Guardianship Management Trusts
§ 11.1Overview of 1301 Management Trust
The 1301 Management Trust, named for chapter 1301 of the Texas Estates Code, offers an attractive mechanism for the management of assets belonging to minor children, incapacitated adults, and persons with only a physical disability. Statutory probate courts overwhelmingly prefer the use of the management trust as an alternative to opening a guardianship estate. Such a trust generally eliminates the need for a guardian of the minor’s or incapacitated person’s estate and permits such persons’ property to be managed without application to the court for approval of discretionary distributions, payment of expenses, and other day-to-day administrative actions. Attorneys, courts, and trustees understandably are more comfortable using familiar forms for the 1301 Management Trust, as such forms have withstood the test of time, are easy to replicate, and are less complicated to administer by the trustee. However, the provisions of the 1301 Management Trust may also be tailored to fit the beneficiary’s unique needs. See form 11-2 in this chapter for a sample 1301 Management Trust.
§ 11.2Statutory Basis of 1301 Management Trust
The 1301 Management Trust began as a section 867 Management Trust, named after section 867 of the Texas Probate Code. Enacted in 1993, section 867 gave courts the power to create a trust for the benefit of a minor child or incapacitated adult as an alternative to guardianship of the person’s estate. See Acts 1993, 73d Leg., R.S., ch. 957, § 1 (H.B. 2685), eff. Sept.1, 1993. Since 1993, the 1301 Management Trust, as it is now called after the recodification of the Texas Probate Code as the Texas Estates Code in 2014, has undergone many revisions to help serve people more efficiently and expand its functionality. The first major change to this court-created trust came in 1997. Before then, a guardianship was needed in order to create a management trust, but the 1997 revisions to Probate Code section 867 made it possible to create a management trust independent of a guardianship for a minor child or an incapacitated adult. See Acts 1997, 75th Leg., R.S., ch. 1375, § 1 (H.B. 1314), eff. Sept. 1, 1997. Then, in 2011, persons with only physical disabilities scored a win when section 867 was amended to enable them to become beneficiaries of management trusts. See Acts 2011, 82d Leg., R.S., ch. 1085, § 30 (S.B. 1196), eff. Sept. 1, 2011. In 2013, section 867 was amended again to allow persons with only a physical disability to apply for the creation of a management trust without the need of a guardian or attorney ad litem. Before the 2013 changes, persons having only a physical disability faced important limitations with respect to the management trust. The 2013 legislative changes to section 867 (recodified in 2014 as Tex. Est. Code §§ 1301.051–.058) enabled persons suffering only a physical disability to (1) file for the creation of a management trust; (2) enjoy more discretion regarding the terms and trusteeship of the trust; (3) avoid the expense of an attorney ad litem; and (4) sidestep court protections normally afforded to incapacitated persons and minor children, like court audits of annual accountings and the bonding of fiduciaries. See Acts 2013, 83d Leg., R.S., ch. 161, §§ 6.060, 6.066, 6.067, 6.069, 6.073 (S.B. 1093), eff. Jan. 1, 2014; Acts 2013, 83d Leg., R.S., ch. 982, §§ 26, 28, 29 (H.B. 2080), eff. Jan. 1, 2014.
§ 11.3Persons Authorized to Seek Formation of 1301 Management Trust
The following persons may apply for the creation of a 1301 Management Trust: (1) the guardian of a ward; (2) an attorney ad litem or guardian ad litem appointed to represent a ward or a ward’s interests; (3) a person interested in the welfare of an alleged incapacitated person who does not have a guardian; (4) an attorney ad litem or guardian ad litem appointed to represent an alleged incapacitated person who does not have a guardian; or (5) a person who has only a physical disability. See Tex. Est. Code § 1301.051. Importantly, in 2011, the legislature extended the list of applicants to include persons having only a physical disability. In 2013, the legislature made forming a 1301 Management Trust for such persons much more efficient by removing the requirements that (1) the court appoint an attorney ad litem; (2) a bank or trust company serve as trustee; and (3) the fiduciary be bonded and file annual accountings. See Tex. Est. Code §§ 1301.057, 1301.058, 1301.154. Such amendments to chapter 1301 of the Texas Estates Code paved the way for the formation of court-created, self-settled supplemental needs trusts.
