PS 01415.016 Illinois
A. PS 07-034 SSI-IL.-Review of Annuity Payments to the Virginia L~ Irrevocable Special Needs Trust, ~ ACTION/Your Ref: S2D5G6 SI 2-1-3 IL Our Ref: 06-0090
DATE: December 12, 2006
This opinion establishes the precedent that in the state of Illinois where a structured settlement agreement contains a non-assignment provision for periodic payments from an annuity, even a court cannot modify the agreement to permit assignment. Therefore, the payments are income because they cannot be assigned directly to a trust or anyone else.
You asked us whether payments from an annuity issued by the Metropolitan Insurance & Annuity Company (hereinafter "Annuity") to the Virginia L~ Irrevocable Special Needs Trust (hereinafter "Trust") constitute income to Hector L~, a disabled adult. For the reasons discussed below, we conclude that the annuity payments are income.
In September 1988, Hector L~ was born with cerebral palsy. His parents subsequently filed a lawsuit on his behalf against the physician who provided pre-natal care. In August 1999, the guardian ad litem, the guardian of the estate, and his parents agreed to a settlement with the defendant and her insurer. On August 30, 1999, the court entered the Order Approving Settlement of Minor's Claim ("Order"), which approved the settlement agreement.
Section 2.2 of the settlement agreement provides for monthly payments for the life of Hector, with such "Periodic payments payable to the designated guardian of Hector L~, a minor (payee)." Section 5 of the settlement permitted the defendant to make a qualified assignment of the obligation to make periodic payments to the Metropolitan Insurance and Annuity Company. Paragraph 12 of the Court's Order approving settlement mentions the Annuity. Section 3 of the settlement provides that the payee does not have the power to sell or assign the periodic payments.
At the time of the settlement, Hector's mother, Virginia, established the Trust with $10 of her own money, and the trustee was Hector's father, Manuel L~. The Annuity agreement indicates that it was effective as of September 20, 1999. Section 3 of the Annuity provides that the periodic payments may not be assigned. Addendum A to the Annuity provides for periodic payments to the trustee of the Trust. The last sentence of the Court's Order instructs Manual L~ to provide an accounting of a special needs trust in February 2001.
The periodic payments from the settlement are income because the payments to Hector are either non-assignable to the trust, or are assignable, but not irrevocably so. Pursuant to POMS SI 01120.200(G)(1)(c), certain payments are non-assignable by law and may not be paid directly into a trust, but individuals may attempt to structure trusts so that it appears that they are so paid. See also Reames v. Oklahoma ex rel. OK Health Care Authority, 411 F.3d 1164, 1171 (10th Cir. 2005) (holding that Social Security disability income could not be assigned into a special needs trust). Pursuant to POMS SI 01120.200(G)(1)(d), a legally assignable payment that is assigned to a trust is income for SSI purposes unless the assignment is irrevocable. If the assignment is revocable, the payment is income to the individual.
There is no indication that an assignment took place, much less an irrevocable one. Pursuant to 215 ILCS 153/25(a), "No annuity issuer or structured settlement obligor may make payments on a structured settlement to anyone other than the payee or beneficiary of the payee without prior approval of the circuit court. . . No payee . . . of a structured settlement may assign in any manner the structured settlement payment rights without prior approval of the circuit court." The settlement agreement indicates that settlement payments were to be made to the guardian of Hector L~, not to a trust. The Court's Order acknowledged the existence of the trust, but did not indicate that the periodic settlement payments were assigned to the trust, much less that the payments were assigned irrevocably. Significantly, elsewhere in the Order, the Court indicated that its oversight of Hector's funds would end when Hector turned 18. The fact that the Court apparently allowed the settlement proceeds to be place in the Trust, for the benefit of a minor Hector, is insufficient to indicate that the Court permitted an irrevocable assignment of future payments to the trust.
