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Tentative Ruling
Judge Colleen Sterne
Department 5 SB-Anacapa
1100 Anacapa Street P.O. Box 21107 Santa Barbara, CA 93121-1107

PROBATE

Matter of Thompson Family Trust

Case No: 1418915
Hearing Date: Thu Oct 24, 2013 9:00

Nature of Proceedings: Petition: Instructions - #13 on the probate calendar

Santa Barbara County Superior Court Probate Calendar Judge Colleen K. Sterne - Department 5 October 24, 2013 CASE: In the Matter of the Thompson Family Trust, Case No. 1418915 MATTER: Petition for Instructions TENTATIVE RULIING: The court finds and orders the following: (1) The deceased settlors’ personal effects shall be considered part of the residue of the Trust and shall be distributed to the beneficiaries, with each beneficiary receiving a 20% interest in the property; (2) The Trust estate shall be distributed in five annual installments, although the trustee is free to make distributions at any time when it is in the beneficiaries’ best interests or for their health, education, support, or maintenance; and (3) James Thompson shall remain a beneficiary of the Trust, notwithstanding that he is disabled and receives public benefits. However, James’s distribution requires the creation of a “special needs” trust, which will be the subject of a later hearing. DISCUSSION: On June 26, 1998, Ben Thompson and Mary Thompson, as settlors, created the Thompson Family Trust, a revocable living trust. During the settlors’ joint lifetimes, they served as co- trustees of the Trust. Ben Thompson died on December 4, 2006 and Mary Thompson died on March 7, 2013. Pursuant to the terms of the Trust, as amended on August 8, 2002, petitioner Union Bank, N.A., successor to Santa Barbara Bank & Trust through merger, was appointed successor trustee of the Trust. The beneficiaries of the Trust are the settlors’ five children, Jack Knox, James Thompson, Amy Alburtis, Nancy Thompson, and Christopher Knox. All of the beneficiaries are adults over the age of 25 years. The Trust property consists of the settlors’ personal effects, including furniture, clothing, jewelry, glassware, silverware, works of art, appliances, and consumer electronics, and the settlors’ residence, located 1021 Serenidad Place, Oak View, California 93022. Union Bank now petitions the court to resolve a number of uncertainties regarding disposition of the Trust assets. Specifically, Union Bank seeks instructions from the court regarding (1) disposition of the Trust’s tangible personal property, (2) whether the Trust estate may be distributed to the beneficiaries free of trust, or must it remain in trust and distributed to them in five annual installments, and (3) whether James Thompson remains a beneficiary of the Trust, and if so, whether his beneficial interest may be distributed to him free of trust or must it be retained in a “special needs” trust for his benefit during his lifetime. James Thompson is a quadriplegic and receives both Medi-Cal and Supplemental Security Income (SSI). ANALYSIS: A trustee or beneficiary of a trust may petition the court for instructions concerning the administration and internal affairs of the trust. Prob. Code §17200, subd. (a). Proceedings concerning the internal affairs of a trust include “[d]etermining questions of construction of a trust instrument,” “[d]etermining the existence or nonexistence of any immunity, power, privilege, duty, or right,” “[d]etermining the validity of a trust provision,” “[a]scertaining beneficiaries and determining to whom property shall pass or be delivered upon final or partial termination of the trust, to the extent the determination is not made by the trust instrument,” “[i]nstructing the trustee,” and “[a]pproving or directing the modification or termination of the trust.” Prob. Code §17200, subds. (b)(1), (2), (3), (4), (6), and (13); see also, Conservatorship of Irvine (1995) 40 Cal.App.4th 1334, 1341 (probate court has jurisdiction under Probate Code Section 17200 to consider a trustee’s petition for instructions concerning the validity of an amendment to an inter vivos trust). The first issue concerns the tangible personal property of the Trust. Article VII, Section A, Paragraph 1 of the Trust provides that the trustee shall distribute the deceased settlors’ personal effects as may be indicated in “a separate written statement” prepared and signed by the deceased settlors, or in the absence of such a written statement, “in accordance with the provisions of this Trust and specifications of Schedule B.” (Petition, Ex. A, Declaration of Trust, p. 10.) Neither a separate written statement by a deceased settlor nor a Schedule B to the Trust is known to exist. (Petition, p. 4:12-13.) Accordingly, the settlors’ tangible personal property, defined in the Trust instrument to include all “clothing, jewelry, furniture, glassware, silver, works of art, pets, cameras, appliances, consumer electronic items, motor vehicles and collections,” but not items of intangible personal property, such as stocks, bonds, notes or other similar interests, shall be considered part of the residue of the Trust estate and shall be distributed in accordance with Article VII, Section A, Paragraph 2, which provides that each of the five beneficiaries shall receive a 20% interest in the Trust assets. The second