§ 11.4Required Terms of 1301 Management Trust
A 1301 Management Trust generally contains required terms as set out below and may also include optional terms. However, these terms may be omitted or modified if doing so is in the best interest of the person for whom the trust is being created. See Tex. Est. Code § 1301.101(c) and discussion below. A 1301 Management Trust created for a minor child or incapacitated person must provide that (1) the minor child or incapacitated person is the sole beneficiary; (2) the trustee may distribute income or principal as necessary for the health, education, maintenance, or support of the beneficiary; (3) any trust income that is not distributed to the beneficiary is added to the trust principal; (4) if the trustee is a corporate fiduciary, it serves without having to give bond; and (5) subject to the court’s approval, the trustee is entitled to receive reasonable compensation payable from the income or principal of the trust for the services the trustee provides to the beneficiary in the same manner that compensation of a guardian is determined and paid. See Tex. Est. Code § 1301.101. If the 1301 Management Trust is created for the benefit of a person having only a physical disability, the trustee need not be bonded, and the trustee is entitled to reasonable compensation without needing the court’s approval. Tex. Est. Code § 1301.101(a–1).
The ward must be the sole beneficiary of a 1301 Management Trust. Tex. Est. Code § 1301.101(a)(1). However, the trust may provide that the trustee make distributions to a person whom the beneficiary is obligated to support as necessary for the person’s health, education, maintenance, and support. Such distributions may be made without the intervention of the ward's guardian or other representative or, in the case of an incapacitated person, the incapacitated person’s representative. See Tex. Est. Code § 1301.102.
A 1301 Management Trust must provide that the trustee may disburse as much principal or income as the trustee determines is necessary for the ward's health, education, support, and maintenance, and that any income not distributed will be added to principal. Tex. Est. Code § 1301.101(a)(2), (a)(3). Curiously, chapter 1301 of the Texas Estates Code fails to specifically address distributions to a minor child beneficiary of a 1301 Management Trust when there exists a person having a legal obligation to support such a minor child. Elsewhere in the Code, guidance is provided in the context of a guardianship of a minor child’s estate. The Code makes it clear that a guardian of a minor child’s estate may not use income or corpus from the ward’s estate for the ward’s support, education, or maintenance unless the guardian presents clear and convincing evidence that the parents are unable to support the ward without unreasonable hardship. See Tex. Est. Code § 1156.051. Though this provision does not specifically relate to distributions to a minor child beneficiary of a 1301 Management Trust, the trustee should find it instructive.
Practice Pointer: Exceptions exist to the mandatory health, education, support, and maintenance standard for 1301 Management Trusts. For example, if the attorney wants the trust to qualify as a supplemental needs trust so that the ward’s eligibility for government benefits will be preserved, the trust should not permit distributions for the ward’s basic maintenance and support but only for the ward’s supplemental needs not otherwise covered by a government benefits program.
A corporate fiduciary serving as the trustee of a 1301 Management Trust serves without bond. Tex. Est. Code § 1301.058(a)(1). Further, any other trustee of a 1301 Management Trust created for a person who has only a physical disability serves without bond. Tex. Est. Code § 1301.058(a)(2). A person other than a corporate fiduciary serving as trustee must file a bond with the county clerk in an amount equal to the value of the trust’s principal plus the projected annual income and with the conditions the court determines are necessary. Tex. Est. Code § 1301.058(b).
§ 11.4:4Trustee’s Compensation
Subject to the court’s approval, the trustee of a 1301 Management Trust may receive reasonable compensation from the trust estate determined, paid, reduced, and eliminated in the same manner as compensation of a guardian under chapter 1155 of the Texas Estates Code. Tex. Est. Code § 1301.101(a)(5), (b). See forms 11-17 and11-18 in this chapter. Chapter 1155 permits the guardian of an estate a fee of 5 percent of the estate’s gross income and 5 percent of all money paid out on a finding that the guardian has prudently managed the estate. Tex. Est. Code § 1155.003. There are exceptions to the 5 percent rule, allowing for the trustee’s compensation to be either increased or reduced. See Tex. Est. Code §§ 1155.002(b), 1155.003, 1155.005–.008.
Many courts, however, permit compensation in accordance with the trustee’s regular fee schedule. If the court permits compensation in accordance with the trustee’s fee schedule, the schedule should be attached to the application creating the trust, and the applicant should seek the court’s approval for trustee compensation based on that schedule.
