Posts Tagged ‘guardian of the estate’

How to Get in Trouble for Your Handling of Your Child’s Money

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?

  1. A conservator (or guardian of the estate, or trustee) must keep good records. This requirement can not be overemphasized.
  2. 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.
  3. 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.
  4. 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.

Attorney Representing Incapacitated Adult Ordered to Refund Fees

JUNE 22, 2015 VOLUME 22 NUMBER 23

How much does it cost to establish a guardianship or conservatorship? Is there any limit on the possible legal costs? These are questions that we deal with on a regular basis.

The short answer, at least in Arizona, is that the attorneys and other professionals in a guardianship/conservatorship proceeding can only charge a “reasonable” fee, and that the Court almost always has the authority to review — and, in appropriate cases, reduce — the fees charged. But that doesn’t help identify what a “reasonable” fee might be.

A recent case from the Washington Court of Appeals sheds a little light on attorneys’ fees in guardianship cases. It also helps make clear that the court’s review includes fees incurred — and paid — before any finding of incapacity was entered.

Kamiko Davis (not her real name) came to the attention of state officials because she had apparently been the victim of financial exploitation. She was an elderly woman who had, years before, immigrated from Japan, and she was more comfortable speaking Japanese. She was suspicious and uncooperative with authorities, and, after the financial exploitation she had suffered, she had an estate of about $700,000. When the investigating agency filed a petition asking for appointment of a guardian (of the person and the estate — what we would call guardianship and conservatorship in Arizona), it was evident that she would benefit from having a lawyer who spoke at least some Japanese, and who would be familiar with Japanese culture and traditions.

That’s how attorney Daniel Quick was appointed as Kamiko’s attorney. In the initial appointment the judge ordered that Mr. Quick’s fees should be limited to $250/hour for a maximum of 10 hours — or about $2,500. Over the next few months, as it became apparent that Kamiko would strenuously object to the legal proceedings at every turn, the court increased the maximum number of hours that could be billed — to a total of 50 hours.

Kamiko signed a durable power of attorney naming her attorney as her agent (for both medical and financial purposes), and a fee agreement with no limitation on the number of hours which might be billed. At some point the probate court decided that Kamiko had not had the capacity to sign the power of attorney, and eventually a limited guardian (of Kamiko’s person and of her estate) was appointed.

The attorney then filed his request for approval of fees charged for his representation. The application showed that he had received $118,110.65 already, and requested an additional $17,137.50 in fees and costs.

The probate court declined to approve Mr. Quick’s additional fees, and ordered that he return all but $30,000 of the fees he had already collected. The judge’s reasoning: whether or not Mr. Quick legitimately put in all the time he claimed, the total amount of fees was simply unreasonable. The $30,000 approved worked out to about 120 hours of legal work (assuming the same $250/hour), and the judge was critical of the attorney’s failure to limit litigation costs, even if his client was difficult to deal with and required special attention.

The Washington Court of Appeals upheld the limitation on attorney’s fees. Even though Kamiko had not been adjudged incapacitated at the time she signed a fee agreement, she was ultimately found to need a limited guardian — and a finding of incapacity was entered at that time. Besides, the appellate court noted, Mr. Quick had been ordered to limit his hours in earlier court rulings, and the amount ultimately approved actually exceeded those limitations.

The bottom line, according to the Court of Appeals: “The court, in overseeing guardianships, must weigh the competing concerns of individual autonomy and protection of incapacitated persons.” That meant that the reduction in allowed fees, and the order for return of over $80,000 in fees already collected, were appropriate in the circumstances. Guardianship of Decker, June 16, 2015.

Would the same result be reached in an Arizona proceeding? Very likely (although, of course, very small changes in the fact pattern might yield very different results). Arizona’s statutes expressly give the probate court the authority to review fees — for attorneys and for other professionals — in guardianship and conservatorship proceedings (Washington’s statutes were held to give that authority, too, but not as clearly or explicitly as Arizona’s laws).

Arizona also has an existing appellate decision which clearly enunciates some of what the Washington Court of Appeals articulated. In 2010, in Sleeth v. Sleeth, the Arizona Court of Appeals ruled that the litigants in guardianship and conservatorship proceedings must pay attention to whether legal fees are ultimately in proportion to the benefit enjoyed by the estate. The underlying facts are strikingly similar: the Arizona case involved assets of slightly more than those in the new Washington case, and legal fees that were larger by a similar proportion. One important difference: the lawyers whose fees were challenged in Arizona represented the guardian/conservator, not the subject of the proceeding.

 

Does a Guardian Have the Power to File a Divorce Petition? In Some States, Yes

FEBRUARY 28, 2011 VOLUME 18 NUMBER 7
The issue arises with some regularity. A married couple, perhaps in their second marriage. Adult children. One spouse becomes ill — often, but not always, demented. The other spouse, unable to cope, turns the care of the ill spouse over to one of the children. That child figures out that, financially, at least, the ill spouse would be better off divorced. That way, control of the ill spouse’s share of the couple’s property could be managed for the sole benefit of the ill spouse, and care could be assured. But can the guardian file a divorce petition?

