JAY J. SANGERMAN, ESQ.
Placement of Tort Awards for Minors © 2003
Once a personal injury/medical malpractice matter involving a minor plaintiff has either settled or concluded with a successful verdict, the plaintiff's attorney needs to consider how and where the funds should be placed. Often the infant's compromise order provides for the placement of the net proceeds into joint accounts between the parent/natural guardian and the clerk of the court or jointly between the parent/natural guardian and financial institutions. The infant's compromise order may further provide that, when the infant reaches the age of majority, the funds be turned over to the individual or, if the individual does not then have mental capacity, that the parent/natural guardian must initiate a guardianship proceeding in the Supreme Court under Article 81 of the Mental Hygiene Law or in Surrogate's Court under Article 17-A of the Surrogate's Court Procedure Act. As a result of such infant's compromise orders, either the funds are not available during the minor's formative years or the parent/natural guardian needs to make an application to the court each time there is a need to withdraw funds for the needs of the infant.
This article discusses various ways in which the net proceeds from a personal injury/medical malpractice action may be placed, and the court procedures necessary for the placement of the funds. This author suggests that plaintiff attorneys seek, and courts order, the placement of the net proceeds in a manner which will offer (i) maximum flexibility for asset management; (ii) discretion to the custodian of the funds for distributions on behalf of the infant plaintiff without the need for court intervention except, perhaps, for certain large expenditures and (iii) reasonable asset protection.
This article addresses (i) placement of funds for an infant plaintiff who will likely possess mental capacity upon reaching the age of majority and (ii) placement of funds for an infant plaintiff who is not expected to possess mental capacity upon reaching the age of majority.
The generally accepted choices for the placement of proceeds to be received by a minor from a personal injury or medical malpractice action are the following:
In addition to these generally accepted approaches for the placement of an infant's funds, this author suggests that attorneys and courts consider placement of funds for infants who are expected to possess mental capacity to manage assets at age eighteen into trusts, provided that the infant retains the legal authority to obtain all funds upon attaining such age.
Disposition of Proceeds for a Minor Plaintiff Who is Likely to Possess Mental Capacity
to Manage Financial Affairs Upon Attaining the Age of Majority
A parent is the "natural guardian of the person" for a minor, but not a guardian of the property of a minor, except by court order. Therefore, if a minor is to receive more than $10,000.00, the appointment of a guardian is necessary, unless the funds are to be placed into a vehicle approved and ordered by the court. See Surrogate's Court Procedure Act Section 2220 (1) which provides that "[w]here an infant ... is entitled to money ... or to the proceeds of a settlement of a cause of action ... the decree or order shall direct that it be paid or delivered to the guardian ... of the property of such person." A guardian is defined in Surrogate's Court Procedure Act Section 103 (24) as "[a]ny person to whom letters of guardianship have been issued by a court of this state." See also Matter of Decker v Pouvailsmith Corp., 225 App. Div. 489, 233 N.Y.S. 407 (3rd Dep't 1929), rev'd on other grounds 252 N.Y. 1; 168 N.E. 442 (1929) stating:
where an infant acquires property it is only a duly appointed guardian by will or deed of the parent or by a court who is legally charged with the control and management of the property. We think that natural guardianship is largely limited to the custody of the person of the infant and does not include the right to manage large property interests suddenly acquired either by inheritance or by the operation of a statute in conferring property rights on him.
