Minor Settlement, Major Decision
Personal injury cases involving minors can be the most heartbreaking and presents difficult decisions about what to do with the settlement money. Unlike settlements involving adults, who have many choices when it comes to how and when they receive their money, minors do not have the same options.
Issues with Minor’s Settlements
Because minors cannot legally take title to property, the court will need to approve both the settlement and the plan for funding. The state has an obligation to ensure the funds are protected for the child’s future use, so they typically will not allow money to go directly to the parents of the child. Parents have a continuing obligation to support their child until the age of majority, so courts sometimes take the stance that 100% of the child’s settlement should be preserved until the child turns 18. For that reason, they may order the funds be placed in a guardianship, depository, or other restricted account which can only be accessed with a court order. While this paternalistic stance is understandable, and in some cases justified, it leaves responsible parents feeling like criminals who cannot be trusted to appropriately spend the money on their child’s care. It also does a disservice to the child in cases where the injuries will require future surgeries, therapies, medications, and other care throughout childhood. Beyond medical expenses, the child may need tutoring or other educational support they might not have otherwise needed, adaptive clothing and equipment, or additional supports for travel. The list is truly endless.
How a Trust Provides Flexibility
One way to gain some flexibility is to place funds in a settlement management trust with a corporate or other professional trustees. The parents will have to work through a trustee to access funds, but typically the court will give the trustee authority to disburse funds as they see fit in accordance with the trust document. The trustee is bound to follow the law surrounding the parental obligation of support. Generally, this obligation extends only to basic supports, such as food, shelter, clothing, and educational expenses. This leaves room to make distributions for other needs like an accessible vehicle, extracurricular activities, travel, and entertainment. Further, it is arguable that expenses directly related to the injury or disability should not fall within the reasonable standard of parental responsibility. This gives the trustee some leeway to make distributions for specific types of food or supplements, adaptive clothing, and educational supports that would not have been needed otherwise. Distributions to modify the home or vehicle to the child’s needs, or even to purchase a new home can also be justified. To make this a smoother process, it is a good idea to ask the court to approve a set amount for larger expenditures (such as a home or vehicle) in the court order authorizing creation of the trust. The court may or may not require the trustee to file annual accountings but will generally give the trustee wide discretion to determine what is permissible. This helps the trustee to collaborate with the parents to ensure the child is supported to the fullest extent possible with the funds available.
Paying a Parent Using a Trust
In many cases, a parent (sometimes both) has had to stop working or has reduced their hours to care for their recovering child. In cases where the child would otherwise need a paid caregiver, a parent can be paid to fill this role so long as the hours and wage are reasonable compared to the market rate for the services being provided. An additional benefit to the parent is that the trustee may choose to contract with a third-party employer to process paychecks which allows the parent to take advantage of group health insurance, workers compensation insurance, and to continue contributing to FICA taxes so they will be eligible for Social Security and Medicare benefits when the time comes. This has become the industry standard because it reduces liability for the trust beneficiary and fills a gap for parents in this situation.
It is important to be cautious about having a parent paid by a trust the child is receiving means-tested benefits like Medicaid or Supplemental Security Income (SSI). These benefits programs sometimes apply or “deem” the parent’s income and assets to the child, so paying the parent may cause the child to lose eligibility for his or her benefits. In some cases, Medicaid will issue a written statement telling the parent how much they can “safely” earn per month, but this varies by jurisdiction. This issue may also arise if a parent is being reimbursed for something that was bought for the child’s benefit or if the parent is receiving a share of the settlement. For this reason, it is not uncommon in this industry that a parent may have to forgo their consortium claim because their settlement money would be a countable resource for the child. If it is possible the parent will be compensated from the trust, then a full analysis of any impact must be completed.
What happens when the child turns 18?
What happens when the child reaches the age of majority depends on a few factors. The first is what the trust document says. A trust may terminate when a child turns a certain age (in some states this is mandated by law), may pay out set amounts at certain ages, or the distribution terms may change. If nothing else, the parental responsibility rules would no longer apply, even if the child is completely incapacitated and totally reliant on his or her parents for care. If the child has full capacity, then they may simply take the reins on requesting disbursements and get to determine who they want their death beneficiaries to be. If the child does not have capacity, then typically the legal guardian (which may be one of the parents) would take that role. In some cases, once the child turns 18 and their parent’s income is no longer deemed to them, they may become newly eligible for public benefits. If the beneficiary already has a special needs trust, then no additional action would be taken. If the original trust was a settlement management trust, then it may be necessary to convert or transfer the trust to a special needs trust which generally must be done with permission from the court.
If an annuity is purchased, then generally when the child turns 18, they will have the ability to factor their remaining payments, potentially leaving them with pennies on the dollar. A trust, if named the irrevocable payee, can prevent this from happening because the trustee would need to consent to factoring. If the situation truly warrants factoring, the trustee may very well consent, or they may have a better solution to propose. It can give parents peace of mind to know that there will be this hurdle to clear to stop their child from making a rash decision.
It may be hard to predict what the child’s needs will be as an adult, so it is critical to build in flexibility or adaptability where possible.
Due to the considerations outlined above, it is important to look at the child’s needs as holistically as possible. Without the aid of a crystal ball, it helps to consult with experts who can help the family think through different scenarios and plan for the life their child will be living 5, 10, or 15 years down the road. With proper planning, the settlement recovery will be available when the child needs it and last long into adulthood.