JULY 6, 2015 VOLUME 22 NUMBER 25
Management of a trust can be difficult, and the responsibilities imposed on a trustee can be considerable. Sometimes that last part is not obvious, since trusts are often unsupervised — that is, no court is involved in the handling of most trusts, and there is no “trust cop” monitoring trustee decisions or expenditures. Even though there may not be immediate consequences, however, mishandling of a trust can lead to real problems for the trustee.
Handling any trust is a challenge. Let’s see if we can make it even more difficult:
- If the beneficiary of the trust is a minor child, the trustee’s problems increase. Parents are expected to provide most of the support for their children, so the trustee should be looking to parents for expenditures before using trust funds. Does that mean the trust can not be used until the child reaches majority? No. The trustee must balance the current needs, the future expectations, and the ability (and, sometimes, the willingness) of parents to provide support.
- Now let’s have a parent of the minor child act as trustee. The problems just got even more complicated. If the parent/trustee decides to use money from the trust for something that parents would ordinarily provide, does that mean that the parent/trustee is making the decision in his or her own interest? Perhaps — it’s at least enough of a problem to make trust administration more challenging.
- Not content with that level of confusion, let’s add one more: the child who is a beneficiary of the trust also has special needs, will have very high future financial needs, and is currently receiving public benefits (like SSI payments, and/or Medicaid coverage). Everything just got more complicated again — the trustee’s decisions about distributions may well have consequences for those benefits, or for future care needs.
- Difficult enough? Let’s add a final element: the trust is subject to the oversight of a court — we’ll call it the probate court (though that will not always be the court’s name). Now there are tax considerations for administration of the trust, the trustee’s choices (even when well-meaning) might be self-interested, trust language and/or distributions might have an effect on benefits eligibility and, as if all that were not enough, once a year the probate court will need to pass judgment on everything the trustee has done in the previous year.
That’s the background for a recent case that illustrates how things can go wrong. As it happens, this week’s case study does not actually involve a special needs trust (the money was held in a guardianship account — what we would call a conservatorship account in Arizona — subject to the court’s oversight) or a minor child (though the beneficiary was the disabled adult child of the person who got in trouble for mismanagement of the funds). In other words, the facts weren’t even as complicated as those sketched out above — and yet there were serious consequences.
What went wrong?
Sandra Ochoa (not her real name) was injured at birth. A medical malpractice case resulted in a substantial net settlement — part of which was used to purchase a structured settlement annuity that paid over $15,000 per month. A court in Illinois had approved the settlement and, after Sandra turned 18, the probate court appointed her mother Vivian as guardian of her estate (again, in Arizona we would call Vivian “conservator,” but the rules would be pretty much the same).
At the time of Vivian’s appointment, Sandra lived with her in her home in California. Vivian’s husband (Sandra’s stepfather) and Vivian’s son (Sandra’s brother) also lived in the home.
Two years later Vivian’s husband changed jobs, and the entire family moved to Florida. Vivian used Sandra’s money to make a down payment on a house in Florida, and then to make the monthly mortgage payments. She also paid herself a salary of several thousand dollars per month to take care of Sandra, and charged expenses related to her vehicle to Sandra’s funds, as well.
When Vivian filed her first annual accounting with the Illinois court, the judge raised questions about all the expenditures Vivian was making. Vivian prepared a proposed budget, under which she would pay herself $4,000 per month for caretaking, another $1,500 per month to a relief caregiver, about $1,000 per month for vehicle expenses, and $3,800 per month for the mortgage payment.
The probate court appointed someone to review Vivian’s accounting and her use of her daughter’s money. The report filed with the court noted that Vivian was using Sandra’s money to support not only Sandra, but the entire family. The court removed Vivian and appointed the public guardian (a government office in Illinois; not every state has a similar office) as the new guardian of Sandra’s estate. The public guardian then sued to recover money from Vivian. That process ultimately resulted in a $421,621.73 judgment against Vivian.
The Appellate Court of Illinois upheld the judgment after Vivian filed an appeal. Vivian argued that her job as guardian of Sandra’s estate should be to make Sandra’s life “as comfortable and pleasurable as possible.” The appellate court agreed with the probate judge: Vivian’s use of Sandra’s money was improper to the extent that it benefited other family members, and she is liable for repayment of the considerable sums expended. In Re Estate of O’Hare, June 11, 2015.
To be clear, Vivian was tagged for two different kinds of violations: she spent her daughter’s money on things that benefited other family members (including herself) at least as much as Sandra, and she kept poor records that made it difficult to support how she had spent the money. What could she have done differently to avoid getting in trouble?
- A conservator (or guardian of the estate, or trustee) must keep good records. This requirement can not be overemphasized.
- If a non-family guardian had been appointed from the beginning, some of the expenditures might have been approved after they had been reviewed by that guardian. Vivian’s obvious self-interest (in setting her own salary, deciding on housing costs, etc.) made it much more difficult to approve payments.
- Vivian should have asked for prior court approval for the kinds and amounts of payments she was making. Explaining how proposed expenditures would benefit Sandra would have given the probate judge a chance to ask questions, weigh in on the appropriate approach, appoint someone to represent Sandra’s interests (and/or to make home visits to determine what would be best for Sandra) and consider all the evidence and options.
- Most importantly, Vivian needed to understand that Sandra’s personal injury settlement — and the monthly annuity payments — were for Sandra’s benefit, not for hers or for any other family members’. Yes, it would be more convenient for Vivian if she could use those funds for housing, pay herself a salary and just focus on taking care of her seriously ill daughter. It’s not permissible, however.