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Articles
Changes To Estate, Gift and Generation Skipping Transfer Taxesdownload this article in Word format 1.) Estate tax currently affects decedent's estates that exceed a value of $675,000. 2.) The new law ultimately phases out the tax by the year 2010. The exemption amounts are as follows:
3.) Beginning in 2010 the top gift tax rate will be the top individual income tax rate as provided under the bill. Changes To The Income Tax Basis Of Inherited Assets After the repeal of the Estate and Generation-Skipping Transfer taxes, the present law rules providing for a fair market value (i.e., stepped-up) basis for property acquired from a decedent are repealed. A modified carryover basis takes effect, which provides that recipients of property transferred at the decedent's death will receive a basis equal to the lesser of the adjusted basis of the decedent or the fair market value of the property on the date of the decedent's death. For a more detailed summary of all the provisions contained in the conference agreement for H.R. 1836, the Economic Growth and Tax Relief Reconciliation Act of 2001, please visit www.house.gov/jct/ and access the document identified as JCX-50-01. How Rhode Island Dealt With the Change in the State Death Tax Creditdownload this article in Word format Recently, the Rhode Island Legislature amended the Rhode Island Estate Tax Law, which previously used the state death tax credit as its estate tax. This amendment was designed to compensate for the loss of projected revenue to the state, due to the recent changes in the federal estate tax law. The federal estate tax law has been changed whereby the estate tax will be gradually eliminated by the year 2010 and, in turn, the state death tax credit will be eliminated by the end of 2004. During the intervening years between 2002 and 2004, the state death tax credit under the new legislation will be slowly reduced. By the end of 2004, the state death tax credit will have been eliminated, thereby eliminating the tax the state is able to collect. In an effort to maintain the tax revenue that is currently being received under the existing estate tax law, Rhode Island has now effectively enacted its own estate tax by taxing those estates that exceed the current federal estate tax credit exemption of $675,000. Those estates will now be taxed at the federal state death tax credit amount that existed before Congress enacted the new law eliminating the federal estate tax. The Rhode Island Estate Tax Law That Would Have Existed Without The Recent Change:
The New Rhode Island Estate Tax Law Rhode Island’s new law reads in pertinent part as follows: 44-22-1.1. Tax on net estate of decedent.—(a) (2) For decedents whose death occurs on or after January 1, 2002, a tax is imposed upon the transfer of the net estate of every resident or nonresident decedent as a tax upon the right to transfer. The tax is a sum equal to the maximum credit for state death taxes allowed by 26 U.S.C. Section 2011 as it was in effect as of January 1, 2001. Under R.I.G.L. § 44-22-1.1, should a person die with an adjusted taxable estate greater than $675,000, his or her estate will be subjected to taxes on the assets exceeding the unified credit amount of $675,000 as set forth in 26 U.S.C. § 2011 for the tax year 2001.2 The adjusted federal taxable estates in the box to the right represent the size of federal estates for which no estate tax would have been due under the law in effect on January 1, 2001 (26 U.S.C. § 2011). Therefore, no state death tax credit would have been due to Rhode Island under this statute for estates of this size. The state death tax credit table set forth below is now the method to calculate the Rhode Island estate tax on all decedents leaving a “net estate” greater than $675,000. The term “net estate” as set forth in R.I.G.L. § 44-22-1.1 appears to be intended to mean that amount of assets as determined under the Internal Revenue Code in 26 U.S.C. § 2033, et seq., and is ultimately reported on line 3 of page 1 of the Federal Form 706 estate tax return.