issue concerns the timing of the distribution of the Trust estate. As discussed above, Article VII, Section A, Paragraph 2 of the Trust identifies the deceased settlors’ five children (Jack Knox, James Thompson, Amy Alburtis, Nancy Thompson, and Christopher Knox) as beneficiaries, with each child receiving a 20% interest in the entirety of the Trust estate. (Petition, Ex. A, Declaration of Trust, p. 10.) Regarding the timing of the distribution, Article VII, Section A, Paragraph 3 provides that “[s]aid distribution shall not take place until said beneficiaries attain the age of Twenty-Five (25) years of age.” (Petition, Ex. A, Declaration of Trust, p. 10.) In addition, Paragraph 3 of Article VII, Section A provides: “Upon the second death we would like the distribution in essentially equal amounts over a 5- year period as follows: 1st year: 20% of assets shall be distributed; 2nd year: 25% of assents [sic] shall be distributed; 3rd year: 33 1/3% of assets shall be distributed; 4th year: 50% of assets shall be distributed; 5th year: Balance of remaining assets shall be distributed.” The first sentence quoted above makes it clear that a beneficiary must be at least 25 years of age to receive a distribution. All of the beneficiaries are adults over the age of 25 years (Petition, p. 3:14) and therefore the age requirement is not an issue. The second sentence, which states that the deceased settlors “would like” the distributions to be made over a five- year period, is advisory (i.e., a statement of desire), but not binding on the trustee. Indeed, elsewhere the trustee is given discretion to make Trust distributions immediately or at any time prior to the expiration of the five years when “necessary for the health, education, support, and maintenance” of a beneficiary. Article VII, Section B, Paragraph 3 is entitled “Management of Beneficial Shares” and provides: “The Trustee may distribute trust principal or earnings to or for the direct benefit of a Successor Beneficiary from said Successor Beneficiary’s respective beneficial share, up to the whole amount of such share, as the Trustee deems in his sole discretion to be necessary for the health, education, support, and maintenance of the respective Successor Beneficiary.” (Petition, Ex. A, Declaration of Trust, p. 11.) The trustee also has discretion to distribute the entirety of the Trust estate when it is in the best interests of the beneficiaries to do so. Article XII, Section A, Paragraph 2 is entitled “Discretionary Termination” and provides: “If at any time the Trustee in his discretion deems the best interests of the Beneficiaries is [sic] served by terminating the Trust and distributing the entire principal and income as provided herein, the Trustee is authorized to do so.” (Petition, Ex. A, Declaration of Trust, p. 18.) The court finds that these provisions reflect an intention on the part of the deceased settlors that the distributions be made in five annual installments, but that the trustee is free in its sole discretion to make distributions of the Trust estate at any time for the “health, education, support, and maintenance” of a beneficiary, or when it is in “the best interests of the Beneficiaries.” The third issue concerns James Thompson and whether he should remain a beneficiary under the Trust. According to petitioner, James is a quadriplegic and is receiving Medi-Cal and SSI benefits. (Petition, p. 8:5-6.) James’s condition is of some concern to petitioner because Article XI of the Trust provides that “[a]ny Beneficiary who is determined by a court of competent jurisdiction to be incapacitated shall not have any discretionary rights of a Beneficiary with respect to this Trust, or to their share or portion thereof.” Article XI also provides that “[a]ny Beneficiary who is diagnosed for the purposes of governmental benefits . . . as being incapacitated or disabled, and who shall be entitled to governmental support and benefits by reason of such incapacitation or disability, shall cease to be a Beneficiary of this Trust. Article XI also provides that any incapacitated or disabled beneficiary “shall cease to be a Beneficiary if any share or portion of the principal or income of the Trust shall become subject to the claims of any governmental agency for costs or benefits, fees or charges.” (Petition, Ex. A, Declaration of Trust, p. 17, ¶1.) The term “capacity” in the probate context generally refers to an individual’s ability to understand and appreciate the nature of his or her acts and decisions. Prob. Code §812. Under California law, all persons are presumed to have the capacity to make decisions and to understand the nature of their acts. Prob. Code §810, subd. (a); see also Andersen v. Hunt (2011) 196 Cal.App.4th 722, 730 (a person’s mental competency is ordinarily presumed). Petitioner has no information to indicate that James has ever been found by a court of competent jurisdiction to be incapacitated. (Petition, p. 8:19-20.) However, James is disabled, and while petitioner has no information which leads it to believe that James has been diagnosed for purposes of receiving governmental benefits as being disabled (Petition, p. 8:21-22), James does receive Medi-Cal and other public benefits and therefore it is possible that his share or portion of the Trust estate will be