short answer is “yes” — at least in some circumstances. A recent Texas Supreme Court case illuminates the principles. And the story is pretty interesting, to boot.
“Dick” Poe was a prominent businessman from El Paso, Texas. He owned several auto dealerships and a number of parcels of commercial real estate. One of his two sons — Troy S. Poe — has cerebral palsy, and requires full-time care.
In 2017 Dick created a trust for Troy, and transferred significant assets to it. He named himself, his other son (Richard, Jr.) and his CPA Anthony Bock as co-trustees. The trust terms required all three of them to act together; any trustee could hold up administration of the trust. There was no provision allowing modification of the special needs trust.
Wait a minute — let’s define “special needs” trust
Or was the trust even a “special needs” trust at all? By some definitions, it would not qualify. It wasn’t set up to make — or keep — Troy eligible for public benefits. In fact, the trust owned the land one of Dick Poe’s dealerships sat on, and it received significant rent. It also owned an El Paso shopping center.
The trust also included a provision allowing trustees to use trust principal for Troy’s “health, education, maintenance or support.” That kind of language is usually anathema in special needs trusts. But the primary beneficiary was (and is) disabled, and has no ability to control the use of trust funds directly. For our purposes, that would qualify it as a “special needs” trust, at least with an expansive reading of the term.
While Dick was alive, he administered the trust on his own. Neither his son Richard nor the CPA participated in most decisions. But then Dick Poe died in 2015, and everything changed.
Dick Poe’s estate dispute
After Dick Poe’s death, his son Richard and Dick’s estate got into a serious legal dispute. In fact, Richard sued the CPA and other business associates, alleging that they had taken advantage of his father. That legal dispute took several turns, and ultimately ended up in the Texas Supreme Court. Last week, the state’s high court ruled against son Richard, and essentially approved Dick Poe’s last-minute changes to his estate plan. But that story, interesting as it is, isn’t about Troy Poe’s special needs trust.
The primary difficulty arose after Dick Poe’s death. Suddenly, the two remaining trustees were locked in an expensive — and sprawling — legal battle. In fact, they would be combatants for the next seven years, at least (the fight isn’t yet over). And the trust requires all trustees to act in unison.
Soon the CPA trustee began to complain that Richard failed to respond to requests for approval. For his part, Richard claimed that the CPA trustee did not keep him informed.
A key dispute: the primary caretaker for Troy Poe, selected by Dick Poe before his death, was a significant expense. Richard claimed that she and her family were benefitting from the trust more than Troy himself. He argued that her fees and expense reimbursements often exceeded the amounts spelled out in a personal services agreement she had signed with the trust before Dick Poe’s death.
If it was impossible for the two trustees to agree on trust administration issues, what about modification of the special needs trust? Could the unanimity requirement be changed? Or was Dick Poe’s trust inviolate?
Trust modification heads to the probate court
In order to accomplish trust business, the CPA trustee asked the El Paso probate court for modification of the special needs trust. Particularly, he asked that the court:
- Add a new, third trustee to break ties
- Remove the requirement that the trustees act “together” — and allow a majority vote of trustees to govern its administration
- Better define the scope of permissible trust expenditures
- Acknowledge that Troy Poe’s welfare should be the primary concern of the trustees, and not any benefit that might flow to Richard Poe if he outlived his brother
Richard Poe agreed that some change was needed, but he demanded that the changes be submitted to a jury. The probate judge decided that trust amendment or modification was not a jury question, and denied the request. Then he
After a hearing, the probate court named a new third trustee (a cousin of Troy’s and Richard’s). The judge also named successor trustees and set up a mechanism to make sure there would always be three trustees. And the judge modified the special needs trust to allow any two trustees to make decisions.
Should Richard Poe have been able to make his arguments to a jury? The Texas Court of Appeals ruled that he should have been given that opportunity, and so reversed the modifications made to the special needs trust. But last week the Texas Supreme Court reversed that reversal.
According to the Supreme Court decision, modification of the special needs trust did not automatically involve a right to a jury trial. The Court of Appeals was ordered to revisit its decision to determine whether the Texas Constitution gives probate litigants a right to a jury trial. In the Matter of Tory S. Poe Trust, June 17, 2022.
What about Arizona?
We have been known to be surprised by appellate court holdings in the past, but we think the issues are pretty well settled under Arizona law:
- Most probate proceedings are tried by judges, and not to juries. In those relatively rare cases where a litigant may be entitled to a jury, it is probably an “advisory” jury, and the probate judge will be free to adopt — or ignore — the jury’s decision.
- Modification of a special needs trust — or, indeed, any irrevocable trust — may be possible in the probate court. The key question will usually be whether the proposed modification violates any of the “material purposes” of the trust. Of course, a trust may make it easy to make modifications. It may also include provisions that make it very difficult to make modifications. Most practitioners favor relatively easy trust modifications, since it’s hard to predict what will happen in a year or two — much less in a decade or two.