In analyzing the impact of this tax on decedents’ estates in Rhode Island it is noteworthy to mention that while the tax does not affect a great many Rhode Island decedents, it does generate a substantial sum of money for Rhode Island. In calendar year 1999, which is the latest information available, the Rhode Island Department of Health, Vitals Records, reported 9,702 Rhode Island resident deaths. The Rhode Island Division of Taxation, Estate Tax Section, in fiscal year 1999 which ends June 30, 1999, reported that 294 estates generated a tax due to the State of Rhode Island. The actual estate tax paid in fiscal year 1999 was approximately $46.9 million which, according to John J. Paterra, Chief of the Estate Tax Division, represented an unusually large collection of revenue. These figures, while not completely accurate due to the Health Department reporting deaths on a calendar year and the Tax Division reporting revenue on a fiscal year, can reasonably be interpreted as a tax affecting only a small percentage of estates. One question that cannot be answered is how many future decedents’ estates will be affected by the tax, due to the anticipated transfer of wealth from the existing senior generation. Likewise, it is unclear whether some of Rhode Island’s population might choose to leave the state for another state without an estate tax. While many Rhode Islanders would like to see the elimination of this tax as is contemplated by the recent changes in the federal law, no one wants to see additional taxes imposed to replace lost revenue. Recognizing that the estate tax generated approximately $27.3 million in fiscal year 2001, one would have to look at the other taxes imposed by the State in order to generate sufficient dollars to replace those lost by this tax. For example, in analyzing the sales tax receipts for fiscal year 2000, the State of Rhode Island collected approximately $702.3 million. With a sales tax rate of 7%, each 1% of the sales tax generates approximately $100 million. Therefore, in order to be able to eliminate the estate tax completely and replace it by increasing the sales tax, the sales tax would have to be raised by approximately 1/4 of 1%. In analyzing the future impact of the state estate tax on Rhode Islanders, one must examine the most recent data available from the United States Treasury for tax year 1994:
Olga Pezza v. Michael Pezza et al.download this article in Word format [Cite as Pezza v. Pezza, 690 A.2d 345] No. 94-244-Appeal. Supreme Court of Rhode Island. February 26, 1997. Surviving spouse sought declaration of her rights in four parcels of real estate that her deceased husband had transferred prior to death into trust for benefit of his children by former marriage. The Superior Court, Providence County, Israel, J., found that trust was valid, and would not be declared invalid for purpose of satisfying surviving spouse's statutory survival interest in real property owned by husband at his death. Surviving spouse appealed. The Supreme Court, Bourcier, J., held, as a matter of first impression, that: (1) illusory transfer test was proper test to determine whether husband's inter vivos transfer of real property was sufficient to defeat surviving spouse's statutory share, and (2) husband's transfer of property to trust was real and complete, under illusory transfer test. Affirmed and remanded. Henry M. Swan, Providence, for Plaintiff. Anthony Mignanelli, Providence, Guy J. Wells, Greenwich, for Defendant. James P. Marusak, Providence, Amicus Curiae. OPINION BOURCIER, Justice. This case comes before us on appeal from a final judgment of the Superior Court. The plaintiff below, Olga Pezza (Olga), had filed a petition seeking a declaration of her rights in four parcels of real estate that her deceased husband, Anthony Pezza (Anthony), had transferred prior to his death into an irrevocable trust for the benefit of his children by a former marriage. The trial justice found that the trust created by Anthony was valid, constituted a completed and absolute inter vivos transfer by the time he died, and would not be declared invalid for the purpose of satisfying Olga's statutory survival interest, as codified in G.L.1956 ß 33-25-2.(fn1) Anthony owned and operated a garage door sales and installation business in John-ston, Rhode Island. His son, Michael Pezza (Michael), and his daughter, Patricia Pezza (Patricia), were both at one time or another employed in that business. Both Michael and Patricia were children of Anthony's first marriage, which ended when his first wife, Flora, died. On February 21, 1973, Anthony married Olga, whose first marriage had ended in divorce. At some point during their marriage, Olga was listed as the joint owner of a residence in Florida that Anthony had inherited from his mother. Olga and Anthony also shared several joint bank accounts. On December 29, 1983, Anthony created an inter vivos trust in which he named himself trustee and his son, Michael, successor trustee. Four parcels of real estate, acquired by Anthony prior to his marriage to Olga, were conveyed to that trust. Also conveyed to the trust were the shares of stock owned by Anthony in his garage door business corporation. Anthony's intent when conveying his real and personal property into the trust, as expressed to his attorney who drafted the trust documents, was to have his children own the property after his death, in satisfaction of a deathbed promise he had made to his first wife.