subject to claims for reimbursement by the various state and federal agencies that provide those benefits. This raises the question, then, whether James should “cease to be a Beneficiary” under the language in Article XI of the Trust. The court finds that James should not cease to be a beneficiary of the Trust merely because there exists the potential for a claim for reimbursement of his public benefits. As quoted above, Article XI provides that a disabled beneficiary shall cease to be a beneficiary if his or her distributive share of the Trust “become[s] subject to claims of any governmental agency for costs or benefits, fees or charges.” (Petition, Ex. A, Declaration of Trust, p. 17, ¶1.) To date, that has not happened (Petition, p. 9:12-14), nor can it be said with any certainty that it will happen in the future. Moreover, there are other provisions of the Trust which reflect that the settlors never intended to outright disinherit a beneficiary simply because the beneficiary receives Medi-Cal or other public benefits. Article XI states: “Not withstanding [sic] the foregoing, the trustee(s) may pay to the beneficiary, or apply for the benefit of the beneficiary, those amounts of income and principal as, in the discretion of the trustee(s), appear necessary for the beneficiary’s health, support, maintenance, and education. “If any other income, resources or governmental benefits are available for the beneficiary’s support, distributions shall be made only for the beneficiary’s ‘special needs,’ which are not being provided by any governmental agency, including, but not limited to, dental care, special equipment, programs of training, education and habilitation, travel needs and recreation.” (Petition, Ex. A, Declaration of Trust, p. 17, ¶¶ 2, 3.) Thus, the Trust clearly contemplates that a disabled beneficiary can and should receive distributions if necessary for the person’s health, support, maintenance, and education, or for the person’s “special needs” that are not being provided for by any governmental agency. Indeed, the trustee is specifically directed to “take into consideration the applicable resource limitations of the public assistance programs” when making such distributions. (Petition, Ex. A, Declaration of Trust, p. 17, ¶4.) The court therefore finds that James is, and remains, a beneficiary of the Trust, entitled to a 20% distribution of the Trust estate, despite his physical disability and the fact that he receives Medi-Cal and SSI. The court notes that the four remaining beneficiaries of the Trust, Jack Knox, Amy Alburtis, Nancy Thompson, and Christopher Knox, all favor this result. (Petition, Ex. I, Consent of Beneficiary forms.) Finally, there is the question whether James’s beneficial interest may be distributed to him free of trust or must it be retained in a “special needs” trust for his benefit during his lifetime. As discussed above, Article XI provides that the beneficial interest of a disabled beneficiary should be held in a “special needs” trust if the person might be disqualified from receiving governmental benefits or if the person might face a possible claim for reimbursement of the benefits received. Article XI states: “If any other income, resources or governmental benefits are available for the beneficiary’s support, distributions shall be made only for the beneficiary’s ‘special needs,’ which are not being provided by any governmental agency, including, but not limited to, dental care, special equipment, programs of training, education and habilitation, travel needs and recreation. “The trustee(s) may seek support and maintenance for the beneficiary from all available governmental agencies, and may take into consideration the applicable resource limitations of the public assistance programs when making distributions. “No part of the trust shall be used to replace any governmental assistance benefits, and no part of the principal or undistributed income shall be considered available to the beneficiary, for purposes of determining Medicaid eligibility. * * * “The portion of the Trust Estate which, absent the provisions of this section, would have been the share of such handicapped person shall be retained in trust for so long as that individual lives . . . .” (Petition, Ex. A, Declaration of Trust, p. 17, ¶¶ 3, 4, 5, 7.) These provisions make clear that the settlors did not wish to leave an inheritance outright to a beneficiary with a severe disability because that might disqualify the person from needs- based public benefits, such as Medi-Cal and SSI. See, 20 Code Fed. Regs §§416:200- 416:269 for SSI financial eligibility requirements and 22 Cal. Code Regs. §§50419-50420 for Medi-Cal financial eligibility requirements. However, it is also clear that the settlors wished to provide a source of funds to meet the beneficiary’s special needs, so long as the funds did not supplant or replace any needs-based benefits and the funds were not subject to claims for reimbursement by governmental agencies. Because James is a quadriplegic and disabled, the court finds that the Trust requires the creation of a special needs trust for his benefit. The terms of such a special needs trust are not set forth in the Trust declaration and therefore this will have to be the subject of a supplemental petition to be heard on a later date.