SEPTEMBER 26, 2016 VOLUME 23 NUMBER 36
Questions often arise about what kinds of payments may, or should, be made from a trust. When the trust is a “special needs” trust, the questions sometimes can be even more pointed — the purpose of a special needs trust, after all, is usually to provide for supplemental needs not available from other sources. As in almost every trust case, there are questions about whether trust expenditures improperly favor one beneficiary over the interests of others; in many special needs trusts, the question is compounded by trying to assess the protection due to the state Medicaid agency, since it is often entitled to repayment from the trust on the death of the primary beneficiary.
All of that, though, is hard to analyze — until a specific trust distribution is at issue. To help review the considerations we might look at a recent case out of South Carolina, in which a special needs trustee’s payment of legal fees has come into question.
Alexis Davis (not her real name) presents a tragic story. In 2006 she delivered triplets (after she and her husband had tried to have children for several years). During the delivery, however, she was catastrophically injured; she remains unable to move or speak, and communicates primarily by blinking.
Alexis’ husband and parents cooperated in filing a lawsuit against the hospital where she was treated, and a settlement was negotiated. A special needs trust was established to handle the settlement proceeds, and it was funded with an initial amount of almost $1 million, plus monthly income payments of over $30,000. Alexis’ mother and father were named as trustees of her special needs trust, and as guardians of her person and conservators of her estate.
After the settlement, Alexis’ husband announced that he wanted to pursue a divorce. In response, her parents filed a divorce proceeding on her behalf, and sought visitation between her and her triplets.
All of the legal proceedings took place in California, where the couple had lived together and the triplets were born. For a time, Alexis’ parents moved to California to help take care of her, and to have her remain close to her family. As the divorce proceeded, however, they moved her back to South Carolina to take care of her at home.
Over almost a decade, legal battles proceeded over the visitation issue. Alexis’ legal position was directed by her parents, acting as co-trustees and as co-guardians. The legal costs were paid from her trust.
Meanwhile, legal fees mounted. Alexis’ ex-husband eventually filed an action in South Carolina to try to prevent Alexis’ parents from paying those costs from her trust. He brought his action against them as trustees but did not name Alexis herself as a party. His request was made on behalf of the triplets, arguing that their interests in the trust were being compromised by the legal expenses.
In response Alexis’ parents asked the South Carolina court to expressly approve legal fees they had paid totaling $495,326.75. They also asked that the trust be modified to make it clear that they could pay legal fees without prior court approval. The court appointed a guardian ad litem (a local lawyer) to represent the triplets’ interests in the trust. The court also appointed another local attorney to act as Alexis’ guardian ad litem, and a third as attorney for Alexis.
Midway through the court proceedings (after several days of trial and after Alexis’ ex-husband finished his presentation) the judge formally amended the petitions to make clear that Alexis herself was a party. Because the allotted time was up, the court continued the whole proceeding for a new date; it was set to start up again several months later. Meanwhile, the judge who had heard the first part of the proceedings lost her reelection bid, and Alexis’ ex-husband appealed the order adding her as a party.
Meanwhile, the first appeal resulted in an order denying Alexis’ ex-husband’s objections, and he appealed to the next level of court — South Carolina’s Court of Appeals. That appellate court agreed with both of the lower courts which had considered the questions, approving the addition of Alexis as a party, the appointment of a guardian ad litem and an attorney to represent her, and the course of the litigation up to that point. Dorn v. Cohen, August 3, 2016.
Are you confused yet? We know we are — and we speak the arcane language of appeals and legalisms regarding trusts and guardianship. But that’s not really our point. Instead, we think that Alexis’ case illustrates an important issue.
The key dispute involved here centers around legal fees of almost $500,000. Since that bill was incurred, the dispute moved to another state, three different attorneys have been appointed to be involved in the case, and a multi-day trial has been conducted — and yet the issues are far from resolved. With the change of judge, it seems safe to suggest that there will eventually be several more days of court proceedings, and more legal wrangling just to get to that point. Meanwhile, the underlying fight — over visitation between Alexis and the triplets — was actually resolved (according to news reports) five years ago. The resolution sounds imminently sensible, and it may even be going well.
Our point is that legal proceedings can sometimes lose their connection to reasonable grounding. From Alexis’ parents’ perspective, they have by this time incurred legal fees that are probably two or three times the original reported bill — and they could conceivably be instructed to pay those fees from their own pockets. On the other side, unknown fees and costs have been incurred by Alexis’ ex-husband. Presumably, all the legal costs will eventually be borne by the triplets, since their inheritances (from their father, their mother’s trust and even their grandparents) will have been significantly reduced.
Does this mean that it is dangerous to even act as trustee of a special needs trust (or, for that matter, of any trust)? No. This level of dispute is extremely unusual. But the story is still a cautionary one.