(fn2) However, despite his conveyance of the property to the trust, Anthony continued to occupy one of the parcels as his marital estate. Furthermore, he continued to collect rents from the other three parcels. Additionally, as part of the trust agreement, Anthony retained the power to revoke the trust and the power to demand payment of the principal. Anthony's will, executed simultaneously with the trust, contained a "pour-over" provision that provided that any of his remaining assets would be placed into and become part of the trust upon his death. On June 25, 1986, following a disagreement between Anthony and Olga, Anthony resigned as trustee of the trust created on December 29, 1983, and pursuant to the provisions of the trust agreement, appointed his son, Michael, as his successor trustee. Anthony also on that same date waived his right to revoke the trust. On November 14, 1986, Olga commenced divorce proceedings against Anthony. On December 5, 1986, less than a month after commencement of the divorce proceedings, Anthony disclaimed his power to demand payment of the trust principal, to be effective as of June 25, 1986, that being the date when Michael was appointed successor trustee and Anthony waived his right to revoke the trust. Anthony died testate on August 18, 1990. In her complaint for declaratory relief filed in the Providence County Superior Court on January 17, 1991, Olga contended that Anthony's transfer of his real property into the trust for the benefit of his children from his first marriage was a fraudulent attempt on his part to deny her of her marital rights granted pursuant to ß 33-25-2, which provides that a surviving spouse becomes entitled to a life estate in all of his or her deceased spouse's real estate owned in fee simple at the time of his or her death. Olga contended that the trust should be declared invalid and that she should be declared to have a life estate in the real property that Anthony had deeded to the trust. After trial without a jury on February 14 and 17, 1994, the trial justice, in a written decision entered pursuant to Rule 52(a) of the Superior Court Rules of Civil Procedure, found that Olga had failed to prove a fraudulent transfer on the part of Anthony in creating the trust and that no legal basis had been shown for invalidating the final trust agreement executed by Anthony on December 29, 1983. The trial justice determined initially that the trust became irrevocable and nontestamentary in nature as a result of Anthony's actions taken on June 25 and December 9, 1986. The trial justice in his decision noted further that, in deciding whether to enforce the trust agreement, there existed a conflict between two competing policy concerns, namely, the right of a property owner to freely alienate his or her property interests and the right of a surviving spouse to some continuation of his or her interest in the property owned by his or her deceased spouse in fee simple at the time of his or her death, the latter right being the policy concern that was once protected by dower and curtesy prior to their abolition by ß 33-25-1. Section 33-25-2, which grants a life estate to a surviving spouse, replaced dower and curtesy as the means through which a surviving spouse's rights are protected. The trial justice, after reviewing various court holdings from other jurisdictions, concluded that there were basically two tests utilized by the courts in situations such as were present before him, one being the intent to defraud or fraudulent transfer test and the other being the illusory transfer test. After consideration of the relevant policy concerns inherent in each and after thoroughly reviewing both the relevant case law and the relevant facts in the trial record, he concluded that the illusory transfer test, as espoused in Newman v. Dore, 275 N.Y. 371, 9 N.E.2d 966 (1937), provided the best and fairest means of analysis. The trial justice consequently held that transfers of property that serve to defeat a surviving spouse's statutory share are invalid only if illusory and that an intent to defraud is, standing alone, insufficient to invalidate an irrevocable trust agreement. The trial justice found additionally that on the basis of the facts in the trial record, Anthony's transfer of his real estate to the trust, although arguably testamentary in nature when first made in 1983, was later transformed into a real and nonillusory inter vivos trust by 1986 when he appointed his son, Michael, as trustee and made the trust irrevocable. Accordingly, the trial justice found that at the time of Anthony's death the trust was real, valid, and not illusory, and