Abuse of Discretion Not Found in Calculation of Trustee’s Commissions for Part of a Year
In the Matter of the Davi H. Kato Special Needs Trust, Dated December 11, 2018, No. A-0414-22, 2024 WL 762247 (N.J. Super. Ct. App. Div. February 26, 2024)
Fabio and Maria Kato (the “Katos”) were natives of Brazil. While visiting New Jersey in 2015, they had a son, Davi, who was born with cerebral palsy. A medical malpractice action resulted in a settlement of $5,700,000. Pursuant to a Chancery Division order, the net proceeds of the settlement were placed into a special needs trust. Maria Kato was the Settlor, and an attorney (“Lawyer”) and Ocean First Bank (“Ocean First”) were named as trustees.
The Lawyer was a New Jersey attorney who came to know the Katos through his mother, who served as a Portuguese translator for the Katos during Davi’s therapy. Fabio Kato testified that the Katos selected the Lawyer as a trustee because they believed he spoke fluent Brazilian Portuguese. However, while he spoke Portuguese, the Lawyer did not speak Brazilian Portuguese.
In September 2021, Ocean First filed a court action to modify the agreement between the bank and the Lawyer as co-trustees regarding administrative duties and the division of commissions. Ocean First alleged that the language barrier had caused a deterioration in the relationship between the Katos and the Lawyer which interfered with Ocean First’s ability to effectively administer the trust.
The Katos filed a cross-claim to remove the Lawyer as co-trustee and appoint someone else. In addition to the communication problem, Fabio Kato complained that the Lawyer consistently refused to consent to trust expenditures for Davi’s benefit. Kato at *1.
In 2022, the Katos and Davi moved back to Brazil. Fabio Kato certified that they had no intention of returning to the United States. They notified the Monmouth County Division of Social Services that they had moved and requested that Davi’s Medicaid benefits be terminated since he would no longer be a resident of New Jersey.
The Katos then moved to terminate the special needs trust and create a new irrevocable trust with Ocean First and someone other than the Lawyer as co-trustees. The Katos argued that the special needs trust had been created, in part, so Davi could qualify for Medicaid while the family lived in New Jersey, but because the family had moved out of the United States and Davi was therefore no longer eligible for Medicaid, the special needs trust no longer filled that need. Id.
Ocean First supported the Katos’ motion. The Lawyer opposed it, arguing that termination of the special needs trust was not in Davi’s best interest.
After two hearings, the trial court terminated the special needs trust and, relying on N.J.S.A. § 3B:12-2, approved the creation of a new trust. Ocean First continued as trustee and a new co-trustee was appointed. Id., at 2.
The Lawyer moved for commissions of $72,435.67. The Chancery Division approved termination commissions of $31,738.41. Id.
The Lawyer appealed.
The Appellate Division first noted that corpus commissions are reviewed under an abuse of discretion standard. Id.
The Lawyer argued that the trial court did not have the authority to terminate the special needs trust because the relocation to Brazil was anticipated by the settlor. The court rejected this argument, noting that the governing standard is whether termination or modification would further the purposes of the trust. N.J.S.A § 3B: 31-28(a). Id. at 3.
The Lawyer argued that termination of the special needs trust solely because Davi was no longer eligible for Medicaid was inappropriate. The Appellate Division rejected this argument also, noting that maintaining Davi’s eligibility for Medicaid was only one of the purposes of the special needs trust, and that continuation of the special needs trust would result in unnecessary expense. Id.
The court explained in a footnote:
With a special needs trust, so long as the Medicaid program had an outstanding right of reimbursement (which, presumably, it would until termination of the special needs trust), a trustee must provide notice to the New Jersey Division of Medical Assistance and Health Services (DMAHS) of expenditures over $5,000, forty-five (45) days in advance. Further, the trustee of the special needs trust had to file an annual accounting with DMAHS. Perhaps most importantly, the special needs trust would exist until Davi no longer had a disability – what seems to be an unlikely occurrence – or died.
Kato at *3, n.1.
The appeals court also noted that with an irrevocable trust, these burdens would not exist and “Davi would have the absolute right to demand and receive the remaining principal of the irrevocable trust when he turns eighteen.” Id. at 3. The Appellate Division agreed with the trial court’s conclusion that the purpose of the trust was to benefit Davi, and that this purpose would be better served by the irrevocable trust.
The Appellate Division also rejected the Lawyer’s argument that the trial court lacked authority to create a new trust. The Appellate Division relied on the language of N.J.S.A. § 3B:12-1, which authorizes the court to establish a protective arrangement, and N.J.S.A. § 3B:12-2, which specifies that a permissible protective arrangement for a minor is “a suitable trust.” Id.
The Lawyer next argued that the trial court incorrectly calculated his commission. The Appellate Division found that the trial court erred in calculating his commission, but not in the way the Lawyer suggested. The Appellate Division went through a detailed calculation of termination commissions, which included a commission on the corpus distributed and “an amount equal to the annual commissions on corpus authorized pursuant to N.J.S.A. § 3B:18-25, but not actually taken by the fiduciary….” Id.
Finally, the Appellate Division noted that during his tenure as co-trustee, the Lawyer received his annual commission in monthly payments. In the first five months of 2022, before the special needs trust was terminated at the beginning of June, the Lawyer received $15,532.13 of his annual commission for 2022. Id. at 4. The Appellate Division phrased and resolve that issue as follows:
We read the plain language of N.J.S.A. § 3B:18-28 in the context of other related provisions. The first issue is what is meant by “an amount equal to the annual commissions on corpus authorized, but not actually taken by the fiduciary.” Thus, it is helpful to examine the meaning of “annual commissions.” The statute governing annual commissions, N.J.S.A. § 3B:18-25, provides trustees “may annually… take commissions on corpus…,” N.J.S.A. § 3B:18-25(a), that is, once a year. The statute does not contemplate monthly payments.
The question here is whether a trustee should be given an annual commission for a year he did not complete. Neither the termination commission statute nor the annual commission statute – nor any other statute concerning commissions – addresses this issue. No provision requires paying a trustee the portion of the annual commission he earned in the year a trust is terminated. Thus, we discern no error or abuse of discretion in the trial judge’s conclusion that a trustee is only owed an annual commission upon completion of a full year.
Id. (emphasis added).