Judge: Daniel M. Crowley, Case: BC684633, Date: 2022-08-10 Tentative Ruling
Case Number: BC684633 Hearing Date: August 10, 2022 Dept: 28
PRELIMINARY ISSUES
Petitioner’s Counsel is advised to carefully review the bolded portions of the following order:
Multiple prior versions of the compromise petition have been filed with defects. A bench memo was provided for a compromise petition heard on 3/18/22. The court continued the hearing to 4/12/22 to correct defects in the SNT issues and to meet a hearing on a motion to reduce DHCS lien. On 3/24/22, prior to the continued hearing, petitioner filed a new petition to approve minor’s compromise, which was set for the 4/12/22 continued hearing date. On 4/12/22, the court continued the hearing on both matters to 5/12/22. On 5/12/22, petitioner and counsel did not appear and the court continued the hearings on the motion to reduce lien and on the petition to approve compromise to 6/15/22. On 6/15/22, the court granted the motion to reduce lien from $30,625 to $17,890.45. The court also recognized that petitioner had filed (or would file) a new petition to approve compromise and it set a new hearing on that petition for the current 7/1/22 hearing date. Petitioner filed a new petition to approve compromise on 6/17/22.
The newly filed petition to approve compromise filed on 6/17/22 has the same net settlement figure and attaches the same proposed SNT instrument as the prior compromise petitions. As such, the analysis in the memorandum below remains largely unchanged, though it is updated to reflect the current state of the required notice to the state agencies (a defect that existed regarding the prior petition).
FACTS
In this civil action, plaintiff Gerson Vasquez is now 16 years old. Petitioner, Olga Martinez, now brings a Petition to Approve Compromise as parent and GAL. The parties tentatively have settled the action for a gross $61,250, with a net of $18,203.30 payable to plaintiff after deduction for fees, costs, etc. (Calculations of the net proceeds are in the Petition to Approve Compromise.). Petitioner now proposes to distribute the entire net settlement proceeds into a special need trust (SNT) for the benefit of plaintiff.
As an initial concern, a SNT should not be used for such a low funding amount. It is widely believed that SNTs funded with under $100,000 (some say even $150,000) are economically unviable because the funds will be consumed by trustee and attorney fees, court costs, etc. relating to the costs of establishing the SNT and ongoing accountings or other court proceedings in the Probate Division for court supervision of the SNT. Here, petitioner is seeking to create and fund an individual SNT and not utilizing a deposit to a pooled SNT which could have mitigated some costs (though for this funding amount even a pooled SNT would be inefficient). The Court would like Claimant’s counsel to address alternatives to the establishment of a SNT, such as an immediate spend-down of the settlement proceeds for the benefit of plaintiff without the use of a SNT.
This case has been referred to the Probate Department for review of the SNT issues relating to the settlement. A SNT is used to receive the settlement funds in these situations so that plaintiff does not lose Medi-Cal and SSI benefits eligibility. Generally, a person receiving Medi-Cal or SSI benefits may have only up to $2,000 in non-exempt assets, and any additional non-exempt assets over $2,000 will cause the loss of benefits eligibility under the relevant federal and state law. Funds held in a valid SNT, however, are exempt assets that do not count toward the $2,000 asset limit for purposes of calculating benefits eligibility.
This referral to the probate department is limited to the review of the proposed SNT instrument and a suggestion of how to move forward regarding administration of the SNT. The review, and therefore this memorandum, does not address the advisability of the compromise amount/terms or related concerns including attorney’s fees and costs which are within the expertise of the civil court.
THE PROPOSED SNT TRUST INSTRUMENT
Petitioner does not provide any briefing regarding SNT issues. Petitioner provides the proposed SNT instrument at Attachment 18b(4) (court’s pdf at p. 70). The main requirements for court created or funded trusts are set forth at California Rules of Court (CRC), Rule 7.903(c) and LASC Rule 4.116(b). The SNT meets legal requirements and is ready for approval as detailed below:
Payback Provision
A cornerstone requirement of an SNT instrument is that it have a “payback provision” whereby any trust assets remaining upon termination of the SNT by death of the beneficiary (or any other reason), the remaining trust assets shall be “paid back” to the state to the extent of benefits received by the beneficiary. The idea is that the assets in a SNT are deemed to be exempt from counting toward the $2,000 asset limit for purposes of calculating benefits eligibility, but then that fiction ends upon beneficiary’s death and the state recovers those funds before they are distributed to beneficiary’s heirs. The existence of this payback provision is the most basic requirement of a SNT instrument. Without that provision, the SNT beneficiary would almost immediately lose benefits eligibility. Put another way, the SNT assets would not qualify as exempt and instead they would be counted toward beneficiary’s $2,000 asset limit. The SNT instrument here contains a sufficient payback provision at Section 4.9 (court’s pdf at p. 78).
