Guardianship Management Trusts
§ 11.1Overview of Chapter 1301 Management Trust
A management trust established under chapter 1301 of the Estates Code is a court-ordered trust created for a ward or an incapacitated person. The court must find that such a trust is in the ward’s or incapacitated person’s best interests. Such a trust generally eliminates the need for a guardian of the ward’s estate and permits the ward’s property to be managed without application to the court for approval of discretionary distributions, payment of expenses, and other day-to-day administrative actions. Tex. Est. Code §§ 1301.053, 1301.101.
§ 11.2Termination of Guardianship
If all the assets of the guardianship estate are transferred to a chapter 1301 trust, the guardian terminates the guardianship estate in the same way that a guardianship terminates at the death of the ward or on the removal of the ward’s disabilities—by filing a final account, an application and order to discharge the guardian and terminate the guardianship, a waiver of notice of the final account, a receipt from the recipient of assets, and other appropriate documents. See generally chapter 14 of this manual.
After the chapter 1301 trust is created, the court may discharge the guardian of the estate only if the guardian of the ward’s person remains and the court determines that the discharge is in the ward’s best interests. Tex. Est. Code § 1301.152.
Texas Estates Code chapter 1301 specifies important technical requirements for management trusts.
If there is an existing guardianship, the guardian of the ward’s estate, the guardian of the ward’s person, the guardian of both the ward’s estate and his person, or the ward’s attorney ad litem or guardian ad litem may apply to the court in which the guardianship is pending to create a trust under chapter 1301 of the Texas Estates Code. Tex. Est. Code §§ 1301.051, 1301.053.
The application for creation of a chapter 1301 trust for a ward must be filed in the court in which the guardianship is pending. If the guardian of the person and the guardian of the estate are in agreement, both may join in the application. 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 11-3 in this chapter.
The statute does not require a hearing on the application; however, the judge may decide a hearing is appropriate, especially if there is any indication of disagreement among the interested parties or any question as to 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.
If the court agrees to waive the hearing, the order should state that the court is creating a chapter 1301 management trust for the ward and direct the guardian to file the final account. See form 11-4.
If the value of the trust’s principal is $150,000 or less and the court finds the appointment to be in the ward’s best interests, the court may appoint a person other than a financial institution to serve as trustee of the trust. Tex. Est. Code § 1301.057(c)(1). If the value of the trust’s principal is more than $150,000, the court may appoint a person other than a financial institution to serve as trustee only if the court finds that no financial institution is willing to serve as trustee and that the appointment is in the ward’s best interests. Tex. Est. Code § 1301.057(c). Before making a finding that there are no financial institutions willing to serve, the court must check any lists of corporate fiduciaries located in the state that are maintained at the office of the presiding judge of the statutory probate courts or at the principal office of the Texas Bankers Association. Tex. Est. Code § 1301.057(c). In all other cases, the court must appoint a financial institution to serve as trustee of the trust. Tex. Est. Code § 1301.057(b).
The establishment of a chapter 1301 trust must be in the ward’s best interests, and the court must make a finding to that effect. Tex. Est. Code § 1301.053. Chapter 1301 does not define the term 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. For example, if the applicant seeks to establish a chapter 1301 special needs trust, the ward’s best interests will be served by preserving the ward’s eligibility for government benefits. If the trust is not a special needs trust, it is presumptively in the ward’s best interests to save the court costs and legal fees associated with a regular guardianship and obtain the advantages of the professional management and broader investment options available to a corporate trustee.
The ward must be the sole beneficiary of a chapter 1301 trust. Tex. Est. Code § 1301.101(a)(1).
A chapter 1301 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), (3). The statute also allows for distribution “for the health, education, maintenance or support of . . . another person whom the [ward] . . . is legally obligated to support.” Tex. Est. Code § 1301.102(a).
Practice Pointer: Exceptions exist to the mandatory health, education, support, and maintenance standard for chapter 1301 management trusts. If the attorney wants the trust to qualify as a special 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 special needs not covered by a government benefits program. For all other chapter 1301 trusts, no distributions should be permitted for the benefit of others whom have a legal obligation to support the ward. In particular, such a provision should not be included in a trust for a minor beneficiary. The parents have a legal obligation to support the minor ward; the minor ward does not have a legal obligation to support the parents. Tex. Est. Code § 1301.101(c). See section 11.4:2 below.
A corporate fiduciary serving as the trustee of a chapter 1301 trust serves without bond. Tex. Est. Code § 1301.058(a). 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).
§ 11.3:8Trustee’s Compensation
Subject to the court’s approval, the trustee of a chapter 1301 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 Estates Code. Tex. Est. Code § 1301.101(a)(5), (b). See forms 11-17 and 11-18 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 the trustee’s regular fee schedule.
The court may appoint a successor trustee of a chapter 1301 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 chapter 1301 trust. Tex. Est. Code § 1301.156. 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 chapter 1301 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 chapter 1301 trust, the court may omit or modify terms required by Code section 1301.101(a), (a–1), or (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 and that it is in the ward’s best interests. Tex. Est. Code § 1301.101(c).
See forms 11-10 and 11-11 in this chapter.
If the ward is a minor, a chapter 1301 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 chapter 1301 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, 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, subject to Estates Code section 1301.202(c), or on the death of the ward. Tex. Est. Code § 1301.203(b).
If the minor beneficiary also suffers from a disability that would require the minor to access a government benefits program, the chapter 1301 management trust may be established as a special needs trust. However, some courts still require that the management trust terminate at the age of twenty-five, even though the ward is likely never to regain capacity. In this situation, the trust must be modified prior to the ward reaching the age of twenty-five in order to ensure that the ward’s government benefits will not be reduced or terminated. See Tex. Est. Code § 1301.203.
The trustee of a chapter 1301 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 Estates Code, and the annual account is subject to court review in the same manner as an annual account prepared by a guardian. 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.
On termination of a chapter 1301 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.
§ 11.3:15Application and Order to Discharge
After the order approving the final account is signed and entered, the trustee of a chapter 1301 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.
§ 11.4:1Pay-Back Provision in Special Needs Trust
If the chapter 1301 management trust qualifies as a special needs trust, the ward may be able to access government benefits programs. If the trust is seeking to qualify as a special 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 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.
§ 11.4:2Parents’ Duty to Support Child
If the beneficiary of a chapter 1301 trust is a minor, the parents still have a duty to support the child, the existence of a trust notwithstanding. Section 1156.051 of the Estates Code provides that a parent who is the guardian of a ward 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. Tex. Est. Code § 1156.051.
Chapter 1301 trusts are considered grantor trusts under Internal Revenue Code sections 671–678. Taxes due and the costs of preparation of tax returns may come out of trust proceeds. Income is taxable to the beneficiary. The trustee should be certain the appropriate tax returns are filed. See 26 U.S.C §§ 671–678.