Case Number: C093796
Court: California Court of Appeal, Third Appellate District
Date Filed: September 01, 2025
Holding
The court held that the trial court abused its discretion by applying an unduly narrow construction of “special needs” under the trust instrument, thereby disallowing expenditures that fell within the broad, statutory and regulatory definition of a special‑needs trust; consequently, the appellate court reversed the lower court’s sanctions and remanded for a new accounting consistent with the proper, expansive interpretation of the trust’s purpose.
Narrative
The appeal in McGee v. State Dept. of Health Care Services centers on a long‑standing dispute over the proper scope of a special‑needs trust (SNT) created for Dianna McGee, a severely disabled adult with short‑bowel syndrome. Daniel McGee, the successor trustee, challenged a series of trial‑court sanctions that barred more than $100,000 in disbursements and imposed a $73,000 surcharge for alleged improper expenditures. The appellate panel reversed, finding that the trial court misapplied the legal standard governing “special needs” and thus exceeded its discretion.
Procedural backdrop
The Sacramento Superior Court originally approved the first two trust accountings (2013‑14). After the third accounting (filed 2016), the Department of Health Care Services (DHCS) objected, asserting that the trustee had spent trust assets on items that were not “special needs” under the trust instrument. The trial court partially rejected the accounting, disallowing $13,000 in food purchases, $39,000 for animal care, and $14,000 for miscellaneous items, and then imposed a $73,000 surcharge. The trustee appealed the sanctions but did not contest the disallowance of the third accounting itself, as the appeal period had lapsed. A fourth accounting (covering 2015‑17) was later filed; the trial court again rejected numerous categories of expense and added a $59,168.86 surcharge, refusing to allow the trustee to offset the penalties with funds the beneficiary had contributed to the trust. The trustee appealed, arguing that the trial court’s definition of “special needs” was too restrictive and that the court erred in refusing offset requests.
Core factual matrix
The trust was established in 2012 as part of a settlement in a medical‑malpractice action. Its governing instrument defines “special needs” as “the requisites for maintaining the Beneficiary’s good health, safety, and welfare when, in the discretion of the Trustee, such requisites are not being provided by any public agency.” The instrument further lists, without limitation, “special equipment, programs of training, education and habilitation, travel needs, and recreation” that are “reasonably necessary” because of the beneficiary’s disabilities. The trust is expressly not a support trust; it is intended to supplement public benefits when those benefits are insufficient.
During the third accounting period, the beneficiary contributed $32,617.15 of her own funds (including a workers’ compensation award and fire‑loss compensation) to the trust, and during the fourth period she paid $41,241.42 on personal credit‑card bills. The trustee sought to credit those contributions against the imposed surcharges and also asked that $13,961.78 spent rebuilding animal shelters after the 2015 Butte Fire be treated as a permissible SNT expense. The trial court rejected all offset requests, finding insufficient proof that the expenditures were “special needs” and that the beneficiary’s personal payments could be applied to the trustee’s liability.
Legal issues
- What is the proper construction of “special needs” under the trust instrument and governing law?
- Did the trial court err in applying a narrow definition that excluded certain categories of expense?
- Were the trial court’s sanctions and refusal to allow offsets an abuse of discretion?
The appellate analysis
The court began by reaffirming the principle that trust‑instrument interpretation is a question of law decided de novo. It applied the statutory framework of Probate Code §§ 21102, 21120‑21122, emphasizing that every term in a trust must be given effect and that the ordinary grammatical meaning prevails unless the instrument demonstrates a contrary intent.
The appellate panel rejected the trial court’s reliance on a single clause—“Special Needs include without limitation … items … that are related to and made reasonably necessary by this Beneficiary’s disabilities.” The court noted that the broader definition earlier in the instrument expressly ties “special needs” to “the requisites for maintaining the Beneficiary’s good health, safety, and welfare” when public agencies do not provide them. The phrase “including without limitation” was read as an open‑ended list, not a limiting qualifier.
