Rep. Elliott Naishtat, D-Austin, filed HB 628 on January 12, 2001. HB 628 would permit guardians ad litem to apply for creation of a guardianship management trust (a trust created under Section 867 of the Probate Code and often referred to as an "867 trust") and would permit individuals to serve as trustee of those trusts in certain circumstances.

Guardianship management trusts under Section 867 are an alternative method of managing the assets of an incapacitated person or minor. Currently only a guardian or attorney ad litem may apply for creation of such a trust, and only banks or trust companies may serve as trustee.

NON-CORPORATE TRUSTEES

The most significant change proposed by HB 628 would be to permit an individual to serve as trustee of an 867 trust. If the value of the trust's principal is $100,000 or less, the court would be able to appoint a non-corporate trustee upon a finding that it would be in the best interests of the incapacitated person -- no showing that a bank or trust company is unwilling to serve would be required. If the value of the trust principal exceeds $100,000, the court could appoint a non-corporate trustee if the court finds that doing so would be in the incapacitated person's best interests and if there is a showing that no bank or trust company is willing to serve. A non-corporate trustee would have to post a bond equal to the value of the trust's principal and projected annual income, and Section 868B would be added to the Probate Code to so provide.

Sometimes it is difficult to get a corporate trustee to take an 867 trust, especially if it is small. In most cases this is just a nuisance, since a traditional guardianship can be used. On the other hand, in Medicaid-planning situations, the inability to create an 867 trust because no corporate trustee is available can be critical. An 867 trust can be adapted to be a "supplemental care trust" or "special needs trust" under 42 U.S.C.A. § 1396(d)(4)(a). A (d)(4)(A) trust can be used to enhance the life of an incapacitated person without disqualifying him or her from Medicaid, but it must be a trust created by a parent, grandparent or the court -- a traditional guardianship won't do. Under current law, if the incapacitated person's caregiver cannot find a corporate trustee willing to take an 867 trust (or come up with another creative solution), the incapacitated person's assets may have to be used up before the person qualifies for Medicaid. Allowing an individual to serve in certain cases will make this problem easier to deal with.

The same problem exists with respect to trusts created under Section 142.007 of the Property Code. So-called "142 trusts" also require a corporate trustee. HB 628 would not change that. In the past, some statutory probate judges have been willing to support a change to permit non-corporate trustees of 867 trusts, but they have not been willing to have the bill making the change to 867 trusts include a parallel change to 142 trusts. In 1999, HB 3028, which attempted to permit individual trustees of 142 trusts, and HB 3632, which would have permitted non-corporate trustees of 867 trusts if the trust principal was worth $50,000 or less and if no bank or trust company was willing to serve. The individual trustee part of HB 3028 was dropped before its Senate companion, SB 1388, was enacted, so current law still prohibits individual trustees of 142 trusts. HB 3632 failed to pass, but its provisions regarding individual trustees of 867 trusts were added at the last minute to HB 1851, which was the State Bar guardianship bill in 1999. HB 1851 was vetoed by Governor Bush for an unrelated reason.

This year's proposal, HB 628, is superior to the 1999 proposal regarding 867 trusts, since it permits non-corporate trustees of larger trusts. Hopefully it will pass this time. Also, don't be surprised if a similar proposal is made with respect to 142 trusts in a different bill filed later this session.

Requiring a non-corporate trustee to post a bond is a necessary parallel to guardianships. The penalty of the bond in HB 628 is similar to that imposed in guardianship cases -- the value of the trust principal plus projected annual income -- but there is nothing in the proposed statute that (1) would make it unnecessary to post a bond for the value of real property or (2) would permit safekeeping agreements to reduce the size of the bond. Perhaps the drafters of HB 628 concluded that the value of real property should be included in the penalty of the bond (even though its value is excluded in guardianships under Section 703(d) of the Probate Code) since under normal trust concepts a trustee would be free to sell real property without court approval. However, the trust instrument could be drafted so that court approval of the sale of real property is required. Also, the court could order safekeeping for a trust as easily as it does for a guardianship. Nevertheless, HB 628 does not provide for these possibilities, and this may make it harder for prospective individual trustees to be bonded. Perhaps HB 628 will be amended to address this point.

GUARDIANS AD LITEM APPLYING FOR CREATION OF TRUSTS

The other change proposed by HB 628 has to do with the person or persons entitled to apply for creation of an 867 trust. When Section 867 was first adopted in 1993, only a guardian was permitted to apply for creation of the trust. The motivation for this restriction was a desire to keep every disgruntled family member or interested person from trying to get the property out of the guardian's hands by asking for creation of an 867 trust. Unfortunately, the guardian-only restriction created some problems. For example, it was necessary for a guardian to be appointed before an 867 trust could be created, even if the applicant for the guardianship knew from the outset that an 867 trust was desired. Thus, the "Texas two-step" was born: first, the applicant applied for appointment as guardian, then the guardian (after qualifying) asked for creation of an 867 trust. This problem was fixed somewhat in 1997 when Section 867 was amended to permit a guardian or "a ward’s attorney ad litem at any time after the date of the attorney’s appointment under Section 646 of this code" to apply for the creation of an 867 trust. The proponents of the 1997 change included the phrase "at any time after the date of the attorney's appointment under Section 646 of this code" to make clear that the attorney ad litem did NOT have to wait until a guardian was appointed before applying. Thus, the applicant for a guardianship could apply, an attorney ad litem could be appointed, the attorney ad litem could ask for creation of an 867 trust, and the trust could be created, all without the appointment of a guardian of the estate -- thus eliminating the need for the Texas two-step.

Unfortunately some smart attorneys have asked the courts to interpret the phrase "at any time after the date of the attorney's appointment under Section 646 of this code" to mean that an attorney ad litem appointed under any other section (or a guardian ad litem, for that matter) cannot ask for creation of an 867 trust. Thus, under this interpretation, if the court gets wind of problems in the guardianship and appoints an attorney ad litem or guardian ad litem to investigate, and if that person decides that the best solution is the creation of an 867 trust, he or she cannot seek that remedy unless the guardian consents (and applies for it himself or herself) or is removed and replaced by a guardian willing to ask for creation of the trust. I believe that that interpretation of Section 867 as now written is wrong and that the Legislature never intended the phrase as a limitation but rather as an expansion, but those arguments have been made and cloud the issue.

HB 628 would sweep all of that away. It would make Section 867(a) read in pertinent part (changes in all caps): "On application by the guardian of a ward or by a ward's attorney ad litem OR AN INCAPACITATED PERSON'S GUARDIAN AD LITEM at any time after the date of the AD LITEM'S appointment under Section 646 OR ANOTHER PROVISION of this code. . . ." Section 867 still would prohibit a mere interested person from seeking the creation of an 867 trust, but the disgruntled person now can try to get the court to appoint an attorney ad litem or guardian ad litem and try to convince that person to apply for creation of the trust.

In 1999, HB 3310 attempted to make it possible for guardians ad litem to apply for an 867 trust. It failed. Also, the State Bar guardianship bill in 1999, HB 1851, proposed expanding the list of persons who could apply to create an 867 trust to include guardians ad litem and any persons having standing to commence a guardianship proceeding. Those provisions, together with the bar's other proposed changes to 867 trusts, were dropped due to opposition from some statutory probate judges. (HB 1851 was later veteod anyway.)

All in all, HB 628 is a step in the right direction on both subjects -- permitting court-appointed attorneys ad litem and guardians ad litem to apply for creation of 867 trusts and permitting individual trustees of such trusts in certain circumstances.  [01/16/01].