Matter of Brennen Trusts
Anthony Marone, Esq.
One of the last matters I litigated on behalf of the Pennsylvania Department of Public Welfare was the Matter of Brennen Trusts. Robin Brennen was the sole lifetime beneficiary of two substantial trust funds. One trust contained Robin’s own funds and the other trust contained Robin’s inheritance from her parents. The question before the Lehigh County Orphans’ Court was both novel and complex: Which trust should pay for Robin’s care?
Robin Brennen is a disabled, capacitated adult suffering from Multiple Sclerosis. Robin’s parents left forty percent of their sizable estate in a third-party funded Special Needs Trust (the “Trust”) for Robin’s benefit. The Trust directed the Trustee to make distributions, up to the entire amount of its principal and income, for the maintenance of Robin’s health and welfare when Robin’s health and welfare were not adequately provided for by government benefits. A sizable portion of the Trust principal and income was used each month to pay for Robin’s rent and medical care in an assisted living facility.
Phillip Brennen is Robin’s brother and the former trustee of the Trust. Robin objected to Phillip’s management of the Trust. After several years of litigation, I was invited to intervene on behalf of the Department by the Orphans’ Court. The Court became aware that several of the transactions involving the Trust negatively effected Robin’s eligibility for Medical Assistance. Specifically, Robin’s proceeds from the settlement of a personal injury action were deposited into the Trust, disqualifying her for Medical Assistance.
All the parties agreed to transfer Robin’s settlement proceeds out of the Trust. The Court approved the Robin Brennen First-Party Funded Special Needs Trust (the “SNT”) and over $450,000.00 was transferred from the Trust to the SNT. After the transfer to the SNT, the Trust was valued in excess of $1,000,000.00.
The SNT contained standard language which complied with the Department’s policy and regulations. The trustee of the SNT was permitted to make distributions for Robin during her lifetime but only for her sole benefit. The Court also approved a clause in the SNT that required the trustee to consider “funds available from government or other sources” when making distributions for Robin. Robin’s attorney represented in Court that the “other sources” was a specific reference to the Trust.
As required by Federal law and Pennsylvania law, upon termination of the SNT the Department was to be paid back for any Medical Assistance provided to Robin during her lifetime. After the payback to the Department, Robin’s sister would inherit the remainder of the SNT. In contrast, the Department would not receive any payback from the Trust. Upon termination, Phillip would inherit 2/3 of the remainder of the Trust. Therefore, the focus of this case was not Robin’s care during her lifetime but the effect paying for that care would have on Phillip, the Department, and Robin’s sister when the Trust and SNT were terminated.
Phillip argued that all of the funds in the SNT should be spent on Robin’s care before any of the income or principal of the Trust could be distributed. Phillip relied on one sentence in the Trust which stated “[i]n carrying out the provision of this trust, Trustee shall be mindful of the probable future needs of the remainder beneficiaries of this trust.” If Phillip prevailed the SNT would pay for Robin’s care before any of the Trust was expended. The principal and income of the Trust would therefore be preserved, increasing the potential amount Phillip would inherit as a remainder beneficiary of the Trust.
In direct contrast to Phillip’s position, Robin argued that all of the Trust should be used for her care before any of the SNT could be distributed. Robin relied on her clear intent as stated in the SNT that the Trustee must consider “other sources,” such as the Trust, before making any distributions. If Robin prevailed, Phillip would potentially receive nothing or a significantly reduced amount from the remainder of the Trust.
After a hearing and oral argument, the Court rejected Phillip’s position. In its opinion, the Court analyzed the Trust settlors’ intent. First, the Court found that although the trustee of the Trust should be mindful of Phillip’s “probable future needs,” Phillip failed to produce any evidence of such needs. Second, the Court found that Robin’s parents did not direct the trustee of the Trust to consider anything other than public benefits when making distributions for Robin because they did not contemplate that Robin would have significant assets of her own. The Court rejected Phillip’s position in its entirety.
The Court did not completely agree with Robin’s position either. The Court found that the although the Trust settlors did not require the trustee to consider Robin’s resources before making distributions for her care, they did not preclude the trustee from making such considerations either. The Court did agree that Robin intended the trustee of the SNT to consider the funds available from the Trust before making any distributions for her care. Therefore, the Trust would not necessarily be completely exhausted before the funds in the SNT would be expended for Robin’s care.
The Court turned to the equities in the matter when crafting its order. The Court stated that the Trust had significantly more assets than the SNT and was in a better position to bear the costs of Robin’s ongoing care. The Court ruled that the Trust would pay for Robin’s care exclusively up to the time when the Trust was spent down to substantially the same value as the SNT. At that point, Phillip and the other remaindermen of the Trust could provide evidence to the Trustee of their probable future needs.
The Brennen case is significant for estate law and elder law practitioners. Brennen is the only reported decision I have found that addresses which trust should pay for the care of a sole lifetime beneficiary when each trust names different remainder beneficiaries. It is also the only decision I have found that analyzes the order of payment between a first-party funded Special Needs Trust and a third-party funded Special Needs Trust.
When drafting a third-party funded Special Needs Trust the attorney should specify the settlor’s intent with regard to the beneficiary’s own funds. Brennen should remind practitioners that a disabled individual with little earning potential may still receive large sums of money from other sources. If the settlor intends the trust to be a payor of last resort for the disabled beneficiary, as Phillip argued, the scrivener should say so.