Search
Close this search box.

Surcharge Order Entered Against SNT Trustee

Print Article
Surcharge order

It can be hard for the trustee of a special needs trust to figure out what expenditures are permitted. The trust document might give some direction. Medicaid and Social Security eligibility workers will review the actual expenditures. And often, a court is looking over the trustee, as well. The court is the only one, though, that can enter a surcharge order against the trustee.

What is a surcharge order?

When a trustee is required to account to the court, expenditures are usually reviewed after the fact. For example, the trustee might determine that it makes sense to purchase a vehicle for the beneficiary, or pay tuition expenses. The trustee might also collect a fee.

Once the trustee submits her account for court review (most often, an annual report), the court might agree that the expenditures all make sense. On the other hand, the court might rule that the trustee should have exercised more caution. The judge might order the trustee not to make similar distributions in the future, but allow the past expenditures.

In rare cases, though, the judge might decide that payments from the trust violated the trustee’s fiduciary duty. The challenged expenditures might have been self-serving, or just poor decisions. The court might decide that the trustee’s decisions violated her fiduciary duty.

When the trustee misbehaves, the court has several choices. The trustee can be removed, and a new trustee appointed. The trustee can also be ordered to return the disapproved expenditures to the trust. That latter type of decision, a surcharge order, can mean that the trustee must dip into her own funds to repay the trust.

Melodie Scott’s failures as trustee

In 2004, Californian Melodie Z. Scott, of Conservatorship and Resources for the Elderly (CARE), Inc, was appointed as trustee of a special needs trust. The beneficiary, a then 7-year-old girl with cerebral palsy, attention deficit hyperactivity disorder and seizures, lived with her mother in Riverside County, California.

The initial funding for the special needs trust was a little under $230,000. It came from a medical malpractice settlement arising from the beneficiary’s birth. For the next seven years, Ms. Scott administered the trust. In 2012, she filed a petition for approval of her trust account, and for termination of the trust.

In her report to the court, Ms. Scott acknowledged that she had charged over $34,000 in trustee’s fees. She had also paid for travel for the beneficiary, her mother and (sometimes) her grandmother or great-aunt. The vacation trips included Jamaica, London, Hawaii and Washington, DC. The special needs trust also purchased a vehicle for the beneficiary’s mother, and paid caretaking fees to the beneficiary’s mother.

When the trust had diminished to a little more than $15,000, the trustee decided it made no sense to continue. At that point, she simply distributed the remaining balance to the beneficiary’s mother for purchase of a residence. The trustee did not, however, monitor the expenditure or insist on any interest in the residence for the trust. In fact, the distribution was not used to purchase a residence but to pay the mother’s household expenses.

Other items contributing to the surcharge order

As the court considered Ms. Scott’s 7-year accounting, several other points became apparent:

  • Ms. Scott’s license to operate as a professional fiduciary had been suspended for a little over two years, during which time she (a) did not inform the court and (b) continued to collect a fee.
  • Trustee fees had been paid without prior court approval — possibly in violation of California rules about court-created trusts.
  • The trustee had not looked at the trust’s terms for guidance about distributions; she testified that the trust was a “cookie-cutter” special needs trust.
  • The beneficiary’s mother, who had received significant distributions from the trust, failed a background check and was disqualified from serving as the beneficiary’s caretaker just as the trust was winding down.
  • Although the trust called for annual court accountings, the trustee did not submit anything for the court’s review or approval until the “first and final” accounting over seven years later.

The probate court’s surcharge order

At a hearing on Ms. Scott’s trust accounting, the court took evidence from several witnesses. It heard from Ms. Scott herself; she testified that she was entitled to a reasonable fee, and that she had been interested primarily in benefitting the trust’s beneficiary. The mother testified that it was in her daughter’s best interests to go on numerous vacation trips, including to family weddings in Hawaii and Washington, DC. A California trustee testified about how he would have administered the trust.

After all that, the judge determined that Ms. Scott had breached her fiduciary duty as trustee. Her accounting was approved, but subject to a $93,036.75 surcharge order.