the property that had been transferred into the trust was not therefore subject to the life estate provided by ß 33-25-2. This Court has not yet considered the question of whether an inter vivos trust can be used to defeat a surviving spouse's statutory right to a life estate in his or her deceased spouse's real estate. Therefore, when an issue of first impression is presented to us, we generally look to other jurisdictions for guidance. Those other jurisdictions that have previously considered the question of whether an inter vivos trust can be used to defeat a surviving spouse's statutory survival interest in real estate have used various approaches in their analyses. The two primary tests employed by the various courts examining this issue are known as the fraudulent intent test, otherwise known as the intent to defraud test, and the illusory transfer test. In the fraudulent transfer test, the court examines several case-specific factors in order to determine whether in the particular case before it the deceased spouse had at the time of the transfer of property into the trust an intent to defraud his or her spouse of his or her statutory survival interest. Those factors are "if the transfer was made without consideration; the size of the transfer in relation to the [spouse's] total assets; the time between the transfer and the [spouse's] death; relations which existed between the husband and wife at the time of the transfer; and the source from which the property came." Sherrill v. Mallicote, 57 Tenn.App. 241, 417 S.W.2d 798, 802 (1967). Once those factors have been considered, the court must then decide whether the transfer was made with an intent to deprive the surviving spouse of his or her statutory share, and if the court determines that such an intent to deprive was present, the court will invalidate the transfer and make the trust property available for distribution to the surviving spouse pursuant to the jurisdiction's statutory survival share statute. See also Hanke v. Hanke, 123 N.H. 175, 459 A.2d 246 (1983). The illusory transfer test involves an approach different from that of the fraudulent intent test. It focuses not on the intent of the transferor-spouse but, instead, on the substance of the transfer itself, that is, whether the transfer was "real" or "illusory." In Newman, supra., the most often cited case involving the illusory transfer test, the New York court noted that most jurisdictions have declined to adopt the fraudulent intent test either because to do so would "cast doubt upon the validity of all transfers made by a married man [or woman], outside of the regular course of business" or because it was "difficult to find a satisfactory logical foundation for it." 9 N.E.2d at 968. The court opined that the fraudulent intent of the spouse making the inter vivos transfer to a trust was not relevant to the court's inquiry because the law in New York at the time Newman was decided gave a surviving spouse only an expectancy interest in the real property of the other spouse(fn3), an interest conditioned on the fact that the spouse would own some real property at the time of his or her death. Furthermore, the court noted that the law in New York at that time did not restrict transfers of property during the life of a spouse. Therefore, the court in Newman, concluded that no right of the wife had been invaded by the husband's inter vivos transfer of his property, which incidentally acted to defeat the wife's mere expectancy interest in her statutory survival share. As a result, the Newman court held that the only relevant inquiry in the factual situation before it wherein the surviving spouse had only an expectancy interest prior to the death of the other spouse was whether the spouse who had transferred the property had "in good faith divested himself [or herself] of ownership of his [or her] property or ha[d] made an illusory transfer." 9 N.E.2d at 969. The court explained that although an intent to defraud is not relevant to the court's inquiry under the illusory transfer test, the court must nonetheless still consider whether the deceased spouse, when he or she made the inter vivos transfer to the trust, had an "intent to divest himself [or herself] of the ownership of the property." Id. [1] The relevance of intent when applying the illusory transfer test was further considered later in Johnson v. La Grange State Bank, 73 Ill.2d 342, 22 Ill.Dec. 709, 383 N.E.2d 185 (1978). In that case the Illinois court said that the relevant inquiry as to intent "relates to the absence of a present donative intent, not to the presence of an intent or purpose to minimize or defeat the statutory marital right of the now surviving spouse." Id., 22 Ill.Dec. at 717, 383 