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Published on October 21st, 2014 | by Millennium Magazine Staff

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Minors in Probate Court: Conservatorships, Minor Settlements and Special Needs Trusts

By Hon. Debora Faulkner and Hon. Amy McCulloch

This article originally appeared in the South Carolina Lawyer and is reprinted with permission from the South Carolina Bar.

Photo by George Fulton 

“I have a minor receiving a settlement, what do I do?” This is a common question heard by probate judges. Unfortunately, the answer to this question, as is often the case in law, is “it depends.” It depends on a number of follow up questions and discussions that this article seeks to explain. Probate practitioners will be familiar with the contents of this article, but this specific area of probate touches many other areas of law and will hopefully be useful for other attorneys.

The Probate Code: the road map

Title 62, Article 5, Part 4 gives us our start. S.C. Code Ann. § 62-5-402 grants exclusive jurisdiction to the probate court to: (1) determine the need for a conservator or other protective order and (2) determine how the estate of the protected person must be managed, expended or distributed. The definition of “protected person” includes a minor for whom a conservator has been appointed.[1] Minor is defined as a person “who is under eighteen years of age, excluding a person under the age of eighteen who is married or emancipated as decreed by the family court.”[2]

When does a minor need a conservator?

Settlement of claims exceeding $10,000

Let’s start with the definition of “claim.” The term is defined in S.C. Code Ann. § 62-5-433(A)(2) as the actual amount accruing to the minor as a result of the settlement. For example, if a settlement in favor of a minor is $112,000, the attorneys’ fees are $37,000 and the court cost is $150, the minor receives $74,850; therefore, a conservator is required. However, the court may also approve another “protective arrangement.”[3] Instead of a conservatorship, the court could approve a structured settlement or a court approved trust such as a special needs trust. In the case of a structured settlement, if the minor will receive more than $10,000 per year under the structure, a conservator will be required.

For those of you who have a workers’ compensation practice, this is consistent with S.C. Code Ann. § 42-9-320: “Whenever any payment of over ten thousand dollars is made to a minor under eighteen years of age, it must be made to some person or corporation appointed by the probate court as a guardian…”[4] The drafters of this statute mistakenly used the term guardian. It is a common mistake often made by insurance companies as well. The correct term for a court-appointed fiduciary appointed to manage the assets of a minor (or incapacitated adults) under the Probate Code is conservator. The only guardians appointed by the probate courtare guardians for incapacitated adults.[5]

Settlement of claims less than $10,000

If the amount is $10,000 or less, and the minor does not already have a conservator from a prior proceeding in an unrelated matter, a person under a duty to pay a minor a net amount $10,000 or less may perform this duty by paying or delivering the money to either: (1) a person that cares for, has custody of and resides with the minor; (2) a guardian of the minor; or (3) to a financial institution under a Uniform Gifts to Minors Act account. In this example, the minor’s case is settled for $12,000, the attorney fees are $4,000, unpaid medical expenses are $500 and a filing fee of $150, the minor’s claim is $7350; therefore, no conservator is required.[6] The funds could be paid to his/her parents to be held by them for his/her benefit until age 18, but there are specific statutory limitations as to what the parent/account custodian may use the funds for as outlined in S.C. Code Ann. § 62-5-103. Specifically, the parent or account custodian is required to apply the money for the benefit of the minor with due regard to: (1) the amount of money and the length of time before the minor reaches the age of 18, and the likelihood that at some future time the minor may be able to manage these funds; (2) the accustomed standard of living of the minor; (3) other funds or sources used for the support of the minor; (4) the parent or account custodian may not pay himself except by way of reimbursement of out-of-pocket expenses for goods and services necessary for the minor’s support, and these funds may not be used to discharge a legal or customary obligation of support that exists between the parent and the child; and (5) excess funds must be preserved for future benefit of the minor, and any balance not used must be turned over to him when he reaches the age of 18.