In most states, the answer is not clear. A handful of states have explicitly addressed the question, with mixed results. The latest state court to face the issue is the Supreme Court of Vermont.

Catherine and Philip Samis had been married for almost a quarter century when Mrs. Samis began to show signs of dementia. Mr. Samis, a Canadian citizen, withdrew across the border to one of the couple’s homes, taking most of their personal effects with him. Mrs. Samis’ son from a former marriage stepped in, secured a guardianship of his mother’s person and estate (in Arizona we would call it a guardianship and conservatorship), and began overseeing her care.

Mrs. Samis is a U.S. citizen, and would be entitled to Social Security benefits under her first (now deceased) husband’s account if she were not married. Since Mr. Samis is a Canadian citizen, there are no Social Security benefits payable to her while she remains married. Her son decided it would be in her best interest — financially, at least — to get divorced, and to divide the couple’s property so that he could control how her share was spent.

Once a divorce proceeding was filed, however, Mr. Samis objected. He argued that Vermont law did not permit a guardian to petition for divorce on behalf of a ward. As with most states, the Vermont statutes were silent on the subject; there was a single reference in Vermont court rules to guardians signing divorce petitions, but no indication how the Vermont legislature felt about the possibility.

After the divorce court denied Mr. Samis’ objection, granted the divorce, divided the couple’s property and ordered Mr. Samis to make a lump-sum support payment of about $300,000, he appealed. The Vermont Supreme Court was thus faced with determining whether Mrs. Samis’ guardian had the authority to initiate the proceeding in the first place.

Ruling that a guardian’s powers are limited to those spelled out in the guardianship statutes, the state’s high court reversed the divorce court’s orders. The justices considered the holdings in a handful of states, including Arizona, and concluded that most do not permit guardians to file divorces.

The ability to file for divorce is intensely personal, said the justices. The only Vermont precedent that addressed the issue at all, an 1877 Supreme Court case, agreed; in that case, a person who had been placed under a guardianship of the estate (what would be a conservatorship in Arizona) was permitted to file his own divorce proceeding despite the guardianship. Now it is clear that in Vermont, at least, the guardian can not file the divorce petition for a ward who has become incompetent.

What about the other states? The Vermont decision cites several that agree with its holding, including appellate courts in Kentucky, New York and South Carolina. Courts in Massachusetts and New Hampshire have allowed guardians to petition for divorce, but have done so based on specific state statutes. According to the Vermont justices, only two states, Arizona and Washington, have permitted guardians to file for divorce even without the support of statutes clearly authorizing the action. Samis v. Samis, February 18, 2011.

As the Vermont Supreme Court notes, Arizona is one of the minority of states clearly permitting the guardian to file a divorce proceeding, even without express statutory authority. That is the holding of the Arizona Court of Appeals in the 1993 case of Ruvalcaba by Stubblefield v. Ruvalcaba, which we reported on at the time (yes, Virginia, there was an Elder Law Issues in 1993/1994), and which we have since described in more detail for our readers.

Distinguishing Two Kinds of Special Needs Trusts

AUGUST 23, 2010 VOLUME 17 NUMBER 27
It really is unfortunate that we didn’t see this problem coming. Those of us who pioneered special needs trust planning back in the 1980s should have realized that we were setting up everyone (including ourselves) for confusion. We should have just given the two main kinds of special needs trusts different names. But we didn’t, and now we have to keep explaining.

There are two different kinds of special needs trusts, and the treatment and effect of any given trust will be very different depending on which kind of trust is involved in each case. Even that statement is misleading: there are actually about six or seven (depending on your definitions) kinds of special needs trusts — but they generally fall into one of two categories. Most (but not all) practitioners use the same language to describe the distinction: a given special needs trust is either a “self-settled” or a “third-party” trust.

Why is the distinction important? Because the rules surrounding the two kinds of trusts are very different. For example, a “self-settled” special needs trust:

  • Must include a provision repaying the state Medicaid agency for the cost of Title XIX (Medicaid) benefits received by the beneficiary upon the death of the beneficiary.
  • May have significant limitations on the kinds of payments the trustee can make; these limitations will vary significantly from state to state.
  • Will likely require some kind of annual accounting to the state Medicaid agency of trust expenditures.
  • May, if the rules are not followed precisely, result in the beneficiary being deemed to have access to trust assets and/or income, and thereby cost the beneficiary his or her Supplemental Security Income and Medicaid eligibility.
  • Will be taxed as if its contents still belonged to the beneficiary — in other words, as what the tax law calls a “grantor” trust.