N.E.2d at 193 (quoting Toman v. Svoboda, 39 Ill. App.3d 394, 349 N.E.2d 668, 673 (1976)). That court proceeded to add that "[a]lthough the spouse's marital rights can be defeated by an actual transfer, a purported transfer whereby the owner does not intend to convey a present interest, but intends to retain ownership, is evidence of an intent to defraud," which is sufficient to invalidate the trust. Id. (citing Newman, supra.). Thus, the court concluded that "an inter vivos transfer of property is valid as against the marital rights of the surviving spouse unless the transaction is tantamount to a fraud as manifested by the absence of donative intent to make a conveyance of a present interest in the property conveyed. Without such an intent the transfer would simply be a sham or merely a colorable or illusory transfer of legal title. * * * [I]f no interests passed under the trusts to the beneficiaries before the death of the settlor then the trusts are testamentary and invalid." Id., 22 Ill.Dec. at 718, 383 N.E.2d at 194. In order for a transfer of real property to a trust to be real, valid, and nonillusory, the spouse transferring the property must effectuate a completed inter vivos transfer by conveyance that both divests him or her of all ownership in the property and that, also, at the time of conveyance, is made with the proper donative intent. See, e.g., Weber v. Harkins, 65 R.I. 53, 13 A.2d 380 (1940)(discussion of donative intent requirement for a completed inter vivos gift and transfer). That rule has also been adopted by the Maine court in Staples v. King, 433 A.2d 407 (Me.1981), where that court, in adopting the illusory transfer test, noted that "[i]t would be irrational to allow a married person to circumvent the statute by simply refraining from making a will and, instead, executing trusts which appear to deplete his estate but which reserve for himself, in effect, the benefits of owning the trust property." Id. at 411. Although Staples was merely concerned with whether the plaintiff in that case had stated in her complaint a claim upon which relief could be granted and not with the actual merits of the plaintiff's action, the court concluded that a trust that "from the technical point of view * * * does not quite take back all that it gives, but practically it does," would not be upheld if it acted so as to defeat a now-surviving spouse's statutory survival share. Id. (quoting Newman, 9 N.E.2d at 969). [2--5] Turning now to the case facts before us, we conclude, as did the court in Newman, that our statute, ß 33-25-2, which grants a life estate to a surviving spouse in the real property owned in fee simple by his or her spouse at the time of his or her death, creates only an expectancy interest in the surviving spouse. The interest that descends and passes by ß 33-25-2 does not become vested until one spouse dies while owning real property in fee simple. Until the time of death there is no means by which to determine the exact extent of the interest to which the surviving spouse is entitled, and therefore, a surviving spouse cannot possess a determinable vested interest until his or her spouse dies.(fn4) Because ß 33-25-2 creates only an expectancy interest, a property-owning spouse is free, while he or she is alive, to transfer his or her real property without interfering with any vested right of a surviving spouse. We believe that the illusory transfer test rule, in the context of the case facts before us in this appeal, also serves both to recognize and to give deserved deference to the policy interests once protected by our former dower and curtesy statute, ß 33-25-1, and the rights of surviving spouses intended by ß 33-25-2. That rule mandates that any conveyance of real estate made by one spouse to any third party or trust must be real and complete and not illusory.See Johnson, supra; Staples, supra; Newman, supra. We adopt now the illusory transfer test as the proper test to be used when determining whether a now-deceased spouse's inter vivos transfer of real property is sufficient to defeat a surviving spouse's statutory share pursuant to ß 33-25-2. [6, 7] When that test is applied to the facts in the record before us, it is clear that Anthony's transfer of his property to the trust was real and complete as of December 5, 1986, at which time, having previously resigned as trustee and having previously appointed his son as successor trustee, he disclaimed his power to compel any reconveyance to him of the real estate subject to the trust pursuant to G.L.1956 ß 34-5-2, thus making the trust completely irrevocable and real. Anthony's intent when creating the trust, as noted earlier, was relevant only insofar as it tended to establish whether he had an intent