The court may appoint a successor trustee of a 1301 Management Trust if the trustee resigns, becomes ineligible, or is removed. Tex. Est. Code § 1301.155. See forms 11-7 through 11-9 in this chapter.
The guardian of the person or estate is not liable for the acts or omissions of the trustee of a 1301 Management Trust. Tex. Est. Code § 1301.156. In response to a case involving a court-created trust wherein the supreme court upheld an exculpatory clause, the legislature enacted the language in section 1301.103 of the Texas Estates Code. See Acts 2011, 82d Leg., R.S., ch. 823, § 1.02 (H.B. 2759), eff. Jan. 1, 2014; Texas Commerce Bank v. Grizzle, 96 S.W.3d 240 (Tex. 2002). A provision of the trust that relieves a trustee from a duty, responsibility, or liability is enforceable only if the provision is limited to specific facts and circumstances unique to the property of the trust and is not applicable generally to the trust, and the court creating or modifying the trust makes a specific finding by clear and convincing evidence that the provision is in the best interest of the trust beneficiaries. Tex. Est. Code § 1301.103.
The court may amend, modify, or revoke a 1301 Management Trust at any time before the trust terminates, but the ward or the guardian of the ward’s estate may not revoke the trust. Tex. Est. Code § 1301.201. When creating or modifying a 1301 Management Trust, the court may omit or modify terms required by section 1301.101(a), (b), which mandates distributions for the ward’s health, education, maintenance, and support, only if the court determines that modification or omission is necessary and appropriate for the ward to receive public benefits or assistance under a state or federal program not otherwise available to the ward, or that it is in the best interests of the person for whom the trust is created. Tex. Est. Code § 1301.101(c). See forms 11-10 and 11-12 in this chapter.
If the ward is a minor child, a 1301 Management Trust terminates on the death of the ward or on the ward’s eighteenth birthday, whichever is earlier, or on a date selected by the court that is not later than the ward’s twenty-fifth birthday. Tex. Est. Code § 1301.203(a). Some courts will not permit a 1301 Management Trust to extend beyond the ward’s eighteenth birthday, assuming the ward is not otherwise incapacitated. If the applicant wants the trust to extend beyond the ward’s eighteenth birthday, the applicant should check with the court in which the guardianship is pending. If the ward is not a minor child, the trust terminates according to the terms of the trust, on the date the court determines that continuing the trust is no longer in the ward’s best interests, or on the death of the ward. Tex. Est. Code § 1301.203(b).
Practice Pointer: If a minor child beneficiary of a 1301 Management Trust also suffers from a disability that would enable the child to access a government benefits program, the 1301 Management Trust may be established as a supplemental needs trust. However, some courts still require that the 1301 Management trust terminate when the ward attains the age of twenty-five, even if the ward is likely never to regain capacity. In this situation, the trust must be modified before the ward reaches age twenty-five to ensure that the ward’s government benefits will not be reduced or terminated. See Tex. Est. Code § 1301.203.
The trustee of a 1301 Management Trust must prepare an annual account and file it with the court. The requirements are the same as those for a guardian of the estate under the Texas Estates Code, and the annual account is subject to court review in the same manner as an annual account prepared by a guardian. Tex. Est. Code § 1301.154. The annual account is therefore due not later than the sixtieth day after the anniversary date of the court order establishing the 1301 Management Trust. The annual account must (1) list all claims against the 1301 Management Trust presented to the trustee and specify which claims have been allowed, paid, or rejected by the trustee and which claims have been the subject of a lawsuit and the status of such lawsuit; (2) show all property that has come to the trustee’s knowledge or possession; (3) show any change in the 1301 Management Trust’s property that was not previously reported; (4) provide a complete account of receipts and disbursements for the period covered by the account, including the source and nature of the receipts and disbursements, with separate listings for principal and income receipts; (5) provide a complete, accurate, and detailed description of the property within the trust, the condition of the property and use of the property, and, if rented, the terms on which and the price for which the property was rented; and (6) show the cash balance on hand and the name and location of the depository where the balance is kept. See Tex. Est. Code § 1163.001.