By contrast, a “third-party” special needs trust usually:

  • May pay for food and shelter for the beneficiary — though such expenditures may result in a reduction in the beneficiary’s Supplemental Security Income payments for one or more months.
  • Can be distributed to other family members, or even charities, upon the death of the primary beneficiary.
  • May be terminated if the beneficiary improves and no longer requires Supplemental Security Income payments or Medicaid eligibility — with the remaining balance being distributed to the beneficiary.
  • Will not have to account (or at least not have to account so closely) to the state Medicaid agency in order to keep the beneficiary eligible.
  • Will be taxed on its own, and at a higher rate than a self-settled trust — though sometimes it will be taxed to the original grantor, and sometimes it will be entitled to slightly favorable treatment as a “Qualified Disability” trust (what is sometimes called a QDisT).

So what is the difference? It is actually easy to distinguish the two kinds of trusts, though even the names can make it seem more complicated. A self-settled trust is established with money or property that once belonged to the beneficiary. That might include a personal injury settlement, an inheritance, or just accumulated wealth. If the beneficiary had the legal right to the unrestrained use of the money — directly or though a conservator (or guardian of the estate) — then the trust is probably a self-settled trust.

It may be clearer to describe a third-party trust. If the money belonged to someone else, and that person established the trust for the benefit of the person with a disability, then the trust will be a third-party trust. Of course, it also has to qualify as a special needs trust; not all third-party trusts include language that is sufficient to gain such treatment (and there is a little variation by state in this regard, too).

So an inheritance might be a third-party special needs trust — if the person leaving the inheritance set it up in an appropriate manner. If not, and the inheritance was left outright to the beneficiary, then the trust set up by a court, conservator (or guardian of the estate) or family member will probably be a self-settled trust.

That leads to an important point: if the trust is established by a court, by a conservator or guardian, or even by the defendant in a personal injury action, it is still a self-settled trust for Social Security and Medicaid purposes. Each of those entities is acting on behalf of the beneficiary, and so their actions are interpreted as if the beneficiary himself (or herself) established the trust.

Since the rules governing these two kinds of trusts are so different, why didn’t we just use different names for them to start with? Good question. Some did: in some states and laws offices, self-settled special needs trusts are called “supplemental benefits” trusts. Unfortunately, the idea didn’t catch on, and sometimes the same term is used to describe third-party trusts instead. Oops.

We collectively apologize for the confusion. In the meantime, note that the literature about special needs trusts sometimes assumes that you know which kind is being described and discussed, and sometimes even mixes up the two types without clearly distinguishing. Pay close attention to anything you read about special needs trusts to make sure you’re getting the right information.

Want to know more? You might want to sign up for our upcoming “Special Needs Trust School” program. We are offering our next session (to live attendees only) on September 15, 2010. You can call Yvette at our offices (520-622-0400) to reserve a seat.

Death of Husband Ends Wife’s Right To Spousal Maintenance

OCTOBER 14, 2002 VOLUME 10, NUMBER 15
Walter and Geraldine Brown had filed for divorce before first Mr. Brown and then Mrs. Brown became incapacitated. When guardianship proceedings were initiated for both of them, the divorce proceeding was simply dismissed.

Mr. and Mrs. Brown lived in Indiana, where the language of guardianship is a little different from Arizona. What Arizonans would call a conservator is referred to as a “guardian of the estate” in Indiana. Two separate banks were appointed as guardians of Mr. and Mrs. Brown’s respective estates.

During the first months of the divorce action Mr. Brown had been ordered to pay spousal maintenance (better known as alimony) to his wife. After the dismissal of the divorce the bank handling Mrs. Brown’s estate asked the probate court to order the bank responsible for Mr. Brown’s estate to continue to make monthly payments. Mr. Brown was ordered to pay $1,600 per month to Mrs. Brown’s guardian.

Mr. Brown had been married before, and he had two sons from that marriage. Mrs. Brown had no children. Mr. Brown’s will left one-third of his personal property and a life estate in one-third of his real estate to his wife, and the balance of his estate to his two sons.

Mr. Brown died shortly after the spousal maintenance award was entered. His sons filed a probate proceeding, divided the estate in accordance with his will and began the process of closing the estate.

At that point Mrs. Brown’s guardian filed a claim against the estate for spousal maintenance that might be due for the rest of her life. After a hearing the probate court agreed and, considering Mrs. Brown’s life expectancy of 13.9 years, set the amount due from Mr. Brown’s estate at just over $160,000.

Mr. Brown’s sons appealed the judgment. Mrs. Brown’s guardian pointed out the Indiana statute (Arizona has a similar law) that allows child support payments to be reduced to a lump-sum claim against a deceased parent’s estate. In these circumstances, argued Mrs. Brown’s guardian, the court should make a similar calculation for spousal maintenance.

The Indiana Court of Appeals disagreed. In reversing the award the Court noted that there is no statute authorizing such a calculation for surviving spouses, and that the state legislature presumably could have created such a claim if legislators thought it necessary. Mrs. Brown’s spousal maintenance award, however, ended with her husband’s death. Estate of Brown v. Estate of Brown, October 2, 2002.

Although Arizona uses “conservator” rather than “guardian of the estate,” the laws of the two states are similar in other respects. The same result should be expected in Arizona, especially where no divorce proceedings have been finalized.

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