Other than personal injury settlements or workers’ compensation proceeds, a minor could be a named beneficiary on a life insurance policy or receive an inheritance of cash or other personal property requiring a conservatorship. Minors may receive funds or property under other circumstances but these are the most common.

Which court approves minor settlements?

It depends on the net amount being paid for the minor and whether the litigation is still pending that resulted in the settlement to the minor.

Circuit court

Is the claim over $25,000? S.C. Code Ann. § 62-5-433(B) explains that the settlement of any claim in excess of $25,000 must be approved by the circuit court. To initiate the proceeding, a verified petition must be filed providing (1) all of the pertinent facts concerning the claims, payment, attorney’s fees and expenses; and (2) the reasons why the proposed settlement should be approved. In addition, the petition must include a statement by the petitioner that the proposed settlement is in the best interests of the minor. The order authorizing settlement must require payment of the money to the conservator. If no conservator has been appointed, the money must be paid to the court until the probate court appoints a conservator. On multiple occasions over the last year, our courts have had petitioners present the circuit court order approving the settlement and the order will direct the minor’s funds to be paid to the guardian ad litem until a conservator is appointed. Payment of the proceeds to a guardian ad litem is not authorized by S.C. Code Ann. § 62-5-103 for amounts over $10,000. For amounts in excess of $10,000, the orders approving settlements should only direct payment to a conservator or to the court until a conservator is appointed. As a practical matter, attorneys often hold the funds in their trust accounts until a conservator is appointed, which is typically a safe practice.

Probate court/circuit court

Is the claim equal to or less than $25,000? If the amount of the claimis equal to or less than $25,000, S.C. Code Ann. § 62-5-433(C) provides that the circuit court and probate court have concurrent jurisdiction. Many attorneys seek approval in the probate court since our dockets can sometimes accommodate a quicker hearing date, and because they can get the settlements approved and the conservator appointed in one hearing. Just remember, however, if the litigation filed in circuit court which resulted in the settlement is still pending, the circuit court must approve the settlement. Probate court will have no jurisdiction to approve the settlement if the circuit court action is still pending. If the action has been dismissed and there is a settlement to be approved, then the probate court can proceed to approve the settlement and appoint the conservator. Although the settlement approval and appointment of a conservator can be accomplished in one hearing, two petitions would be required as a petition is required for each action.

If the minor has an existing conservatorship as a result of a prior receipt of property, the conservator may settle the claim without court authorization or the conservator can petition the court for approval. However, notice of the claim must be given to the probate court so that bond adjustments can be made to cover the additional settlement funds being deposited into the existing conservatorship.

In most cases, a conservator has never been appointed and this is a first for your client. In those cases, the guardian or guardian ad litem must petition the court for approval of the settlement. Once again, the petition must provide (1) all of the pertinent facts concerning the claims, payment, attorney’s fees and expenses; and (2) the reasons why the proposed settlement should be approved. If the claimamount exceeds $10,000, a conservator must be appointed. Otherwise, the settlement proceeds may be distributed in accordance with S.C. Code Ann. § 62-5-103, as discussed above.

If the amount is more than $2,500 but less than 10,000.01, court approval is required, but no conservator is appointed. However, the probate judge can make protective arrangements should the judge determine the assets need protection from waste or misappropriation.

If the amount of the claim is less than $2,500, the settlement may be effected by the parent or guardian of the minor without court approval and without a conservator. Again, the settlement proceeds must be distributed in accordance with S.C. Code Ann. § 62-5-103, as discussed above.

How do I establish a conservatorship and what are the requirements?