To justify the surcharge order, the trial judge made several key observations:

  • Ms. Scott mostly allowed the beneficiary’s mother to have anything she asked for, which paved the way for her to charge larger fees without any objection from the mother.
  • If Ms. Scott had submitted her accountings annually, she presumably would have been reined in long before misspending the bulk of trust assets.
  • The trust itself called for expenditures “reasonably necessary in providing for this Beneficiary’s special needs,” and not for the mother’s convenience or wishes.
  • The final distribution of over $15,000 to the beneficiary’s mother was not supportable as for the child’s benefit.

The Court of Appeals decision

The California Court of Appeals agreed with the trial judge, and upheld the surcharge order. The appellate court did find that one $1,000 expenditure was permissible, however. The trust had paid for an attorney to advocate for the beneficiary’s during her school’s IEP (individualized education program) meetings. That single expenditure was allowed by the Court of Appeals.

The bottom line: the surcharge order against Ms. Scott was reduced to $92,036.75. She will now have to repay that amount to the trust. Scott v. McDonald, August 22, 2018.

Robert B. Fleming

Attorney

Robert Fleming is a Fellow of both the American College of Trust and Estate Counsel and the National Academy of Elder Law Attorneys. He has been certified as a Specialist in Estate and Trust Law by the State Bar of Arizona‘s Board of Legal Specialization, and he is also a Certified Elder Law Attorney by the National Elder Law Foundation. Robert has a long history of involvement in local, state and national organizations. He is most proud of his instrumental involvement in the Special Needs Alliance, the premier national organization for lawyers dealing with special needs trusts and planning.

Robert has two adult children, two young grandchildren and a wife of over fifty years. He is devoted to all of them. He is also very fond of Rosalind Franklin (his office companion corgi), and his homebound cat Muninn. He just likes people, their pets and their stories.

Elizabeth N.R. Friman

Attorney

Elizabeth Noble Rollings Friman is a principal and licensed fiduciary at Fleming & Curti, PLC. Elizabeth enjoys estate planning and helping families navigate trust and probate administrations. She is passionate about the fiduciary work that she performs as a trustee, personal representative, guardian, and conservator. Elizabeth works with CPAs, financial professionals, case managers, and medical providers to tailor solutions to complex family challenges. Elizabeth is often called upon to serve as a neutral party so that families can avoid protracted legal conflict. Elizabeth relies on the expertise of her team at Fleming & Curti, and as the Firm approaches its third decade, she is proud of the culture of care and consideration that the Firm embodies. Finding workable solutions to sensitive and complex family challenges is something that Elizabeth and the Fleming & Curti team do well.

Amy F. Matheson

Attorney

Amy Farrell Matheson has worked as an attorney at Fleming & Curti since 2006. A member of the Southern Arizona Estate Planning Council, she is primarily responsible for estate planning and probate matters.

Amy graduated from Wellesley College with a double major in political science and English. She is an honors graduate of Suffolk University Law School and has been admitted to practice in Arizona, Massachusetts, New York, and the District of Columbia.

Prior to joining Fleming & Curti, Amy worked for American Public Television in Boston, and with the international trade group at White & Case, LLP, in Washington, D.C.

Amy’s husband, Tom, is an astronomer at NOIRLab and the Head of Time Domain Services, whose main project is ANTARES. Sadly, this does not involve actual time travel. Amy’s twin daughters are high school students; Finn, her Irish Red and White Setter, remains a puppy at heart.

Famous people's wills

Matthew M. Mansour

Attorney

Matthew is a law clerk who recently earned his law degree from the University of Arizona James E. Rogers College of Law. His undergraduate degree is in psychology from the University of California, Santa Barbara. Matthew has had a passion for advocacy in the Tucson community since his time as a law student representative in the Workers’ Rights Clinic. He also has worked in both the Pima County Attorney’s Office and the Pima County Public Defender’s Office. He enjoys playing basketball, caring for his cat, and listening to audiobooks narrated by the authors.