225 App. Div. 491. Citations omitted.
Funds, including those from a personal injury or malpractice action, payable to a minor who is expected to possess mental capacity upon reaching the age of majority, must be available to such minor upon his/her reaching such age, and cannot be "locked up" in trusts which would prevent the minor from obtaining such funds upon his/her reaching such age. See, e.g., Surrogate's Court Procedure Act Section 1707 (2); Matter of the Estate of Yolette Mede, 177 Misc. 2d 974; 677 N.Y.S.2d 707 (Surr. Ct. Kings Co. 1998) wherein the minor's father sought approval from the court to invest the children's shares of the personal injury/wrongful death settlement in trusts, which were irrevocable and were not to terminate until each child reached the age of thirty-five. The court, although understanding the father's concern about turning over significant assets to an eighteen year old, would not permit a restriction to the access of settlement proceeds after an infant reached the age of eighteen, absent a showing that any of the infants would lack the requisite mental capacity to handle one's own finances pursuant to Surrogate's Court Procedure Act Article 17-A or Mental Hygiene Law Article 81. The Mede court stated:
The court also understands petitioner's concerns that an 18 year old may be unable or ill-prepared to manage large sums of money. However, in spite of the court's empathy for petitioner and his views, the court is unable to allow petitioner to have access to his children's funds past their age of majority while investing them in a manner which has not been sanctioned by statute. As new investment proposals continue to appear before the court, the Surrogate cannot, without direction from the Legislature, permit the significant erosion of the statutory standards set forth in the SCPA and EPTL.
See also a decision in Florida, similar to Mede, in which the Florida court held that there is no authority in the Florida guardianship statutes which would authorize creation of trusts for minors which prevent the minor from receiving the funds upon obtaining the age of majority. In Re: the Guardianship of Jacqueline D. Bernstein and Joseph G. Bernstein, and Michelle A. Bernstein, Guardian, Appellants/Cross-Appellees, v. David Miller, Appellee/Cross-Appellant, 777 So. 2d 1125; Fla. App. (Court of Appeal, 4th District, 2001), LEXIS 813; 26 Fla. L. Weekly D 340. 1
A. Pursuant to Civil Practice Law and Rules Section 1206
Civil Practice Law and Rules Section 1206 provides a relatively simple, and frequently used, mechanism for the placement of proceeds from a personal injury/medical malpractice action. Pursuant to this statute, the court can order the net proceeds to be placed into joint accounts with financial institutions or the clerk of the court. This mechanism is cost efficient and can save significant time in concluding the litigation through the court's signing of the infant's compromise order. The infant's compromise order pursuant to Civil Practice Law and Rules Section 1206 will generally provide that (i) if the infant possess sufficient mental capacity to manage assets upon reaching the age of majority, the funds shall be automatically turned over to the infant, (ii) if the infant does not possesses sufficient mental capacity, the parent/natural guardian or custodian of the funds must initiate a Mental Hygiene Law Article 81 or Surrogate's Court Procedure Act 17-A guardianship proceeding or (iii) require the parent/natural guardian or custodian of the funds to make an application to the court which had jurisdiction over the tort matter to determine whether a guardianship needs to be undertaken for the disposition of the funds.
The following problems may occur as a result of the placement of assets into joint accounts:
. . . .
B. Pursuant to Surrogate's Court Procedure Act Article 17 or Article 17-A.
It is possible to apply to the Surrogate's Court (and some trial court judges will require such application) for the appointment of a guardian to receive the net settlement funds on behalf of the infant plaintiff. Such application would be made either pursuant to (i) Surrogate's Court Procedure Act Article 17 if the minor is expected to possess sufficient mental capacity upon attaining the age of majority or (ii) Surrogate's Court Procedure Act Article 17-A if the minor is mentally retarded or otherwise developmentally disabled. A guardianship application based only on infancy may be granted where the court is "satisfied that the interests of the infant will be promoted by the appointment of a guardian." Surrogate's Court Procedure Act 1707 . The "term of office of a guardian of the person or property so appointed expires when an infant attains majority." Surrogate's Court Procedure Act 1707 (2). As to those shown to be mentally retarded or developmentally disabled within the meaning of Article 17-A, a guardian may be appointed upon the court's determination that "appointment is in the best interest of" such person (Surrogate's Court Procedure Act 1750 and 1750-a). The procedures for obtaining Article 17 and Article 17-A guardianships are similar.
Surrogate's Courts will generally require all assets to be invested in bank accounts, designated by the Surrogate. Therefore, in instances where there is a large amount of upfront cash payable to the infant plaintiff, asset management may be cumbersome. For instance, in a million dollar net settlement, the Surrogate will likely require not less than eleven different named financial institutions for the placement of the funds, to assure that no institution will have more than a beginning balance of approximately $90,000.00. Diversification of investments becomes impossible.