As with all litigation in probate court, the action is commenced by the filing of a summons and petition. Specifically, Probate Court Form 540GC is the Petition for Protective Order/Appointment of Conservator. Probate court forms may be found at www.sccourts.org or your county probate court’s website. S.C. Code Ann. § 62-5-405 requires personal service on the person to be protected. In addition, service is required on the parents, or other adult relatives if there are no parents, or other persons as the court may direct. Typically, one parent is petitioning to be conservator for the minor child. In those cases, the other parent must be served. In lieu of service, the interested parties may sign and file an Acceptance of Service. In addition, the interested parties may decide to renounce their right to serve and/or nominate the petitioner or someone else to serve as conservator for the minor. Probate courts may vary from county to county in requiring additional information, but it is always helpful to file any supplemental information with the petition that may be relevant (i.e. settlement sheet; statement from insurance company; pleadings and order approving settlement related to the action which is the basis of the funds; etc.).

If the court determines that a guardian ad litem would be helpful to the minor, the court may appoint an attorney with the authority of a guardian ad litem.[7] Pursuant to subsection (c), before making an appointment or other protective order, the court must hold a hearing.

S.C. Code Ann. § 62-5-408(2) provides the probate courts have “all those powers over the estate and affairs of the minor which are or might be necessary for the best interests of the minor, his family, and members of his household.”[8] Under this authority, the probate courts may appoint a conservator; may approve a trust agreement for the minor’s benefit; or grant other relief which will protect the minor’s assets that the court finds reasonable.

In the event a conservator is appointed, bond may be required. Pursuant to S.C. Code Ann. § 62-5-411, the court must require the conservator to be bonded unless good cause is shown. Some probate courts, depending on the county, may allow for alternate protection by allowing the use of restricted accounts. The benefit of a restricted account is that it does not require payment of a premium, which may be substantial. The downside of a restricted account is that a court order is required before any funds can be spent by the conservator. In minor conservatorships, the minor rarely needs to use any funds because they have the support of their parents or other legal guardians. Therefore, a restricted account may be more appropriate for minor conservatorships because it avoids the payment of a bond premium every year. Generally, the funds are rarely used so the burden of obtaining a court order would be infrequent.

Following the appointment of the conservator, S.C. Code Ann. § 62-5-418 requires the filing of a Conservator Inventory and Appraisement (Probate Court Form 550GC). In the usual minor conservatorship, the minor’s only asset reflected on the inventory is the amount of the settlement. Each year the conservator is required to account to the court regarding the minor’s funds by filing a Conservator Annual Accounting (Probate Court Form 562GC).[9] The funds should be managed in accordance with The Prudent Investor Rule. The conservatorship terminates when the minor reaches 18 years of age. The conservator must file a final accounting. If the accounting is acceptable, the court will require a receipt signed by the 18-year-old and proceed to issue an order discharging the conservator.[10]

What is a special needs trust and how can I use it?

Special needs trusts are complicated trusts authorized by 42 U.S.C. § 1396p(d)(4)(A) and are used to allow a minor to continue receiving benefits from the government (such as Supplemental Security Income (SSI) and Medicaid), after receiving proceeds from a settlement or some other source. Often a minor will become disqualified from continuing to receive government assistance when a lump sum of money is received, but the trust is used to hold those funds out of the minor’s hands for benefit eligibility purposes. The statute requires that (1) the individual be under the age of 65; (2) the individual be disabled (as defined in 42 U.S.C. § 1382c(a)(3)); (3) the trust be established for the benefit of the minor; and (4) the trust be established by a parent, grandparent, legal guardian or “a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan.”[11]

Whether a minor is disabled can be established in a number of ways. A minor is considered disabled under 42 U.S.C. § 1382c(a)(3)(C) if the minor “has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.”[12] While the probate courts are not required to make a finding of disability to have jurisdiction over the minor and the minor’s assets, if a finding has not been made, a finding must be made to approve the creation of a special needs trust.

The caveat for special needs trusts is that when the individual dies, the remaining trust funds must first be used to repay any amounts the individual received from the state for Medicaid benefits. In South Carolina, the Department of Health and Human Services (DHHS) is the agency that has first priority to any funds remaining in the special needs trust, up to the amount provided by South Carolina in Medicaid benefits. After DHHS is satisfied, any remaining funds are distributed according to the terms of the trust, which is typically intestate succession.

