TN 1 (06-14)

PS 01415.033 New Jersey

A. PS 14-108 Michael Supplemental Benefits Trust

DATE: May 30, 2014

1. SYLLABUS

This opinion examines whether the assignment of child support payments into the Michael Supplemental Benefits Trust (Trust) is irrevocable. Child support payments may be considered irrevocably assigned to a trust when they are court ordered or when the terms of the assignment cannot be modified. In this case, the Court did not directly order the child support payments. However, the Court neither approved nor disapproved the “Agreement” that discussed the child support payments, but merely incorporated it into the Judgment of Divorce. New Jersey law recognizes that a property settlement agreement is a binding contract and should be enforced according to the original intent of the parties. Because the Agreement was incorporated as part of the Judgment of Divorce and is treated as a binding contract under New Jersey law, and the terms of the assignment cannot be changed without modifying a court-ordered judgment of divorce and property settlement agreement, the child support payments are irrevocably assigned to the Trust.

2. OPINION

QUESTION PRESENTED

Whether the assignment of child support payments into the Michael Supplemental Benefits Trust (Trust) is irrevocable, such that the payments should not be considered as income to the claimant Michael (Michael) for purposes of determining eligibility for Supplemental Security Income (SSI).

OPINION

Because the terms of the assignment cannot be changed without modifying a court-ordered judgment of divorce and property settlement agreement, we conclude that the assignment of child support payments is irrevocable absent a change in circumstances. However, we note that the treatment of any additions to the Trust as income may be dependent in part on other factors, including the status of the underlying Trust as a resource.

BACKGROUND

Michael was born in 1997. His parents, Sandra and John, divorced in October 2013, after entering into a Property Settlement Agreement (Agreement). At the request of the parties, this Agreement was incorporated by Court order as part of the Dual Final Judgment of Divorce, with Property Settlement Agreement Attached (Judgment of Divorce), on October 28, 2013. Under the terms of the Agreement, John agreed to pay permanent child support directly into a “Special Needs Trust” to be established on Michael’s behalf, but the Court did not expressly order the creation of a trust. [1] The Trust instrument was executed the following month, in November 2013. The Trust states that it is intended to be the recipient of Michael’s child support payments “in order to protect and continue [his] qualification for public benefits.” Trust, Article (Art.) II(C). Michael’s mother stated that all funds deposited in the account consist of child support payments owed in accordance with the Agreement, although it appears that the account may have been opened with a nominal sum ($5.00) provided separately by Michael’s parents.

The terms of the Trust provide that “[a]t no time shall [Michael] obtain a vested interest in Trust income or principal.” Trust, Art. III(F). However, Michael’s parents retain the right to revoke the Trust or amend any of its terms, if both parties agree. Trust, Art. V(A)-(B). The Trust may also be revoked or amended by the action of one parent alone, if the other is incapacitated or deceased. Id. After the death of both parents, the “Trust shall become irrevocable.” Trust, Art. V(C).

ANALYSIS

Child support payments are generally considered to be unearned income to the recipient. 42 U.S.C. § 1382a(a)(2)(E); 20 C.F.R. § 416.1121(b); see Program Operations Manual System (POMS) SI 00830.420 (providing that some payments from an absent parent may be excluded). However, if a legally assignable payment is irrevocably assigned to be paid directly to a trust that is not itself a resource, the payment is not considered to be income for SSI purposes. POMS SI 01120.201(J)(1); see also POMS SI 01120.200(G)(1). [2] If the assignment is revocable, in contrast, the payment remains income to the individual legally entitled to receive it. Id. Child support payments may be considered irrevocably assigned to a trust when they are court ordered or when the terms of the assignment cannot be modified. See POMS SI 01120.201(C)(2)(b).

In this case, Michael’s parents entered into a Property Settlement Agreement, which included a provision that child support payments would be made directly to the Trust. See Agreement, ¶ 5.1 (providing that “Husband will pay $770.50 per month permanent child support for Michael ” and that “Michael’s child support will go directly into the Special Needs Trust”). The Agreement was incorporated as part of the Judgment of Divorce, and child support payments are presumably being made to the Trust at present. You have asked whether the court’s order renders the assignment of these funds to the Trust irrevocable.

First, we note that the Judgment of Divorce expressly states that the Court “neither approved or disapproved” the Agreement, but merely incorporated the Agreement by reference at the request of the parties. However, even if this created doubt as to whether the assignment was “court ordered,” as stated in your question, New Jersey law recognizes that a property settlement agreement is a binding contract and should be enforced according to the original intent of the parties. See, e.g., Pacifico v. Pacifico, 920 A.2d 73, 77 (N.J. 2007). We therefore conclude that the assignment in this case was binding once signed and incorporated, whether as a result of the court order or the underlying contract between the parties.