to totally divest himself of the real estate, that is, whether he had the present donative intent that was required for the validity of his inter vivos transfer. Arguably, Anthony possessed only an intent to create a testamentary gift when he first attempted to establish the trust on December 29, 1983, evidenced by the fact that he retained the power to revoke the trust, retained the power to demand payment of the trust principal, and was the named trustee as well as the trust beneficiary. However, he certainly possessed and expressed the necessary present donative intent by June 25, 1986, when he named his son as successor trustee and totally divested himself of the right to revoke the trust. When later, on December 5, 1986, he disclaimed his right to demand any payment of the trust principal, it became absolutely clear that the trust was not then illusory. Therefore, at the time of Anthony's death on August 18, 1990, the trust was complete, valid, and real, having been made so with a then-present donative intent on Anthony's part, which completely divested him of all benefits of trust property ownership. Therefore, the trial justice's findings that the terms of the trust agreement should be enforced and that the real property conveyed to the trust by Anthony is not subject to Olga's statutory survival interest as codified in ß 33-25-2 are without error. It was Olga's burden at trial to establish "by clear and satisfactory evidence" that Anthony did not intend, in praesenti, on December 5, 1986, to then finally and completely divest himself of all ownership and control over the trust property and to vest immediate exclusive ownership and control in the trust. Slepkow v. Robinson, 113 R.I. 550, 556, 324 A.2d 321, 325 (1974). She failed to so persuade the trial justice whose findings we sustain. Accordingly, for all the foregoing reasons, Olga's appeal is denied and dismissed. The final judgment appealed from is affirmed, and the papers in this case are remanded to the Superior Court. Footnotes: 1. General Laws 1956 ß 33-25-2 reads as follows: "Whenever any person shall die leaving a husband or wife surviving, the real estate owned by the decedent in fee simple at his or her death shall descend and pass to the husband or wife for his or her natural life subject, however, to any encumbrances existing at death; provided that the liability, if any, of the decedent to discharge the encumbrance or encumbrances shall not be impaired. The provisions of ßß 33-1-1 and 33-1-2 shall be subject to the provisions of this chapter and of ß 33-1-6." 2. Some property was not conveyed to the trust. Anthony explained to his attorney that it was his intention that Olga would retain possession of the house in Florida and would enjoy the benefit of certain monetary assets, including his individual retirement account. 3. The relevant law in Newman v. Dore, 275 N.Y. 371, 9 N.E.2d 966 (1937) provided that a surviving spouse could elect to take his or her share of the deceased spouse's estate according to the laws of intestacy instead of taking under the spouse's will. However, a surviving spouse could not make that election when the deceased spouse "'devised or bequeathed in trust an amount equal to or greater than the intestate share, with income thereof payable to the surviving spouse for life.'" Id. at 966. The deceased husband in Newman did have such a provision in his will whereby his wife would get a life estate in one third of his estate at death. However, three days prior to the husband's death, he transferred all of his property into a trust. It is the validity of that later trust that the wife challenged in Newman. 4. It should also be noted that, in fact, until one spouse dies, it is not even clear which spouse will be the surviving one. Thus, even who will be the surviving spouse is a mere expectancy. Edward A. Chenot v. Nancy Bordeleau, Director Of Rhode Island Department Of Human Servicesdownload this article in Word format No. 88-173-M.P. Supreme Court of Rhode Island. July 12, 1989. Mentally retarded beneficiary of a trust fund sought review of decision of Department of Human Services appeals officer sustaining termination of beneficiary's medical benefits. The Superior Court, Providence County, Cresto, J., reversed the appeals officer's holding and the Department petitioned for a writ of certiorari. Certiorari was granted and the Supreme Court, Kelleher, J., held that: (1) trust was a discretionary trust and, thus, beneficiary could not compel trustee to make distribution of trust income or principal for his support, and (2) Department erred when it considered the assets of the trust as beneficiary's resources. Writ of certiorari previously issued quashed, petition for certiorari denied