Furthermore, even if the parties attempted to seek such an order, the court would not have authority to approve such an assignment. Both the settlement agreement and the Annuity contain non-assignment provisions. The courts in Illinois have found that such non-assignment clauses in structured settlements are not only enforceable, but that courts are powerless to allow assignments after approving such settlements. See In re Foreman, 302 Ill. Dec. 950 (Ill. App. Ct. 2006). Thus, the settlement agreement did not allow either Hector's guardian or Hector to assign the rights to Hector's income and Hector was prohibited by law from making such an assignment. Even though Hector has been transferring his money to the trust (through his guardian), the settlement forced him to retain the rights to the periodic payments and these payments remain his income.
For the reasons discussed above, we conclude that the Annuity periodic payments to the Trust are income.
B. PS 00-383 Illinois Trust for Lorraine S~
DATE: July 17, 1997
Under Missouri law, a party cannot, by contract or agreement, alter his obligation to pay future child support without judicial modification of the support decree. Therefore, payments made by one parent to a trust in lieu of court ordered support payments are considered the child's income, available for the child's support and maintenance.
Caution: Because of a change in the Social Security Act, this precedent may only be applicable to trusts established before 1/1/00.
You requested a legal opinion regarding a document creating a discretionary supplemental trust with SSI recipient Lorraine S~ (Lorraine) as beneficiary. You inquired whether Lorraine has unrestricted access to the trust principal for her support and maintenance, i.e., whether the trust principal is a resource for SSI purposes. You also inquired as to the validity of the Statement of Intent by which Lorraine's father agreed that support payments would be paid into the trust.
We conclude that the Statement of Intent, which sought to modify the court order of support, would be held invalid under applicable state law, and that the trust assets should be considered Lorraine's income or resources for SSI purposes, at least to the extent that the assets were derived from payments made pursuant to the Statement of Intent or from other property which had been owned by Lorraine or by her guardian on Lorraine's behalf.
Pertinent Documents Other than the Declaration of Trust
Lorraine, currently twenty-one years old, is the disabled daughter of Deborah S~ (Deborah) and David S~ (David). Deborah and David were divorced in Missouri in 1995. The Judgment/Decree of Dissolution (divorce decree), entered on November 1, 1995, states that there were two children of the marriage: Lorraine, born March 15, 1976, and Lynne, born October 4, 1978. Divorce Decree at 2. The divorce decree awards child support "for the parties' minor children" in the amount of $566 per month per child to be paid by David to Deborah. It further states, "The Court hereby finds that the child LORRAINE is incapacitated and in need of parental support past the age of emancipation." Divorce Decree at 3. It incorporates all terms of a Marital Settlement Agreement (settlement agreement). Divorce Decree at 2. It also permits Deborah to remove the residency of the children to Illinois. Divorce Decree at 4.
The notarized settlement agreement, signed by David on August 15, 1995, in Missouri, and by Deborah on October 25, 1995, in Illinois, requires David to pay to Deborah $566 per month, per child "for the parties' children as and for child support for the care, support and education of the parties' minor children." Settlement agreement at 6. It further states: The parties agree and stipulate that the child LORRAINE S~ is incapacitated and is in need of parental support past the age of emancipation, and said support shall continue until her death, the death of the Respondent, or further Order of the Court. Settlement agreement at 6. Paragraph 15 provides that no modification or waiver of any of the terms will be valid unless it is made in writing and executed with the same formality as the settlement agreement. Settlement Agreement at 10.
On October 24, 1995, one day before the settlement agreement was finally executed, David signed a notarized Statement of Intent agreeing to contribute monthly to a trust to be created for Lorraine's benefit, in lieu of the court ordered child support payments.
On January 26, 1996, the Circuit Court of Kane County, Illinois appointed Deborah as Lorraine's guardian.
Declaration of Trust
On January 30, 1996, Deborah executed, in Illinois, a declaration of trust (declaration), as "Settlor and Trustee," creating the "Lorraine S~ Discretionary Supplemental Trust." The declaration recites that Deborah transferred $10.00 to the trustee which, along with any additional property received from her or any other person and all investments and reinvestments, was to constitute the trust estate. Declaration at 1.