Practice Pointer: Practitioners should consider whether other requirements imposed on the guardian of an estate, as set out in Texas Estates Code section 1163.003 (Supporting Vouchers and Other Documents Attached to Account) and section 1163.005 (Verification of Account and Statement Regarding Taxes and Status as Guardian), apply to the trustee of a 1301 Management Trust. The trustee must provide a copy of the annual account to the guardian of the ward’s estate or person. Tex. Est. Code § 1301.154. See forms 11-5 and 11-6 in this chapter. The trustee of a 1301 Management Trust created for a person who has only a physical disability need not file an annual account with the court. See Tex. Est. Code § 1301.154(d). See section 11.3 above.
Practice Pointer: Most often, the 1301 Management Trust contains marketable securities managed by a professional investment advisor. Account statements for the trust account are available each month, but most standard account statements are insufficient to provide a snapshot of the assets in the 1301 Management Trust as of the anniversary date of the trust's creation. Moreover, such account statements rarely provide the detail necessary to report the unrealized gains and losses with respect to each asset under management. Reporting unrealized gains and losses with respect to the assets under management is necessary to enable the proper balancing of the trustee’s annual account. To address this issue, consider asking the investment advisor to provide a detailed annual report of the assets under management as of the anniversary date of the creation of the trust and ask that the report include, with respect to each asset under management, value as of the anniversary date of the creation of the 1301 Management Trust; date of purchase; purchase price; date of sale; sales price; and, for assets currently in the portfolio, any unrealized gains and losses associated with such assets.
On termination of a 1301 Management Trust, the trustee must prepare a final account in the same manner as a guardian under sections 1204.101 and 1204.102 and, after court approval, must distribute the remaining trust assets to the ward when the trust terminates on its own terms, to the successor trustee, or to the personal representative of the deceased ward’s estate. Tex. Est. Code § 1301.204. See forms 11-12 and 11-13 in this chapter.
§ 11.4:11Application and Order to Discharge
After the order approving the final account is signed and entered, the trustee of a 1301 Management Trust must deliver any property remaining in the trust to the former ward, a successor trustee, or the representative of the deceased ward’s estate. Tex. Est. Code § 1301.204. The trustee should obtain a receipt from the person or entity to whom the property was delivered and file it with the court along with the application and order to discharge the trustee. See forms 11-14 through 11-16 in this chapter.
§ 11.5Optional Terms of 1301 Management Trust
The terms of a 1301 Management Trust created for a ward or an incapacitated person may allow the trustee to make distributions to a person whom the beneficiary is obligated to support as necessary for that person’s health, education, maintenance, and support. Such distributions may be made without the intervention of the ward’s guardian or representative of an incapacitated person. See Tex. Est. Code § 1301.102. Further, the court may include additional provisions in a management trust on the trust’s creation or modification if the court determines the addition does not conflict with a required term. See Tex. Est. Code § 1301.102(d).
§ 11.5:1Authority for Modifying Required Terms of 1301 Management Trust
The court creating or modifying a 1301 Management Trust may omit or modify otherwise applicable required terms if the court is creating a trust for a person who has only a physical disability or if the court determines that the omission or modification is (1) necessary and appropriate for the person for whom the trust is created to be eligible to receive public benefits or assistance under a state or federal program that is not otherwise available to the person or (2) in the best interests of the person for whom the trust is being created. See Tex. Est. Code § 1301.101(c). These provisions appear to open the door to a broad range of planning options for which a 1301 Management Trust may be adapted. Consequently, the practitioner might consider customizing or adding terms to the standard 1301 Management Trust form to address the individual needs of the beneficiary. The following practice notes focus on setting out specific examples wherein making modifications to the standard language of the 1301 Management Trust results in significant benefits to the beneficiary.