New Jersey law also permits child support payments to be made to a trust, especially when that trust is designed to meet the present and future needs of a dependent, disabled child. See J.B. v. W.B., 73 A.3d 405, 419 (N.J. 2013) (“The redirection of a child support obligation from a parent to a trust designed to meet the present and future needs of the dependent, disabled child should not be considered exceptional or extraordinary relief, if such a plan is in the best interests of the unemancipated child.”). Michael’s child support payments, therefore, are legally assignable.

Furthermore, as a general rule, “absen[t] . . . unconscionability, fraud, or overreaching in negotiations of the settlement,” a trial court has “no legal or equitable basis . . . to reform the parties’ property settlement agreement.” Miller v. Miller, 734 A.2d 752, 758 (N.J. 1999); see J.B. v. W.B., 73 A.3d at 417 (noting that “care must be taken not to upset the reasonable expectations of the parties”) (internal citations omitted). Support obligations may nonetheless be modified, provided the requesting party meets the threshold standard of changed circumstances. Lepis v. Lepis, 416 A.2d 45, 54 (N.J. 1980). In this case, the Judgment of Divorce indicates that both parties represented to the Court that the Agreement was entered into freely and voluntarily, and the Agreement itself states that “the parties are satisfied that [the] Agreement is fair and equitable.” Agreement, ¶ 6.8. We are also not aware of any change of circumstances that would cause the Court to modify the order and Agreement requiring that child support payments be made directly to the Trust.

Although the Trust does include an article reserving the right of Michael’s parents to revoke the Trust if both parents agree or one parent is incapacitated or deceased, the language of the Agreement itself is mandatory and does not provide for an alternative to the deposit of “child support . . . directly into the Special Needs Trust.” Agreement, ¶ 5.1; see Trust, Art. V. Because the Agreement was incorporated as part of the Judgment of Divorce, and is treated as a binding contract under New Jersey law, it seems likely that a modification would be necessary if the parties wished to cease making payments into the Trust or to revoke the Trust entirely. This again would require a showing of changed circumstances. See Lepis v. Lepis, 416 A.2d at 54; see also J.B. v. W.B., 73 A.3d at 417 (noting that where parents have “agreed to undertakings advantageous to a child beyond that minimally required, the public policy favoring stability of arrangements usually counsels against modification”) (internal citations omitted). In the absence of such circumstances, at this time the child support payments are irrevocably assigned to the Trust.

Although we were asked only for an opinion as to whether the assignment of child support payments into the Trust is irrevocable as a result of the Court’s order, your question suggested that you are reviewing these payments for treatment as potential income. We therefore note that, even if the Court’s order directing payment of Michael’s child support into the trust is irrevocable at present, the treatment of any additions to the trust as income may be dependent in part on other factors. In particular, if the underlying Trust is itself determined to be a resource, additions to the trust principle may be considered as income or conversion of a resource. See POMS SI 01120.201(B)(3), SI 01120.201(C)(3), SI 01120.201(J)(2)-(3); see also POMS SI 01120.200(G)(2)(b).

CONCLUSION

We conclude that the child support payments are irrevocably assigned to the Trust, but note that this may not fully determine whether additions to the Trust are appropriately considered as income.


Footnotes:

[1]

In the event that the trust was not yet in place by October 28, 2013, the Agreement provided that child support payments would be held in trust by Michael’s grandfather until the trust was established.

[2]

Your question refers to the Trust as a “third party trust,” although the Trust appears to include Michael’s own assets in the form of child support. See 42 U.S.C. § 1382b(e)(6)(C)(iii) (defining assets to include payments to which the individual is entitled but does not have access because of action by a person or entity, including a court, with legal authority to act in place of, or on behalf of, the individual); see also POMS SI 01120.201(B)(7) (providing that a “trust is considered to have been established with the assets of an individual [rather than those of a third party] if any assets of the individual (or spouse), regardless of how little, were transferred to a trust other than by a will”), POMS SI 01120.201(C)(2)(b) (providing examples of trusts established with an individual’s own assets, including where child support is assigned by court order directly into a trust). Since we were asked only for an opinion regarding the irrevocability of the assignment of child support payments to the Trust, however, we are including “see” or “see also” citations to the rules for trusts funded with third party assets insofar as the rules are the same for both types of trusts.


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PS 01415.033 - New Jersey - 06/12/2014
Batch run: 08/03/2015
Rev:06/12/2014