If your client is a minor, what happens after settlement can be just as important as what happened before. Several important decisions will need to be made in order to ensure the best outcome for the client. This article will take you through each step of the process in making these decisions after the case is resolved. Ultimately, the court will need to approve the settlement and the method that will be used to protect the recovery as well as determine that it is in the child’s best interest.
Step 1: Determine How and When Funds Will Be Received in a minor’s settlement
How and when the funds are received from the defendant is just as important as how they are ultimately disbursed to the client. A lump sum will ensure faster access to all or part of the recovery, which may be appropriate if the child has immediate needs or the recovery is small and not expected to last or grow. For some minors though, deferral may make more sense which may necessitate evaluating other options over a lump sum.
A popular deferral option is to structure at least a portion of the recovery. A structured settlement must be created before the funds are distributed by the defendant. If receipt of the settlement has occurred, then this option is no longer available, which is why this decision needs to be made early. A structured settlement offers several benefits, including guaranteed growth and payouts over different periods of time, perhaps beginning when the child is an adult.
Parents sometimes express concern about their child, as a young adult, having access to funds when they are not mature enough to handle them or might succumb to pressure from others. Even if payouts are delayed or increase over time, once the child turns 18 they’ll have the ability to sell their structure on the secondary market, giving them access to quick cash and drastically reducing the amount of the settlement they receive. One way to mitigate both concerns is to designate a trust as the irrevocable payee of the structure. The trustee serves in a protective role over the client and can make sure funds are not spent hastily or irrationally. As the irrevocable payee, the trustee’s consent would be needed to sell the annuity. This means the client could still sell their annuity, but not without permission from the trustee, ensuring it would only be sold if sale was truly in the client’s best interest. A trust is a great way to maintain long-term protection over most settlements.
Step 2: Determine Where the Funds Will Go and Who Will Control Them
With a minor, funds can generally only be deposited in the Court Registry, a restricted depository account, with an appointed guardian or conservator, or in a trust. When funds are deposited in the Court Registry, withdrawals may only be requested by filing a motion with the court. It may take over 30 days to receive funds. A restricted depository account is a bank account that is court-ordered and court-monitored. Withdrawals from this account can only be made with court approval. In some cases, a guardian or custodian may be appointed to hold and disburse funds in accordance with the court’s instruction. A guardian is legally obligated to act in the child’s best interests and to seek approval from the court when funds need to be spent. A trust is managed by a trustee, who is responsible for holding, managing, and distributing funds. The trustee also has a legal obligation to act in the child’s best interest and will generally abide by the court’s direction. Generally though, there is no need for court approval of each disbursement and most courts will not require a guardianship of the property on top of a trust with a corporate trustee.
From the perspective of the parent or guardian, all these options feel nearly the same—they won’t have direct access to the funds and will need someone else’s permission to spend them. The difference is that a trust can add convenience and additional protection for your client. The best option will ultimately depend on the child’s needs, the size of his or her recovery, and support system.
When does a trust go from a nice-to-have to a need-to-have? When the client is disabled, especially if they are or will be on means-tested public benefits. A structure, even one that is carefully “engineered” to pay out below the limits of public benefits programs, does not offer any real protection and would force monthly spend-down of the funds. Only a special needs trust (SNT), properly drafted in compliance with 42 USC 1396(d)(4) and administered in compliance with the regulations surrounding means-tested benefits, is going to guarantee the child’s funds do not disqualify them from their benefits.
If you have a minor client with public benefits, it is critical to understand the concept of deeming. Under most means-tested benefits programs, the income and assets of the parent or parents who live with the child will be “deemed” or counted as the child’s income. This issue can arise when a child is injured and a parent has a loss of consortium claim—even if the child’s recovery goes into an SNT, the parent’s recovery may still result in disqualifying income. If the parent also has a disability, they could put their funds in their own SNT. They could also place the funds in a third-party SNT for their child, but as beneficiary, the funds would need to be spent for the child’s benefit (although the rules are not as strict as first-party SNTs). Sometimes, the best thing a parent can do is give up their recovery in order to preserve benefits like SSI and Medicaid for their minor child.