§ 11.5:2Adding Supplemental Needs Language
For beneficiaries receiving Supplemental Security Income or Medicaid, or those who may at some point need to avail themselves of such benefits, the practitioner should consider creating the 1301 Management Trust as a supplemental needs trust. This will ensure that the trust property is not considered an asset of the beneficiary for purposes of determining eligibility for these means-tested benefits. “Supplemental Needs Trust” (SNT) is a broad term encompassing self-settled and third-party created trusts, and most 1301 Management Trusts are self-settled trusts, even though the funds such trusts receive often come from another person (such as when a minor child is the named beneficiary of a life insurance policy). The SNT provides a mechanism for preservation of assets and distributions for the beneficiary while giving the beneficiary the option of maintaining eligibility for certain governmental need-based benefits. The operative words describing these trusts are “supplemental needs,” thereby distinguishing such trusts from “support” or other types of trusts. SNTs may have very strict distribution restrictions, prohibiting certain distributions, or they may be drafted more broadly. A trust with broad distribution standards may give the trustee full discretion to make distributions, even to the extent of causing the beneficiary to forfeit governmental benefits, if it is determined that such a strategy is in the best interest of the beneficiary. If the 1301 Management Trust qualifies as a supplemental needs trust, the ward may be able to access government benefits programs. If the trust is to qualify as a supplemental needs trust, special care must be given to ensure that the trust conforms to the provisions of 42 U.S.C. § 1396p(d)(4)(A), including a pay-back provision in the trust document. A pay-back provision requires that on the termination of the trust, either on the death of the beneficiary or on the beneficiary’s regaining capacity, the trust is required to reimburse the state Medicaid agency for all medical expenses paid on behalf of the ward. Failure to include this pay-back provision will result in the loss of the government benefit. 42 U.S.C § 1396p(d)(4)(A).
Practice Pointer: Under current Social Security regulations, the trust is permitted to pay some administrative expenses before reimbursement to the state. On the death of the trust beneficiary, the trust is allowed to pay taxes owed from the trust due to the death of the beneficiary and reasonable administration fees associated with terminating and wrapping up the trust. Social Security Administration Program Operations Manual SI System 01120.203.B.10.
§ 11.5:3Extending Term of Trust
If the person for whom a 1301 Management Trust is created is a minor child, section 1301.203(a) of the Texas Estates Code requires the trust to terminate on the earlier of the following: (1) the person’s death; (2) the person’s eighteenth birthday; or (3) the date provided in the court order, which may not be later than the person’s twenty-fifth birthday. If the person for whom a management trust is created is not a minor, the trust terminates (1) according to the terms of the trust; (2) on the date the court determines that continuing the trust is no longer in the person’s best interest; or (3) at the person’s death. Tex. Est. Code § 1301.203(b). Considering the provisions set out in section 1301.203 regarding termination, it may be possible for the adult beneficiary of a 1301 Management Trust formed when the beneficiary was a minor child to seek court modification of the trust to extend the term of the trust beyond the date provided in the original provisions of the trust. Such an extension may be an option as long as continuing the trust is in the best interest of the beneficiary. When the beneficiary of a 1301 Management Trust becomes an adult, section 1301.203(b) of the Code governs the termination of the trust. Consequently, the requirement that the trust terminate no later than the beneficiary’s twenty-fifth birthday may be lifted and the termination date extended by the court through modification of the trust when doing so is in the beneficiary’s best interest. The court may modify a 1301 Management Trust at any time before the date of the trust’s termination. See Tex. Est. Code § 1301.201.
Example: Consider a beneficiary for whom a 1301 Management Trust was created when he was young who now struggles with physical and mental health challenges, though he is far from incapacitated. He appreciates the fact that the 1301 Management Trust bestows the following benefits: (1) professional management by a corporate trustee; (2) court oversight of distributions, investments, and fees; (3) professionally prepared annual accountings; (4) possible protection from creditors and future failed marriages; and (5) the ability to qualify for valuable needs-based governmental programs. Though the trust is scheduled to terminate when the beneficiary reaches the age of twenty-five, given the benefits of the trust he has enjoyed for almost his entire life, he may desire that the trust continue for many more years.
Section 1301.203 of the Estates Code provides that “[i]f the person for whom a management trust is created is a minor, the trust terminates on . . . the date provided by court order, which may not be later than the person’s 25th birthday. . . . If the person for whom a management trust is created is not a minor, the trust terminates . . . on the date the court determines that continuing the trust is no longer in the person’s best interests.” Tex. Est. Code § 1301.203. In the example above, the beneficiary was a minor child when the 1301 Management Trust was created. But now as an adult beneficiary of the trust, he should be able to make a case that extending the term of the trust is in his best interest and ask the court to modify the trust to extend its term beyond his twenty-fifth birthday. Even if the court declines to extend the term of the trust beyond his twenty-fifth birthday based on section 1301.203, he could make application to extend the trust term based on section 1301.051, which provides that a person who has only a physical disability may apply for the creation (and presumably a modification to extend the term of) a 1301 Management Trust. If the beneficiary seeks an extension of the trust’s term as a person with only a physical disability, he might consider asking the court to do more than extend the trust term. For example, he might ask the court to alleviate the trustee of the duty to file annual accountings under section 1301.154, which provides that “[t]he court may not require a trustee of a trust created for a person who has only a physical disability to prepare and file with the court the annual accounting.” Doing so would enable the trust to save the expenses associated with the preparation and filing of the annual accountings and enable the beneficiary to retain more privacy with respect to the assets and distributions associated with the trust.