and dismissed, and record in case returned to Superior Court. Anthony R. Mignanelli, Lauren E. Jones, Jones & Aisenberg, Providence, for plaintiff. James E. O'Neil, Atty. Gen., Terence J. Tierney, Asst. Atty. Gen., Providence, for defendant. OPINION KELLEHER, Justice. The issue raised by this administrative appeal is whether the interest of Edward A. Chenot (Edward) in a trust was properly considered a resource by the Department of Human Services (DHS) for the purpose of administering its medical-assistance program. The uncontroverted facts are substantially as follows. Edward is a mildly retarded adult. In 1977 his father, Albert J. Chenot (the father), executed a last will and testament that left the majority of his estate, including the family residence, in trust. The will named the Pawtucket Trust Company as trustee and provided in pertinent portion that "[t]he trustee may at any time or times pay all or any portion of the net income or principal or both net income and principal of the trust to or for the benefit of my son, Edward A. Chenot, as the said trustee, in its sole and uncontrolled discretion, shall deem necessary or advisable for his comfort, support and welfare. Upon the death of my son, Edward A. Chenot, the trustee shall provide for and pay for all necessary funeral expenses out of the trust estate and the remainder after the payment of said expenses shall be divided equally among my children, * * * share and share alike. "It is my intention that the trustee shall exercise its discretion primarily for the benefit of Edward A. Chenot because of his special needs and circumstances." After the father's death in late 1977 Edward and his sister continued to reside in the family residence. However, in 1985 the sister realized that she was incapable of both maintaining the home and providing Edward with the care he required. Consequently the decisions were made that the home would be sold and Edward would be admitted to a facility where he would be taught the skills necessary for independent living. On May 1, 1985, Edward was admitted to the Intermediate Care Facility for the Mentally Retarded operated by the Blackstone Valley section of the Rhode Island Association for Retarded Citizens (the facility). From this date until August 16, 1985, DHS considered Edward eligible for its medical-assistance program and paid the entire cost of the care provided by the facility. However, on this later date DHS's opinion regarding Edward's eligibility for medical benefits changed dramatically. This change occurred because on August 16, 1985, the family residence was sold. When the proceeds of the sale were placed in the trust, it contained over $42,000 of liquid assets. Upon learning of the trust's enhanced status, DHS immediately terminated Edward's medical-assistance benefits. The rationale for this termination relied on a portion of DHS's manual that provides that disabled applicants for medical assistance are ineligible if they possess resources in excess of $4,000. The DHS considered the trust assets Edward's resources and terminated his benefits.(fn1) Soon after this termination occurred, Edward requested and received an administrative hearing. The DHS appeals officer sustained the termination on the ground that "the funds in the trust, * * * are available to be utilized for the comfort, support and welfare of [Edward]." Following this decision, Edward sought Superior Court review pursuant to G.L.1956 (1988 Reenactment) ß 42-35-15. The Superior Court justice considered many factors, including the circumstances surrounding the creation of the trust, the intent of the father, and the expected duration of Edward's hospitalization and reversed the appeals officer's holding. The DHS, acting pursuant to ß 42-35-16, petitioned this court for a writ of certiorari. The petition was granted on September 8, 1988. The issue of whether DHS can consider the assets of the instant trust as Edward's resources is a question of law. Although this court may "not substitute its judgment for that of the agency in regard to the credibility of witnesses or the weight of the evidence concerning questions of fact," we may freely review questions of law "'to determine what the law is and its applicability to the facts.'" Carmody v. Rhode Island Conflict of Interest Comm'n, 509 A.2d 453, 458 (R.I.1986). Even though we have never decided whether a beneficial interest in a trust can properly be considered a resource in determining eligibility for medical-assistance benefits, similar issues have been decided in other jurisdictions. See Hoelzer v. Blum, 93 A.D.2d 605, 462 N.Y.S.2d 684 (1983); Lineback by Hutchens v. Stout, 79 N.C.App. 292, 339 S.E.2d 103 (1986); Lang v. Commonwealth Dept. of Public Welfare, 515 Pa. 428, 528 A.2d 1335 (1987). These courts have based their decisions primarily upon the variety of the trust being considered. [1] The two varieties of trusts commonly encountered in the above-cited cases are the support trust and the discretionary trust. When a court decides that the benefit applicant is the beneficiary of a support trust, the trust assets are considered resources of the applicant. In Re Will of Cooper, 76 Misc.2d 166, 349 N.Y.S.2d 613 (1973); Stoudt v. Commonwealth Dept. of Public Welfare, 76 Pa. Commw. 