A New York judge held that the trustees of a special needs trust have a duty to the disabled beneficiary to inquire into the beneficiary’s condition and to apply trust income to improving it, and that it is not sufficient for the trustees to simply safeguard the assets in the trust. Matter of JP Morgan Chase Bank NA.(Surrogate’s Court of New York County, December 31, 2012)

Marie Holman died in 2005 at the age of 85. The gross value of Marie’s estate was approximately $12 million, of which about $3 million was the date of death value of Marie’s co-op apartment, and about $9 million was the date of death value of her stocks and bonds.

Marie was survived by two adopted children, Charles A. Holman, and Mark C. Holman. Mark was severely disabled and vulnerable, wholly dependent on others for his care. Mark was described as “[profound[ly] [intellectually disabled], suffering from autism,” as well as “non-verbal and engag[ing] in numerous repetitive and self stimulating behaviors.” Mark was “nonverbal and requires constant supervision and assistance with all activities of daily living.” Based on Mark’s disabilities, prior to her death Marie placed Mark in an residential facility, the Anderson School in Straatsburg, New York.

Marie’s will left her entire estate to the Marie H. Revocable Trust of 1995. Upon Marie’s death, the balance of the revocable trust was to be divided into two equal shares, one share allocated to a special needs trust for Mark, and one share allocated to a trust for Charles. Upon Marie’s death, Marie’s long-time attorney and the Chase Manhattan Bank, N.A. (Chase) were designated as trustees.

In October 2006, the decedent’s long-time attorney filed a lawsuit seeking appointment as guardian of the person of Mark. At the initial hearing, the attorney revealed that, although he was applying for guardianship as a result of a promise to Mark’s mother on her death bed, he had not seen Mark since Mark was six years old. Moreover, the attorney had never visited the Anderson School to ascertain Mark’s condition or his needs, nor had he inquired of the staff about any unmet needs. The attorney also revealed that, although Mark was the beneficiary of a multi-million dollar trust of which he was a trustee, he had not expended a single dollar on Mark’s behalf. Upon  court order, a representative of Chase appeared in court and explained its similar inaction as a result of its lack of institutional capacity to ascertain or meet the needs of a severely disabled, institutionalized young man. Thereafter, again upon court order, the co-trustees retained the services of a certified care manager with extensive experience with people with disabilities.

In December 2010, the trustees filed an accounting covering the period from March 2005 through March 2010. The accounting showed, among other things, that in the five year period covered by the accounting the trustees only spent about $3,500 on the beneficiary, in payment for the services of the certified care manager as ordered by the court in 2006. All of the other trust expenditures were for trustee commissions and legal fees. However, once the Trustees were required by court order to make themselves knowledgeable about Mark’s condition and his needs, and the availability of services that would enable them to provide for those needs, they began to use funds from his trust for the purposes which his deceased mother desired.

The Court found that the trustees wrongfully left Mark to languish for several years with inadequate care, despite the fact that the Mark’s trust had abundant assets. In so doing, the Court held that the trustees failed to exhibit a reasonable degree of diligence toward Mark. In that regard, the court held as follows:

The plain language of the Mark Trust elucidates Marie’s intent in its creation. Article 2.1, section (iii) authorizes the trustees to pay any income not applied for Mark’s benefit “to any facility he may be residing in and/or to any organization where he may be a client or a participant in any program(s).” This provision reflects both the importance of Mark’s quality of life to Marie and the minimum knowledge that Marie expected her trustees to have about Mark and his situation. In order to exercise their discretionary power of expenditure, at the very least they are required to take steps necessary to keep themselves fully informed of Mark’s residential situation and ancillary services. It is not sufficient for the trustees to simply safeguard the Mark Trust’s assets; instead, the trustees have a duty to Mark to inquire into his condition and to apply trust income to improving it. The trustees abused their discretion by failing to exercise it. [The attorney’s] complicity is exacerbated by the fact as drafter of the Mark Trust, as well as the drafter of Marie’s Will, he was aware of Mark’s incapacity for years before serving as trustee… Both case law and basic principles of trust administration and fiduciary obligation require the trustees to take appropriate steps to keep abreast of Mark’s condition, needs, and quality of life, and to utilize trust assets for his actual benefit.

As a result of their breach of fiduciary duty, the Court held that the trustees’ “failure to fulfill their fiduciary obligations should result in denial or reduction of their commissions for the period of their inaction.”

The case is annexed here – Matter of JP Morgan Chase Bank NA