§ 11.5:4Coordinating Investments and Distributions with Estate Plan
Most 1301 Management Trusts address the investment authority of the trustee and contain language similar to the following:
Trustee shall invest the trust estate in accordance with the standards now or hereafter set forth in chapter 113 of the Texas Property Code, as amended. Trustee may also invest all or any part of the trust estate in one or more common trust funds or mutual funds now or hereafter established by Trustee or an institution affiliated with Trustee when it is found by Trustee to be prudent. To the extent allowed by law, Trustee’s investment authority shall not be limited by any provisions of the Texas Estates Code.
Often, however, little consideration is given to preserving the estate plan of the incapacitated beneficiary when the plan involves beneficiary designations, pay-on-death provisions, or accounts held with others as joint tenants with rights of survivorship.
Example: Consider an older adult who recently became incapacitated and has accumulated a sizable estate that, with good management, could support the older adult through his sunset years. Though the will leaves the estate to the person’s children in equal shares, some assets will pass outside of probate; for example, to a longtime housekeeper as the pay-on-death beneficiary of a credit union account, and to a church as the beneficiary of a 401(k). When the person became incapacitated, a 1301 Management Trust was established, and one of the children was appointed guardian of the person. In drafting the 1301 Management Trust and selecting a trustee, care was taken to respect the incapacitated adult’s estate planning wishes and sidestep, to the extent possible, potential claims from persons receiving assets outside of probate against the trustee after the incapacitated adult’s death. To protect the incapacitated adult’s existing estate plan, the drafting attorney could consider asking the court to order the trustee of the 1301 Management Trust to maintain the incapacitated adult’s church as the beneficiary of the 401(k) plan and to designate the church as the beneficiary of any subsequent IRA rollover account resulting if the trustee is unable to maintain the 401(k) account with the plan administrator. The drafting attorney could also include language to guide the trustee with respect to retention of assets, investments, distribution, and apportionment of income, expenses, gains, and losses.
Frequently, when a 1301 Management Trust is formed for an incapacitated person, the trustee gathers and manages the assets under the trustee’s institutional canopy, paying little mind to existing beneficiary designations, pay-on-death designations, and rights of survivorship. Properly, the trustee’s primary focus is on the best interests of the incapacitated beneficiary. However, respecting the estate plan of the incapacitated beneficiary should factor into the discussion about the best interests of the beneficiary. Section 1301.204 of the Estates Code provides that, “[u]nless otherwise provided by the court . . . the trustee of a management trust shall . . . distribute the principal or any undistributed income of the trust to . . . the representative of the deceased ward’s or incapacitated person’s estate on the ward’s or incapacitated person’s death.” Tex. Est. Code § 1301.204.When an incapacitated beneficiary of a 1301 Management Trust properly establishes an estate plan, as in the example above, the practitioner should consider including a more tailored distribution-on-death provision in the trust document. Naturally, drafting a 1301 Management Trust agreement with an eye toward protecting potential successors in interest to an incapacitated person’s assets requires many considerations: (1) whether the beneficiary designations/pay-on-death provisions/joint tenant with right of survivorship agreements are valid; (2) whether those having an expectancy interest in the assets or estate of the incapacitated person should receive notice of the application for the creation of a 1301 management trust (see Tex. Est. Code § 1301.0511); (3) whether those having an expectancy interest in the assets or estate of the incapacitated person should join in a settlement agreement (see, e.g., Shepherd v. Ledford, 962 S.W.2d 28 (Tex. 1998)) wherein they approve of the distribution provisions of the 1301 Management Trust upon the death of the incapacitated beneficiary; (4) what tax implications are associated with proportionate distributions from nonqualified and qualified assets; and (5) whether a trustee is willing to serve when the trust contains more complicated management and distribution provisions. Trustees generally appreciate more instructive trust terms that help the trustee manage and distribute the assets earmarked for potential successors in interest, which can minimize the risk of later claims against the trustee.