To support the broader reading, the court turned to federal and administrative authority. Under 42 U.S.C. § 1396p(d)(4)(A), a special‑needs trust is a “discretionary trust … intended to provide for expenses that assistance programs such as Medicaid do not cover.” The Third Circuit has described those expenses as encompassing “books, television, Internet, travel, and even such necessities as clothing and toiletries,” a range far broader than strictly disability‑related medical care. The Social Security Administration’s Program Operations Manual System (POMS) likewise excludes from countable resources a wide array of household goods, personal effects, and even pets, regardless of whether they are directly tied to the beneficiary’s disability.
The court further cited California treatises that distinguish “basic needs” (food, shelter, medical care) from “special needs,” the latter covering the “entire universe of a person’s goods and services except for food, shelter, and medical care.” This doctrinal backdrop confirmed that the trial court’s narrow construction was inconsistent with both statutory purpose and prevailing administrative interpretation.
Having established that the trial court applied the wrong legal standard, the appellate panel concluded that the lower court’s disallowances and the $73,000 surcharge constituted an abuse of discretion. The court stressed that while the trustee’s discretion is not absolute, it must be exercised “reasonably” and in good faith, taking into account the resource and income limits of SSI and Medi‑Cal. The trustee is therefore entitled to a fresh accounting in which the broader definition of “special needs” governs, and the trial court must reconsider the offset requests on a case‑by‑case basis, ensuring that any disbursement does not impermissibly jeopardize public‑benefit eligibility unless the trustee can demonstrate a clear beneficiary‑interest.
Closing perspective
McGee clarifies a pivotal point for California probate practitioners: the term “special needs” in SNT instruments must be read expansively, aligning with federal intent to allow discretionary trusts to cover the full spectrum of a disabled adult’s life‑enhancing expenses. The decision reins in trial courts that might otherwise impose a de facto “support‑trust” limitation on SNTs, preserving the trust’s purpose of supplementing—not supplanting—public benefits.
The remand will likely generate a new wave of accounting disputes, particularly concerning the evidentiary burden on trustees to prove that specific expenditures (e.g., animal‑care costs, recreation, or personal property) are reasonably necessary and do not constitute in‑kind support. Moreover, the ruling leaves open the precise standard for allowing beneficiary‑contributed funds to offset trustee sanctions—a question that will surface in future motions.
For attorneys advising SNT trustees, the opinion underscores the necessity of meticulous documentation linking each disbursement to the broad “health, safety, and welfare” criteria and of maintaining contemporaneous records that demonstrate compliance with SSI and Medi‑Cal resource rules. Failure to do so may invite renewed trial‑court scrutiny, but the appellate bar for overturning a sanction has now been raised.
Referenced Statutes and Doctrines
- Probate Code §§ 21102, 21120‑21122 – construction of trust instruments.
- Probate Code §§ 16040, 16080, 16081 – fiduciary duties, standard of care, and good‑faith discretion.
- Probate Code §§ 3602(d), 3604, 3605 – special‑needs trust statutory framework.
- 42 U.S.C. § 1396p(d)(4)(A) – federal definition of a special‑needs (supplemental) trust.
- Social Security Administration, POMS §§ SI 01120.200E.1.c., SI 01130.430B‑C – treatment of SNT disbursements and excluded resources.
- 20 C.F.R. §§ 416.1212, 416.1216, 416.1218 – definitions of exempt resources for Medicaid.
Key Cases
- Herting v. State Dept. of Health Care Services (2015) 235 Cal.App.4th 607 – background on SNTs in California.
- Estate of Traung (1962) 207 Cal.App.2d 818 – trustee discretion inquiry.
- Estate of Powell (2000) 83 Cal.App.4th 1434 – de novo review of trust construction.
- Eneaji v. Ubboe (2014) 229 Cal.App.4th 1457 – abuse of discretion standard.
- Sullivan v. County of Suffolk (2d Cir. 1999) 174 F.3d 282 – federal definition of supplemental needs trust.
- Lewis v. Alexander (3d Cir. 2012) 685 F.3d 325 – preemption of state limits on SNT distributions.
- Ventura County Dept. of Child Support Services v. Brown (2004) 117 Cal.App.4th 144 – distinction between support and supplemental trusts.