The process for establishing a special needs trust begins with the filing of a Summons and Petition for a Protective Order, using form Form 540GC, along with the statutory filing fee, which is currently $150. The Summons and Petition must be served on all interested parties. The special needs trust agreement will need to be submitted to DHHS for approval, if the minor is Medicaid eligible. Following a hearing and upon the court’s satisfaction, the court will issue an order establishing the special needs trust.

Once the trust is established, the trustee may use the funds for the benefit of the disabled minor for expenses that are not covered by the benefits received from the government. For example, trustees may use trust funds to pay for a vehicle, a home, clothing, medications, travel expenses, etc. When a home or vehicle is purchased, the assets become trust assets and are subject to oversight by the probate court. The trustee should be mindful that the expenses are for the benefit of the minor, and vehicle and houses, if purchased with trust assets, should be accommodating of the minor’s disability. The idea of accommodating the minor’s disability when purchasing assets seems to be a “no-brainer,” but we often get requests for large, two-story houses and the individual is wheel-chair bound; or requests for a vehicle that is not a van or some other handicap accessible vehicle. As the trustee’s role and discretion requires an understanding of the purpose and restrictions of a special needs trust, the trustee may often be a person that is not the minor’s parent or legal guardian, but rather a person such as a financial institution or an attorney. The attorney petitioning for approval of the trust and the court must consider the appropriateness of the trustee.

Another related trust for disabled minors and adults is a pooled fund trust, which is authorized by 42 U.S.C. § 1396p(d)(4)(C). This article will not expand on pooled fund trusts, but the major differences are that Pooled Fund Trusts are established and managed by a non-profit association and each individual has a separate account but the accounts are pooled together for purposes of investment and management of funds.

A minor receiving needs-based government benefits, including but not limited to SSI and/or Medicaid, who is not disabled and is expected to receive additional funds, would not be disqualified from continuing to receive benefits as long as the conservatorship is restricted so that the conservator cannot use conservatorship assets for payment of those expenses that would be considered for the individual’s support and maintenance by the Social Security Administration (SSA). (Social Security Administration, Program Operations Manual System, SI 01140.215, Conservatorship Accounts (effective December 4, 2012), available at https://secure.ssa.gov/poms.nsf/lnx/0501140215).

Most of the authority regarding these topics comes from Chief Justice Toal’s Order regarding settlement procedure for minors or incapacitated persons, dated May 23, 2014; Article 5 of Title 62 (Probate Code) of the S.C. Code of Laws; and 42 U.S.C. § 1396p.

So, the answer to the question is still “it depends,” but hopefully you now have a few pointers to get you started in the right direction.

Hon. Debora Faulkner is probate judge for Greenville County. Hon. Amy McCulloch is probate judge for Richland County.

Information in the article is not to be taken as legal advice.
 

[1]S.C. CODE ANN. § 62-5-101(3) (2009).

[2] S.C. CODE ANN. § 62-1-201(27) (2009 Supp. 2013).

[3] S.C. CODE ANN. §§ 62-5-103, 62-5-409 (2009).

[4] S.C. CODE ANN. § 42-9-320 (1976 Supp. 2013) (emphasis added).

[5] S.C. CODE ANN. § 62-5-101, et seq. (2009 Supp. 2013).

[6] S.C. CODE ANN. § 62-5-103 (2009).

[7] S.C. CODE ANN. § 62-5-407(a) (2009 Supp. 2013).

[8] S.C. CODE ANN. § 62-5-408(2) (2009).

[9] S.C. CODE ANN. § 62-5-419 (2009 Supp. 2013).

[10] S.C. CODE ANN. § 62-5-106 (Supp. 2013).

[11] 42 U.S.C. § 1396p(d)(4)(A) (2012).

[12] 42 U.S.C. § 1382c(a)(3)(C) (2012).

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