Who Gets Special Needs Trust Balance on Death of the Beneficiary?

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Death of the beneficiary

A special needs trust, of course, is for the primary benefit of the individual with a disability. But what happens on the death of the beneficiary?

The trust might spell out its “remainder” beneficiaries — the ones who receive the balance on the death of the disabled beneficiary. But sometimes the trust just says that it goes to the beneficiary’s “heirs at law” under intestate succession rules.

If the trust is set up using the beneficiary’s own funds (or funds that the beneficiary had the right to receive), the trust probably says that any remaining balance goes to the state Medicaid agency. But what if there’s enough money left in the trust to pay back the Medicaid folks, and still distribute to remainder beneficiaries?

Olivia Morales’ California trust

That was exactly the situation for Olivia Morales, who died in California in 2020 at the age of six. Back in 2014, when her mother was pregnant with Olivia, she reached out to the father, Jorge Ovalles. His response: she should take the “morning-after” pill. She declined, and he cut off all further contact with her.

Olivia’s birth was difficult. She suffered several birth injuries, and ended up with kidney failure, a central line for medications, tube feedings and a catheter for dialysis treatment. She underwent a kidney transplant shortly after her birth. When Olivia’s mother called Mr. Ovalles to ask for help, he said he didn’t want to have anything to do with Olivia.

In 2015, Olivia’s mother filed a paternity action against Mr. Ovalles. The later court decision doesn’t explain why, but it might have been part of Olivia’s continuing qualification for government assistance. In any event, a DNA test apparently confirmed that Mr. Ovalles was the father. The upshot of the paternity action: Mr. Ovalles was ordered to pay $1,788 in monthly child support, which was collected from his wages for the last three years of Olivia’s life. That court proceeding also included a provision that Mr. Ovalles would “have no visits with the child.”

Olivia’s mother pursued a medical malpractice case on her behalf, and ultimately collected about $1 million in (net) settlement proceeds. She established a special needs trust to hold Olivia’s money and to keep her eligible for public assistance. That trust — as all such trusts must — included a provision that the state Medicaid agency would be repaid at Olivia’s death. Anything left over could go to her “heirs at law.”

Olivia’s death and the Medicaid claim

When Olivia died in 2020, California’s Medicaid agency had only paid for $21,000 of Olivia’s care. The trust, now just over $1 million, would almost all go to the heirs as a result of the death of the beneficiary.

Was Mr. Ovalles an heir of Olivia’s? The general rule would say that he was. If an unmarried individual without children (and Olivia, recall, was six) dies, their heirs are usually their parents. Normally, on the death of the beneficiary the remaining trust assets would be split equally between those parents.

But Mr. Ovalles was a particularly uncaring father. And California law says that a parent who refuses to “acknowledge” their child can not later inherit from their untimely death.

The issue doesn’t come up all that often, since parents usually do not outlive their children. But children with profound disabilities sometimes die at very young ages, of course. Should Mr. Ovalles be entitled to a share of Olivia’s remaining trust?

The California probate court decided that he should. Even though he might not have been father-of-the-year material, reasoned the judge, he had “acknowledged” Olivia when he agreed that he was the father and that he owed child support payments. The fact that he didn’t ever visit her didn’t change the picture — at least according to the trial judge.

The Court of Appeals begs to differ

The California Court of Appeals reversed the lower court. In an unpublished decision (that can’t be cited for its precedential value), the appellate court ruled that Mr. Ovalles’s bare-minimum “involvement” didn’t entitle him to be treated as Olivia’s heir. Westamerica Bank v. Morales, February 24, 2023.

There are several interesting observations to be made in Olivia’s tragic court case. One is something most lay people don’t even realize: there’s no intermediate step toward justice. The courts could rule that Mr. Ovalles was entitled to half of the million-dollar trust. Or they could determine that he was entitled to none of it. There is no opportunity for the legal system to split the difference. “Well, he ought to receive a small share of Olivia’s estate — say 10% or 20%” is not a legal choice.

Another is to observe that the question ultimately comes down to Mr. Ovalles’s total involvement in his daughter’s life. Yes, he acknowledged that he was the father. But he provided zero emotional support for Olivia or her mother, and only the court-ordered minimum in financial support.

Could the trust have included a provision disinheriting Mr. Ovalles on the death of Olivia, the beneficiary? Yes — but it would be uncommon for the court to agree to such a provision when the trust was first established. Judges — and lawyers, for that matter — are optimistic. Perhaps Mr. Ovalles would step up to his responsibilities before Olivia’s death. It might not seem too likely, but it might happen.

What about Arizona?

Would the same thing happen under Arizona law? Perhaps. Like California, Arizona’s statute allows some parents to be disinherited for something akin to abandonment. But Arizona’s statute would be a little harder to apply to Mr. Ovalles. It says that a parent may not inherit from their deceased child “unless that natural parent has openly treated the child as a natural child and has not refused to support the child.” But that limitation may apply only when the child has been adopted by someone else.

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.