The Surrogate's Court will likely require the guardian to apply to court each time the guardian desires to expend funds for the child. See Surrogate's Court Procedure Act 1713, which provides for the authority and discretion of the Surrogate's Court to allow the withdrawal and application of an infant's funds. Some Surrogates permit the guardian to submit an annual budget, requiring a court order for any expenditure not set forth in the approved annual budget. Since the court can make the funds available for the benefit of the infant, the funds held may be deemed available resources for Medicaid and Supplemental Security Income, removing the infant from eligibility.
An innovative approach, which later became statutory, is the placement of an infant's funds through an investment advisory agreement. This approach was codified by amendment to the Surrogate's Court Procedure Act in the year 2000 as Section 1708(2)(c), which states:
The court may also dispense with a bond wholly or partly when it authorizes the guardian to invest the guardianship funds pursuant to an investment advisory agreement with a bank, trust company, brokerage house, or other financial services entity acceptable to the court. The investment advisory agreement shall provide that the guardianship funds will be invested in accordance with the provisions of section 11-2.3 of the estates, powers[,] and trusts law and that the funds so invested shall not be released from the custody of the custodian identified therein except on order of the court. The petition to invest the guardianship funds pursuant to this subdivision shall be accompanied by a copy of the proposed investment advisory agreement. If the custodian of the funds is not the same person or entity providing the investment advice, a separate custodial agreement shall also accompany the petition to invest the guardianship pursuant to this subdivision. Such custodial agreement shall be with an institution acceptable to the court for the purpose of retaining control of the guardianship funds and shall also provide that the funds under the control of the custodian shall not be released from custody except on order of the court.
Section 1708(2)(c) permits diversity of investments, not otherwise permitted under a Surrogate's Court guardianship. Additionally, certain expenditures for the benefit of the infant, subject to the provisions of the investment advisory agreement (which was approved by the Surrogate's Court), might be able to be made without further order of the Surrogate's Court. In considering applications for the creation of an investment advisory agreement, Surrogates have denied applications, e.g., where the infant is nearing age 18 (including infants of age 14), the prospective corporate fiduciary is seeking fees pursuant to its fee schedule, rather than requesting the Surrogate to set the fiduciary fees, or the fiduciary is seeking exoneration of fiduciary liability. See In the Matter of Derek W. Bryant, 188 Misc. 2d 462; 729 N.Y.S.2d 309 (Surrogate's Court, Broome Cty, 2001) (application denied where infant is 14 years of age); Matter of Diana Lauren Ziskin, (Nassau County Surrogate's Court, NYLJ, October 1, 2001,) (application for investment advisory agreement denied due to compensation and exoneration of fiduciary liability issues); Matter of Christopher Corapi, (Onondaga County Surrogate's Court, NYLJ, July 13, 2001) (court found agreement provisions contrary to the Prudent Investor Act, but indicated that upon receipt of an agreement omitting language contrary to the Prudent Investor Act, it would grant the petition).
C. Alternative for Placement of Settlement Proceeds for a Minor Who is Expected to have Mental Capacity upon Reaching the Age of Majority .
This author suggests that trial judges offer an additional vehicle for the placement of personal injury/medical malpractice proceeds: a vehicle that provides for flexibility of assets, security of the funds and ability for distributions for the benefit of the infant without the need for an application to the court for each request. Such vehicle would be similar to the Surrogate's Court Procedure Act Section 1708 investment advisory agreement. Specifically, it is suggested that courts order the placement of funds into irrevocable trusts, payable to the minor upon attaining the age of majority. Such trusts would not violate the infant's rights to the funds upon reaching the age of majority.
Pursuant to the terms of the trust recommended here, the trust assets would be invested in diversified investments pursuant to the Prudent Investor Act, within any limitations set by the court, and the trustee would have discretion to make payments to third parties on behalf of the minor. Courts have authority to order the creation of such trusts pursuant to the court's powers under Civil Practice Law and Rules 1206, in the same way that courts have the authority to order the establishment of supplemental needs trusts for a disabled minor pursuant to Civil Practice Law and Rules 1206. 3 It would be unfortunate if the funds payable to an infant who is expected to possess mental capacity upon attaining the age of majority could not be managed with diversified investments pursuant to the Prudent Investor Act, while courts generally have no objection to a disabled infant's funds placed into a supplemental needs trust being managed with diversified investments. It is additionally unfortunate that, although funds for a disabled infant are available for his/her benefit, funds for a healthy infant may not be available for the benefit of the infant until age eighteen.