In addition to the benefits mentioned previously, SNTs are often used as a long-term planning tool when a child with disabilities is expected to outlive their parents. A well-funded and properly-managed SNT can give parents peace of mind that their child will be clothed, fed, and sheltered, and that someone will have their child’s best interests in mind after they are gone. Thanks to the body of law surrounding trusts, an SNT can continue for decades and if at any point there is no trustee, the court can appoint one.
A special needs trust pairs especially well with an ABLE account, for those who qualify. The beauty of an ABLE account is that it can pay for things an SNT cannot. One of the cardinal rules of SNT administration is that they cannot be used in a way that would disqualify a beneficiary from their benefits (unless it’s in their best interest). Some items are completely prohibited, such food and shelter, if your client has SSI. ABLE accounts, however, can be used for any “qualified disability expense.” ABLE accounts are currently limited to contributions of $15,000 per year and open only to those whose disability presented before age 26. While these kinds of accounts cannot presently take the place of an SNT, they are incredibly helpful for those who qualify.
Whatever option is selected, it is important for parents and planners to understand that the child’s recovery cannot be used in the place of their legal responsibility to provide for normal parental responsibilities such as food, clothing, shelter, and education. That means these funds cannot be used for school clothes, school supplies, daycare, after-school care, etc. This can be very frustrating for parents, especially when they have just spent years supporting a child who has had very different needs since the accident. Trustees and courts approach this issue differently, but generally it is appropriate to consider the child’s needs relative to the needs of a “normal” child. For example, a child with leg braces needs certain shoes and socks to accommodate the hardware and make the braces more comfortable. While shoes and socks are items of clothing and would otherwise be prohibited under the parental responsibility rule, this is plainly a situation where these items are needed because of the child’s condition; therefore, an argument could be made that the shoes and socks go beyond the reasonable parental support obligation and should be payable from the recovery. It is always prudent to think through what the child needs (now and throughout childhood), make a plan, and seek an order with the court’s blessing for anything questionable up front. This is especially helpful for something that skirts the line of the sole benefit rule, like the purchase of a vehicle. Unless it is clear to the trustee that the vehicle will be used exclusively to transport the child, they are likely to ask for contribution from the parent(s) towards the purchase price. Getting a court order establishes that this purchase was contemplated from the beginning and gives the trustee clear direction.
In cases where a trust is a good fit, the next question is whether to create a standalone trust or join a pooled trust. A pooled trust is a collection of trust sub-accounts pooled for investment purposes. Both serve the same role in terms of benefits-preservation, but there are three areas where pooled trusts standout. First, pooled trusts have lower fees than banks administering standalone trusts. Second, the minimum opening account balance is much lower (or non-existent) with pooled trusts, where as banks will often require a minimum of $500,000 or more. Third, pooled trusts are a turnkey solution with very little lead time required and only a basic agreement called a joinder required. A standalone trust will need to be drafted, which itself can be costly, and a trustee will need to be selected (and might need some training if the trustee is a friend or family member).
Step 3: Seek Court Approval for the Minor Settlement
Once you have created a plan for who, where, what, and when, the final step is presenting it to the court and arguing why it’s in the client’s best interest. To facilitate this process, Pooled Trust Services offers our clients assistance with drafting the petition and order. We are also happy to provide any information the court may require to make its decision, such as information related to how the funds are invested and the types of insurance we maintain. In some cases, we are available to attend the hearing, if needed.
The bottom line is that the attorney, in concert with the parent(s) or guardian(s), needs to take the time to work through what the child needs now, what they will need in the future, and the best path to get them the most out of their recovery. This may require consultation with experts in this area as well as some shopping around. The time spent now will ensure the recovery you worked so hard to get them will not be wasted, squandered, or poorly managed.
Jason D. Lazarus is the managing partner and founder of the Special Needs Law Firm; a Florida law firm that provides legal services related to public benefit preservation, liens and Medicare Secondary Payer compliance. He is also a founding Principal and Chief Executive Officer of Synergy Settlement Services, which offers healthcare lien resolution, Medicare secondary payer compliance services, pooled trust services, settlement asset management services and structured settlements.