Colman v. Department of Mental Health

Weaver, J. The issue in this case is whether the Department of Mental Health may seek reimbursement for the cost of care it provided to Barbara [432] Hertsberg from a trust established for her benefit. The determinative question is who should be considered the settlor of the trust — Barbara Hertsberg, or her mother, Edith Hertsberg, who funded the trust pursuant to a court order. The probate court concluded that Barbara was the settlor, and that the department could seek reimbursement from the trust. The Court of Appeals held that Edith was the settlor, and that the trust could not be reached. We reverse, and reinstate the order of the probate court. i Barbara Hertsberg is a developmentally disabled person. In 1983, her guardian filed a complaint in Wayne Circuit Court on her behalf, alleging that Edith Hertsberg, Barbara’s now-deceased mother, neglected Barbara and failed to provide for her with the Social Security benefits Edith Hertsberg had received on behalf of Barbara. A consent judgment was entered on January 17, 1986. Under its terms, Edith Hertsberg was ordered to fund a trust for the benefit of Barbara with $150,000. On January 23, 1986, a discretionary trust with a spendthrift provision was established pursuant to the consent judgment. The trust agreement named Edith Hertsberg as the grantor and Elaine Levy and Edie Colman as co-trustees. Upon the death of Barbara, the trust principal was to be distributed to several of her relatives. As a recipient of mental health services provided by the department, Barbara was subject to a financial liability determination. In May of 1994, the department determined that the trust assets were available to Barbara to reimburse the state for $90,800 in past services provided, and for $729 a month for continued [433] care. The trustee filed an administrative appeal of the department’s financial liability determination, but this appeal was adjourned by the consent of the parties, who agreed that the matter should be determined by a court. The probate court noted that discretionary trusts can protect assets from creditors when the trust settlor is a third party and the beneficiary has no absolute interest in the trust. However, relying on In re Johannes Trust, 191 Mich App 514; 479 NW2d 25 (1991), the court said that where the settlor of the trust is also the beneficiary, the assets are reachable by creditors. The court agreed with the department’s contention that Barbara Hertsberg was the true settlor of the trust because she was the plaintiff in the lawsuit from which the trust arose. The Court of Appeals reversed. It also focused on In re Johannes Trust, supra. The Court said that in light of Johannes, the probate court had erred in determining that Barbara Hertsberg was the settlor of the trust. Edith Hertsberg created the trust, and furnished the funds for it. Barbara contributed none of the trust assets. The department appealed and we granted leave. n A discretionary trust provides that a “trustee may pay to the beneficiary so much of the income or principal as he in his discretion determines . . . .” Miller v Dep’t of Mental Health, 432 Mich 426, 429; 442 NW2d 617 (1989). Normally, a discretionary trust cannot be reached by creditors because the beneficiary has no ascertainable interest in the assets. Id., p 431. However, where the beneficiary is also the settlor of [434] the trust, we agree with the Court of Appeals in In re Johannes Trust, supra, that creditors can reach the assets of the trust. Like the Johannes panel, we find persuasive and adopt Restatement Trusts, 2d, § 156. Section 156 states: (1) Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest. (2) Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit. [Id., p 326.] As recognized by the Court of Appeals in In re Johannes Trust, supra, it would be contrary to public policy to allow a person to shelter assets from creditors in a trust of which he is the beneficiary. Furthermore, to allow an individual to so shelter assets would defeat the express requirement of the Mental Health Code that individuals reimburse the state for services rendered to them by the department. MCL 330.1804; MSA 14.800(804).1 Thus, the dispositive [435] question in this case is whether Barbara Hertsberg was the settlor of the trust. We find that a settlor is one who provides consideration for a trust. See 191 Mich App 520; Ronney v Dep’t of Social Services, 210 Mich App 312, 317; 532 NW2d 910 (1995); Forsyth v Rowe, 226 Conn 818, 826; 629 A2d 379 (1993); Guaranty Trust Co of New York v New York Trust Co, 297 NY 45, 50-51; 74 NE2d 232 (1947). In In re Johannes Trust, supra, the petitioner, as