In summary, the advantages of this type of trust are:
For added protection, at the termination of the trust, the court may require the presentation of a final accounting to the infant upon his/her reaching majority age. Annual accountings should be required, which should be given to the minor no later than age fourteen, in addition to the minor's parents/guardians. With the use of a corporate trustee, the court should not need to be concerned about a conflict of interest between parent and child, or the use of the funds by the parents for their personal benefit.
Disposition of Proceeds for a Minor Plaintiff Who is Likely Not to Possess Mental
Capacity Upon Attaining the Age of Majority
A. A Supplemental Needs Trust established and funded through Civil Practice Law and Rules Section 1206; or a Guardianship Established under Mental Hygiene Law Article 81 or Surrogate's Court Procedure Act Article 17 or 17A .
1. The judge who is presiding over the underlying tort matter has the authority pursuant to Section 1206 of the Civil Practice Law and Rules to order the net proceeds payable to the infant plaintiff to be paid into a supplemental needs trust, 4 without the need for an additional proceeding for the appointment of a guardian pursuant to Mental Hygiene Law Article 81 or pursuant to Surrogate's Court Procedure Act Article 17 or 17-A. See, e.g., DiGennaro by DiGennaro v. Community Hosp. of Glen Cove, 611 N.Y.S.2d 591 (App. Div. 2d Dep’t 1994), wherein the court held that trial court had discretion pursuant to Civil Practice Law and Rules 1206 to approve the creation of a supplemental needs trust and the payment of the proceeds from the lawsuit into the supplemental needs trust. The court reversed the lower court stating that approval should not have been denied on the ground that the infant was never adjudicated an incompetent where the facts indicated that he would be permanently incapacitated. See also In the Matter of Beth E. Mills v. Mark Durst et al., 156 Misc. 2d 676; 594 N.Y.S.2d 537 (Onondaga Cty 1993), in which the court stated:
Civil Practice Law and Rules 1206 explicitly provides for settlements which restrict the use of an infant's funds beyond the age of the infant's minority. Civil Practice Law and Rules 1206 (c) states: "no court order shall be required to pay over to the infant who has attained the age of eighteen years all moneys so held unless the depository is in receipt of an order from a court of competent jurisdiction directing it to withhold such payment beyond the infant's eighteenth birthday" (emphasis supplied). This sentence contemplates restraints on an infant's access to settlement funds after the infant becomes an adult if the court finds restriction to be necessary in the infant's best interests. While the court's discretion should rarely be exercised to restrict access to settlement proceeds after an infant reaches the age of 18, the court cannot avoid making this determination where the infant's best interests require it.
The most significant factor in the decision as to whether or not to restrict an infant's control over settlement proceeds after the age of 18 is whether there is a reasonable possibility that the infant will become a competent adult. Here it does not appear that there is and therefore, the court should not, in a rote fashion, grant the same relief it would for a child who will presumably become a competent adult.
Establishing a supplemental needs trust pursuant to Civil Practice Law and Rules saves legal fees, allows the case to settle faster and permits the matter to be completed by the trial judge who is familiar with the infant, the infant's needs and his/her family situation.
2. The supplemental needs trust can also be established pursuant to the appointment of a guardian under Article 81 of the Mental Hygiene Law or Article 17 or 17-A of the Surrogate's Court Procedure Act. In the past, many trial judges referred the determination for whether a supplemental needs trusts should be ordered for the placement of tort proceeds, and the review of the trust, to the Mental Hygiene Law Article 81 guardianship part. 5 It is this author's experience that presently most trial judges are willing to order the supplemental needs trust as part of the infant's compromise order. 6 Supplemental needs trusts are also ordered within Article 17-A 7 and Article 17 proceedings. 8
There are many different methods and vehicles by which to place the award from a personal injury or medical malpractice matter. This article has been intended to set forth, and expand upon, those choices for placement of assets, which need to be considered on a case-by-case basis.