§ 11.5:5Avoiding Final Distribution to Estate of Ward or Incapacitated Person
A contested guardianship often results when a person having compromised mental capacity begins signing estate planning documents, especially when the terms of such documents deviate significantly from the person’s previous estate plan or if they stray from what may be considered to be a natural distribution. Resolving the contested guardianship sometimes requires presettling the distribution plan to take effect upon the death of the proposed ward. Naturally, presettling the distribution plan would require a finding that the possibility of improvement in the proposed ward’s mental capacity is extremely remote.
Example: Consider a recently incapacitated person who has been married several times. The person has four children from the first marriage and enjoys a very close relationship with his children and grandchildren. Late in life, the incapacitated person remarries, and as his mental capacity begins to decline, he becomes susceptible to the influence of others. Despite the incapacitated person’s longtime relationship with his estate planning attorney, the new spouse has estate planning documents prepared on behalf of the incapacitated person by a different attorney, leaving the entire estate to the new spouse. Such a changed plan represents a significant departure from that which the incapacitated person had maintained for many years, as he had consistently provided that his children were to receive one-half of his estate. The children become aware of these changes and arrange for the parent to meet with the parent’s longtime attorney. The attorney refuses to take instruction from the longtime client or the children of the client, as the attorney questions his client’s capacity. The children then file for guardianship of their parent, and the new spouse contests the guardianship. After a long, bitter dispute, the parties meet for mediation. One of the sticking points preventing settlement of the guardianship dispute is that the incapacitated person’s latest estate-planning changes name the new spouse as the sole beneficiary. The parties all agree that a 1301 Management Trust is preferred to the creation of a guardianship estate, and no party wants to litigate the estate plan after the incapacitated person’s death. The parties are willing to agree that the incapacitated person’s estate should be distributed according to the terms of a minimally funded revocable trust the incapacitated person formed years before his mental capacity began to decline.
Tex. Est. Code § 1301.204 provides that, “[u]nless otherwise provided by the court . . . the trustee of a management trust shall . . . distribute the principal or any undistributed income of the trust to . . . the representative of the deceased ward’s or incapacitated person’s estate on the ward’s or incapacitated person’s death.” Given the family’s willingness to agree in a mediated settlement agreement that the revocable trust should govern the final distribution of the incapacitated person’s estate, the court approves a modification to the standard language of the 1301 Management Trust that enables the trustee to distribute the principal and undistributed income remaining in the management trust to the trustee of the revocable trust upon the incapacitated person’s death. The court’s willingness to allow such a trustee-to-trustee transfer upon the incapacitated person’s death enables the family to resolve the contested guardianship, preserve assets for the care of the incapacitated person, and avoid the possibility of a will contest upon the person’s death.
§ 11.5:6Hurdles to Modifying 1301 Management Trust
Finding innovative solutions to challenges that are as unique as the life stories giving rise to them inserts an element of risk that some practitioners may find unacceptable. The risk may be minimized when the 1301 Management Trust is used to address challenges in a way that enhances or protects the best interests of the beneficiary and ensures the due-process rights of interested persons. But institutional resistance on the part of trustees and judges may stymie efforts to tailor the 1301 Management Trust to the needs of a beneficiary. Many of the modifications suggested herein require the acceptance by interested persons or at least notice to persons whose interests are at stake. For example, if the terms of the 1301 Management Trust direct the distribution of the trust upon the death of the ward or incapacitated person to someone other than the personal representative of the estate of the ward or incapacitated person, in contravention of section 1301.204 of the Texas Estates Code, due-process concerns arise about those having an expectancy interest in the beneficiary’s estate. Naturally, such concerns may be put to rest if the deviations from the traditional 1301 Management Trust provisions are supported by a settlement agreement signed by all interested persons. In addition, many courts in Texas face budgetary constraints and lack the resources required to properly oversee guardianship cases. In January 2019, the Office of Court Administration released findings on its initiative to enhance protections of incapacitated persons by implementing the Guardianship Abuse, Fraud and Exploitation Deterrence Program. The findings support the program for reasons including that (1) over 21,000 of the state’s approximately 51,250 active guardianships reside in counties that lack resources to closely monitor these important cases; (2) a review of 29,606 guardianship files found that 41 percent were out of compliance; and (3) in the 244 counties in Texas without a statutory probate judge, the county judge or county court at law judge presides over guardianship cases without sufficient resources to monitor their cases. Office of Court Administration, Texas Guardianship Reform: Protecting the Elderly and Incapacitated 2 (Jan. 2019), www.txcourts.gov/media/1445683/gafedp-annual-report-fy19.pdf.