guardian of her disabled sister, established a discretionary trust for the sister’s benefit from assets that the sister had inherited. The Johannes panel determined that, insofar as the trust was funded with assets provided by petitioner’s disabled sister, she would be considered a settlor of the trust, and the department could reach those assets.2 It held that to the extent the disabled sister funded the trust, she was the settlor and liable to the department for services provided. Id. In concluding that Barbara was not the settlor of the trust, the Court of Appeals reasoned: When reviewing a trust, the intent of the settlor should be carried out as much as possible and the settlor’s intent can be gained from the trust document. In re Maloney Trust, 423 Mich 632, 639-640 (Cavanagh, J., with Williams, C.J., and Levin, J., concurring), 641 (Ryan, J., with Williams, C.J., and Levin, J., concurring); 377 NW2d 791 (1985). Pursuant to the trust agreement, Edith Hertsberg created the trust by trans [436] ferring $150,000 to the trustees. The transfer of the money directly to the trustees indicated that Edith Hertsberg never intended for Barbara to receive the money. Because the $150,000 was never transferred to Barbara, she did not contribute any of her assets to the creation of the trust. See Johannes Trust, supra at 520-521. Therefore, the trial court erred when it concluded that Barbara Hertsberg was a settlor of the trust. [Unpublished opinion per curiam, issued July 5, 1996 (Docket No. 181189), slip op, p 3.] Although it is true that the trust agreement recites that Edith Hertsberg is the grantor of the trust, and that she transferred to the trustees the assets that funded the trust, the mechanics of the transaction are not controlling. It is the identity, not the intent, of the settlor that is at issue. The fact that Barbara Hertsberg, through her guardian, agreed that the funds would be paid into the trust, rather than directly to her, does not alter the fact that she had control over the disposition of the property.3 We find the Court of Appeals sole reliance on Edith’s intent as expressed within the trust agreement erroneous in this case, given that the motivation for the establishment of the trust is expressed within the consent judgment. The consent judgment states: That Edith Hertsberg shall forthwith fund a certain trust in favor of Barbara J. Hertsberg (a copy of which is attached hereto as Exhibit A) with $150,000.00; further that this requirement is binding upon her heirs, assigns, and personal representative. [437] Edith Hertsberg created the trust in exchange for the settlement of an action filed against her on Barbara Hertsberg’s behalf. The cause of action was a form of property belonging to Barbara Hertsberg, and the proceeds of that settlement formed the consideration for the trust. In an analogous and persuasive decision, the Connecticut Supreme Court held that a trust funded by the settlement of the beneficiary’s tort claim was a medicaid qualifying trust4 because the trust’s assets were attributable to the beneficiary even though the settlement was consummated by the beneficiary’s father. Forsyth v Rowe, supra, p 826. Therefore, we hold that Barbara Hertsberg was the settlor of the trust. Accordingly, we reverse the judgment of the Court of Appeals and reinstate the October 3, 1994, order of the probate court. Mallett, C.J., and Brickley, Boyle, and Taylor JJ., concurred with Weaver, J. MCL 330.1804; MSA 14.800(804) stated: The individual, the spouse, and the parents, as these terms are defined in section 800, shall be financially liable for services provided to the individual by the department. Under the version of MCL 330.1818(c); MSA 14.800(818)(c) applicable at the time of trial in this case, an individual’s ability to pay was determined from consideration of his or her financial situation. That consideration shall include, but need not be limited to, the following factors: [435] income, expenses, insurance proceeds, and number and condition of dependents, assets, and liabilities. These provisions were amended by 1995 PA 290. The revisions would not affect our holding in this case. The Johannes panel concluded that the record did not explain who had legal claim to the disabled sister’s share. As the department suggests, the situation is analogous to an employer agreeing with an employee to pay wages into the employee’s trust. The wages, like the settlement award, belong to the employee, and it is the employee’s decision regarding the manner in which payment is to be made. 42 USC 1396a(k) dealt with Medicaid qualifying trusts. This statute was repealed in 1993 under the Omnibus Budget Reconciliation Act.