Planning for Special Needs Trusts

Special needs trusts can provided additional resources for disabled minors and adults.  Special care has to be taken in planning for these trusts.  The recent Estate of Mendard, No. 14-18-00434-CV (Tex. App. — Houston [14th Dist.] 2019) provides an example.  It involves a special needs trust that ended up owning a house that the disabled beneficiary’s relatives lived in rent-free, thereby depleting the assets of the trust for the benefit of the disabled beneficiary’s relatives.

Facts & Procedural History

The case involved a self-settled special needs trust.  The trust owned a house that the incapacitated adult’s relatives resided in.  The trust had a corporate trustee.

The incapacitated adult could not reside in the house and her relatives were not paying rent for the use of the house, so the trustee brought suit to evict the relatives and to collect unpaid rents.  The probate court considered the matter, but the relatives did not show up to the court hearing or request a continuance.  Thus, the probate court ordered the relatives to vacate the property.

The relatives vacated the property and then brought this appeal, which the court addressed.  The appeals opinion goes on to address whether the relatives could bring suit given that they had already vacated the property.  We aren’t addressing the substance of the appeal in this post, but note that the continuing appeal only further served to deplete the estate assets that would otherwise be used for the beneficiary of the special needs trust.

About Special Needs Trusts

A special needs trust is a type of trust whereby a trustee holds and uses trust assets for an individual who is receiving needs-based government benefits. The trust is structured so that the trust assets do not limit government benefits.

Unlike third party trusts, self-settled trusts are subject to certain restrictions.  This limits the ability for the disabled person to use their own assets to fund the special needs trust (the mechanics of this are beyond the scope of this article, so if you have questions about these limitations we encourage you to give us a call to discuss them).

Non-Productive Assets in the Trust

While it is not discussed in the case, given the procedural history, we’ll take some liberties to make assumptions.

It appears that the disabled adult inherited the property from her parents.  It also appears that the parents did not provide for a special needs trust during their lifetime, but rather, a management trust was created under the Texas Estates Code as part of the probate process and structured as a special needs trust.

Regardless of the process, the result is that a non-productive asset, i.e., real estate that was not producing rental income, ended up being held in the trust.  The special needs trust was not being used appropriately.  The purpose of the special needs trust is to maximize the resources available to the disabled adult.  This purpose is even to maximize government benefits.

This points out a critical aspect of setting up the special needs trust.  One has to pay special attention to the assets that go into the trust.  This is not only important for qualifying the trust as a special needs trust, but, as highlighted by this case, also to ensure that the purpose of the trust is realized.  With self-settled trusts, the assets that are to be contributed to the trust must be segregated into those the disabled person owns at the time and those that third parties own and intend to transfer.  The assets also have to be segregated into productive and nonproductive assets.

Do you need help with a probate matter in Houston or the surrounding area?  We are Houston probate attorneys.  We help clients navigate the probate process.   Call today for a free confidential consultation, (281) 219-9090.