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October 23rd, 2024
Contributor: Ethan J. Loch
In re Hector M. Hernandez Supplemental Needs Trust: A Rare Published Opinion on Trusts and Probate
Introduction
The Michigan Court of Appeals recently issued a rare published opinion in a probate case, In re Hector M Hernandez Supplemental Needs Trust. This decision addresses important issues surrounding special needs trusts, notice requirements in protective proceedings, and the validity of trust provisions.
The case arose from a dispute over the distribution of remaining funds in a supplemental needs trust established for Hector M. Hernandez Sr. following a $2 million medical malpractice settlement. After Hector suffered a major stroke in 2014 that left him quadriplegic, his sister and guardian, Luisa Martinez, hired an attorney to create a special needs trust to manage the settlement funds. This was done without ever consulting or giving notice to Hector’s children. The trust directed the remaining funds, after all payments due to the State of Michigan were made, to be distributed to Luisa.
When Hector died in 2021, approximately $2 million remained in the trust. A dispute emerged between Luisa, who claimed entitlement to the funds under the trust’s residuary clause, and Hector’s adult children, who argued they should have received notice of the trust’s creation as Hector’s presumptive heirs.
Court’s Analysis
The court’s analysis focused on two main issues: notice requirements and the validity of the trust’s residuary clause.
With respect to notice, the court held that Hector’s adult children were entitled to notice of the petition for funding and approval of the special needs trust. This decision was based on the Estates and Protected Individual Code’s (EPIC) notice requirements for protective proceedings, which apply even before a protective order is entered.
The court explained that notice of a hearing for a protective order must be provided to “the ward or the individual alleged to be incapacitated and that individual’s spouse, parents, and adult children.” The court rejected the argument that notice was not required because Hector was not yet a “protected individual” at the time of the petition, emphasizing that these notice requirements apply to the petition itself, before any protective order is entered.
With respect to the residuary clause, the court found the trust’s residuary clause, which directed remaining assets to Hector’s sister Luisa, to be unenforceable. This decision was based on several factors. First, the clause contradicted the circuit court’s order creating the trust, which explicitly barred Luisa from receiving any funds from the settlement. Secondly, Luisa’s limited authority as guardian did not extend to making estate planning decisions for Hector. And finally, the stated purpose of the special needs trust was to supplement governmental benefits, not to distribute assets to Luisa.
The court also rejected the argument that the residuary clause could serve as Hector’s will. Under MCL 700.2502, a valid will must be in writing and signed by the testator. The trust lacked Hector’s signature, and there was insufficient evidence of his intent to leave the remaining balance to Luisa. Thus, the trust dissolved upon Hector’s death and payment of necessary expenses. The remainder of the funds would pass to Hector’s estate and then by the laws of intestacy (which take effect when a person dies without a valid will).
Conclusion and Significance
This case offers several important lessons for clients involved in estate planning, especially when dealing with special needs trusts and incapacitated individuals. First, it underscores the critical importance of proper notice in probate proceedings. Even when creating a trust for an incapacitated person, all presumptive heirs must be notified of the proceedings. Failure to provide such notice can lead to the invalidation of trust provisions or even the entire trust.
Secondly, the case highlights the limitations of a guardian's authority in estate planning matters. Guardians cannot make unilateral decisions about the distribution of their ward’s assets after death, even when creating a special needs trust. Any provisions that go beyond the guardian's authority or the court’s explicit instructions may be deemed unenforceable.
Thirdly, this decision emphasizes the need for clear and unambiguous documentation of the incapacitated person’s intent, especially when it comes to the distribution of assets after death. Without such evidence, even seemingly straightforward trust provisions may be challenged and overturned.
In light of these lessons, clients should work closely with experienced estate planning attorneys to navigate the complex legal landscape of special needs trusts and incapacity planning, ensuring that all procedural requirements are met and that the incapacitated person’s wishes are clearly and legally documented.
Disclaimer
This publication is for general information only. The information contained is not intended as formal legal advice. If you have any questions or need assistance, please contact your attorney at Curtis, Curtis & Brelinski, P.C.
Click here for the In re Hector M Hernandez Supplemental Needs Trust appellate opinion.
Article by: Ethan J. Loch
Categories: Firm News