576, 464 A.2d 665 (1983). However, if the trust involved is a discretionary trust, courts hold that its assets are not assets of its beneficiary. Application of Yan Manor Nursing Home, Inc., 96 Misc.2d 463, 409 N.Y.S.2d 201 (1978). [2] A support trust directs the trustee to apply the trust's income and/or principal as is necessary for the support, maintenance, education, and welfare of the beneficiary. First National Bank of Maryland v. Dept. of Health and Mental Hygiene, 284 Md. 720, 725, 399 A.2d 891, 893 (1979); Restatement (Second) Trusts ß 154 (1959). The beneficiary of a support trust can compel the trustee to make a distribution of trust income or principal merely by demonstrating that the money is necessary for his or her support, maintenance, education, or welfare. Id. [3] The discretionary trust allows the trustee complete and uncontrolled discretion to make allocations of trust funds if and when it deems appropriate. First National Bank of Maryland, 284 Md. at 725, 399 A.2d at 894. Because the trustee is given such broad powers, the beneficiary can only compel the trustee to distribute funds if it can be shown that the trustee is abusing its discretion by acting arbitrarily, dishonestly, or improperly in regard to motive in denying the beneficiary the funds sought. Town of Randolph v. Roberts, 346 Mass. 578, 579, 195 N.E.2d 72, 73 (1964); Lineback, 79 N.C.App. at 297, 339 S.E.2d at 106. [4] As our discussion indicates, the task of finding a solution to this controversy would be simplified if the father had created either a support or a discretionary trust. However, a review of the language employed by the father indicates that he created an amalgamation of the two. Such a creation requires us to determine the legal significance of the words utilized by the father. The primary emphasis of the father's will was that the trustee was to have "sole and uncontrolled discretion" to administer the trust. In fact on no fewer than six occasions the will granted the trustee sole discretion. Despite this obvious emphasis, DHS argues that the language concerning Edward's "comfort, support, and welfare" negates the trustee's discretion and converts the instant trust into a support trust. We disagree. The language relied upon by DHS merely directs the trustee to exercise its discretion on Edward's behalf. The trustee is in no way required to provide a specific type of support to Edward. The trustee is only required to make disbursements of trust assets that it deems "necessary or advisable for [Edward's] comfort, support, and welfare." Since we find this language to be an insignificant limitation on the trustee's discretionary powers, we hold that the father's words created a discretionary trust. [5]This court, in the case of Stone v. Westcott, 18 R.I. 685, 687, 29 A. 838, 839 (1894), recognized a discretionary trust and held that the trustees are the sole judges of the propriety of applications for funds. "So long as they act in good faith, their exercise of the discretion or refusal to exercise it cannot be controlled by the court." Id. In the instant case the trustee refused to apply trust funds toward Edward's expenses at the facility. In a letter from the trustee to the facility, the trustee stated that it intended to distribute trust assets over a long period so as to help Edward live independently. Accordingly it refused to pay the bill from the facility, saying that doing so would exhaust the funds and run contrary to the intent of the trust. In light of Stone we cannot hold that the trustee erred in refusing to pay the facility's bills. [6] For the reasons stated, DHS erred when it considered the assets of the trust as Edward's resources. The DHS's petition for certiorari is denied and dismissed. The writ previously issued is quashed, and the record in the case is returned to the Superior Court with our decision endorsed thereon. Footnotes: 1. Although the father's home had been an asset of the trust since his death, its value only became a "resource" upon its sale because a portion of DHS's manual specifically excludes a home in which the applicant is living from the definition of "resource." |
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