Facing scarcity of resources and attempting to standardize the review and audit of 1301 Management Trust accountings, some courts resist approving 1301 Management Trust terms that look unfamiliar. This resistance is not misplaced, as approving such terms requires the court to make a finding that the terms are in the best interests of the beneficiary. Tex. Est. Code § 1301.053. Further, the court must take a more circumspect approach than usual and determine whether all parties in interest are before the court. Moreover, the court must confirm that due-process concerns are addressed. Finally, once the 1301 Management Trust is operational, the court must revisit its terms each year as the annual accountings are being audited, if the distinctive language of the 1301 Management Trust impacts the management or distribution of assets.
The court may appoint an individual, including someone who is a private professional guardian, a nonprofit corporation qualified to serve as a guardian, or a guardianship program as the trustee of a 1301 Management Trust, provided the court finds that (1) the appointment is in the best interests of the ward or incapacitated person for whom the trust is created and (2) the value of the trust’s principal is either less than $150,000 or more than $150,000, but the applicant has been unable to find a financial institution in the geographic area willing to serve as trustee. In all other cases where the beneficiary is a minor child or an incapacitated person, the trustee must be a financial institution. Tex. Est. Code § 1301.057. If the management trust is formed for the benefit of a person having only a physical disability, the court is not required to appoint a financial institution to serve as trustee. In all other cases, the court must appoint a financial institution to serve as trustee of the 1301 Management Trust. Tex. Est. Code § 1301.057.
The application for creation of a 1301 Management Trust for a ward must be filed in the court in which the guardianship is pending. Tex. Est. Code § 1301.052(a). If the guardian of the person and the guardian of the estate are in agreement, both may join in the application. See Tex. Est. Code § 1301.051. If one person is serving as guardian of both the person and estate, that person should file the application in both capacities. See forms 11-1 through 11-4 in this chapter. The statute does not require a hearing on the application; however, the judge may decide a hearing is appropriate and most often does, especially if there is any indication of disagreement among the interested parties or any question about whether the trust is in the ward’s best interests. The judge also may appoint a guardian ad litem to assist the court in determining whether the trust would be in the ward’s best interests. Tex. Est. Code § 1301.054(c). If the court agrees to waive the hearing, the order should state that the court is creating a 1301 Management Trust for the ward and direct the guardian of the ward’s estate, if one has been appointed, to file the final account. See forms 11-5 and 11-6. Importantly, a 1301 Management Trust may also be created for an alleged incapacitated person who does not have a guardian if the court, after a hearing on the matter, finds that (1) the person who would be the beneficiary of the 1301 Management Trust is incapacitated and (2) the creation of a 1301 Management Trust is in the person’s best interest. Tex. Est. Code § 1301.054. Naturally, the alleged incapacitated person will have a court-appointed attorney ad litem (and a court-appointed guardian ad litem if necessary) to represent the alleged incapacitated person in the hearing to determine the person’s capacity. Tex. Est. Code § 1301.054(c). The establishment of a 1301 Management Trust must be in the ward’s best interests, and the court must make a finding to that effect. See Tex. Est. Code § 1301.053. Texas Estates Code chapter 1301 does not define “best interests,” nor does it address the factors the court may consider in determining best interests, so the attorney will have to describe these items based on the facts and circumstances. For example, if the applicant seeks to establish a 1301 Management Trust with supplemental needs provisions, the ward’s best interests will be served by preserving the ward’s eligibility for government benefits. If the 1301 Management Trust contains standard terms, the ward’s best interests will be served by saving the court costs and legal fees associated with a regular guardianship and obtaining the advantages of the professional management and broader investment options available to a corporate trustee.
Texas Estates Code chapter 1301 management trusts are considered grantor trusts under Internal Revenue Code sections 671–678. See 26 U.S.C. §§ 671, 677(a). Taxes due and the costs of preparation of tax returns may come out of trust funds. Income is generally taxable to the beneficiary. 26 U.S.C. § 671; 26 C.F.R. § 1.671–2. The trustee should be certain the appropriate tax returns are filed. See 26 U.S.C §§ 671–678.