CRC Rule 7.903(c) and LASC Rule 4.116 Requirements
The main requirements for court created or funded trusts are set forth at California Rules of Court (CRC), Rule 7.903(c) and LASC Rule 4.116(b). The proposed SNT instrument meets those requirements.
Note that petitioner could have requested that the requirements for bond, accountings, court approval of changes in trustee, and court approval of attorney fees and trustee fees not apply to this SNT pursuant to subsection (d) of CRC Rule 7.903. That subsection provides that “Unless the court orders for good cause shown,” the requirements described in the first sentence of this paragraph do not apply to trusts funded with less than $20,000. With those requirements absent, the SNT would not need to be sent to the probate division to open a new case for court supervision of the SNT. As presented in this petition, those requirements are present in the proposed SNT instrument, leading to a high cost of administration for this SNT in relation to the low funding amount.
Concern Regarding SNT Instrument
The SNT instrument was executed by petitioner as proposed trustee, and that signature was notarized, all on January 12, 2022. The SNT instrument should not be executed until the court approved the creation and funding of the SNT. Occasionally, petitioners will use a “seed trust” that they establish on their own then request mere funding of that SNT with the settlement proceeds, but there is no indication of that procedure in this petition. The court should clarify that the SNT instrument should be executed and funded only after this court issues an order allowing it. The court voids the January 12, 2022 execution of the SNT instrument; the SNT should only be executed after the court issues an order pursuant to this petition.
FINDINGS
When ultimately approving the establishment or funding of a SNT from settlement proceeds, the court must make the following findings pursuant to Probate Code section 3604(b) (there are factual allegations in the Petition to Approve Compromise and its attachments supporting the settlement that generally cover the requisite findings):
TRUSTEE AND BOND
Petitioner proposes that she shall act as the SNT trustee. Normally, bond must be required of a trustee unless the trustee is a corporate fiduciary. (California Rules of Court, Rule 7.903(c)(5), Probate Code section 2320.) Petitioner/mother does not meet that requirement and bond should be required.
As noted above, there is no briefing provided in the petition regarding SNT issues and petitioner has chosen to make the bond requirement apply to this SNT notwithstanding the very small funding. A proper bond calculation would be $20,000 based upon the SNT funding amount plus an additional amount required for any costs of recovery. The bond premium, however, could be over $1,000 per year on a $18,000 SNT. The Court requests counsel for the Petitioner address the need for bond. If required, the Court will set the bond requirement at $20,000.
NOTICE
When seeking approval of a SNT, service must be made upon three state agencies including the Dept. of Mental Health, Dept. of Developmental Services, and Dept. of Health Care Services. (Probate Code section 3611(c).)
The proof of service attached to the petition indicates service only of the proposed order and not the petition. Moreover, that proof of service indicates service only upon the Dept. of Health Care Services but not the other two state agencies. The proof of service also indicates a mailing date of 2/4/22, a date well before the current 6/17/22 petition and apparently for the prior versions of the petition.
On 3/24/22 and 4/12/22, petitioner filed separate Notices of Continuance for the motion to reduce lien and for the petition to approve compromise that indicate service on all three state agencies, but it indicates service of only that notice brief and not the petition brief. The state agencies must receive service of the briefs to have an opportunity to review the proposed SNT and the settlement figures.
Notice therefore is deficient. The Court continues the hearing for proper notice. Required notice will be 15 days by mail, not extended for mailing.
THE PROPOSED ORDER
A proposed order was provided within the petition briefing at Attachment 20 (court’s pdf at p. 88). It is extremely brief and only orders that the SNT may be funded. The following requirements apply:
General Orders
The order approving the SNT must include a copy (or the terms) of the proposed SNT instrument to capture the text of the trust being approved. (Not satisfied.)
Housekeeping Orders
The proposed order should address the general findings and additional orders relating to the SNT issues. (See section above regarding bond, findings, etc.) (Not satisfied.)
When the funding of a SNT is allowed, the court order will include language requiring petitioner to file an accounting within a year (with a date specified in 14 months to allow time for drafting and filing of the accounting). (Not satisfied.)
An order establishing an SNT also should include language requiring the submission of a Notice of Commencement of Proceedings for a Court Supervised Trust on LASC Form PRO 044 within 60 days. It is that filing that will hand the case off to start the trust administration for the SNT that will host the future SNT accountings and any bond issues or other trust issues. (Not satisfied.)
CONCLUSION
The Petition to Approve Compromise of Pending Action on Behalf of Minor Gerson Martinez Vasquez filed by Petitioner Daniel Olga Martinez will be CONTINUED to August 30, 2022, at 1:30 p.m. in Department 28 of the Spring Street Courthouse so as to allow Petitioner to provide notice to the appropriate governmental agencies. In the interim, the Court wishes to discuss the issues bolded above with Petitioner’s counsel.
Petitioner is ordered to give notice of this ruling.
Petitioner is ordered to file the proof of service of this ruling with the Court within five days.
The parties are directed to the header of this tentative ruling for further instructions.