The declaration makes clear that Deborah's intent as settlor is to provide supplemental support beyond any support which can be provided by any governmental, public, or private agency. To this end, it states that no part of the trust is to be considered owned by Lorraine, that Lorraine has no vested right or interest in the income or principal, and that no property, goods or services purchased or owned by the trust for Lorraine's use is to be considered as under Lorraine's control. 1. The declaration prohibits any expenditure for "basic food, clothing and shelter" or making any trust income or principal available to Lorraine for conversion into such items, unless all governmental and private agency benefits for which Lorraine may be eligible because of her disability have been fully exhausted. 3, § 4. The declaration also prohibits any direct payment to Lorraine and prohibits the trustee from making any distribution for Lorraine's support if such support is otherwise available through a governmental agency. 1,3.
Within this framework, the Trustee has sole discretion to distribute principal or income for Lorraine's exclusive benefit to provide for her supplemental support and maintenance, but only to the extent that such items are not otherwise available through any governmental entity or private agency. 2; 3, §§ 5-9. The declaration also contains spendthrift provisions, protecting the trust estate from the creditors' claims and prohibiting assignment of a beneficiary's interest. 3, § 3; 5, § 2.
Deborah is Trustee. If her acting as Trustee in any way jeopardizes Lorraine's entitlement to government benefits or subjects the trust to claims of reimbursement by any private or governmental body, successor trustees are named. 5.
Deborah, as settlor, has reserved the right to amend the trust "in whole or in part for whatever reason" and has given the Trustee the right to amend or reform the trust provisions the Trustee deems it necessary, due to changes in law, in order to preserve the stated intent of the trust. 3, § 10. In the event of a court determination that reimbursement is required or disqualification from, or reduction, in governmental benefits, the declaration directs the Trustee to amend or reform the trust to effect the Settlor's purpose and, if that cannot be done, to terminate the trust and distribute the trust principal and income to Deborah, "not in any fiduciary capacity, but as [Deborah's] sole and exclusive property without any preconditions or requirements on the use or application of those funds." 3, § 11. If Deborah is deceased at the termination of the trust, distribution is to be made to Lorraine's guardians, also as their sole and exclusive property and not in any fiduciary capacity, or, if no guardian to the Trustees as their sole and exclusive property and not in any fiduciary capacity. Id. If the trust is still in existence at Lorraine's death, the trust estate is to be distributed to Deborah or to her heirs, per stirpes. 4.
Resources, for SSI purposes, include assets that a person owns and can convert to cash to be used for the person's support and maintenance. See 20 C.F.R. § 416.1201(a). If the person has the right or power to liquidate property, or her share of the property, it is a resource. Id. Trust assets are considered an SSI recipient's resource if the SSI recipient has the power to revoke the trust and use the trust assets to meet his needs for food, clothing, or shelter, or if he can direct use of the trust assets for such purposes. See POMS SI 01120.200(D)(1)(a). Whether the person can revoke the trust or direct use of the trust assets depends on the terms of the declaration of trust and on applicable State law. POMS SI 01120.200(D)(2).
We deal first with the additions to the trust made pursuant to the Statement of Intent signed by Lorraine's father, David. If the support payments had been made by Lorraine's father to Deborah in compliance with the settlement agreement that the Missouri court incorporated into the divorce decree, the payments would have been considered Lorraine's income for SSI purposes. See 20 C.F.R. 416.1121(b). The Statement of Intent seeks to modify the court's support order in two ways. First, instead of making support payments directly to Deborah for Lorraine's benefit, in accordance with divorce decree, the Statement of Intent contemplates payment of the same amount to Deborah as Trustee of the discretionary trust. Second, the divorce decree required that the payments be used for Lorraine's "support." As Lorraine's guardian, Deborah has a duty to use the funds for Lorraine's support. Under the terms of the discretionary trust, however, Deborah could use the funds for supplemental costs, but she would be precluded from making disbursements for basic food, clothing and shelter, and she would have no obligation to make any disbursements at all.
The question is whether Lorraine's parents can enter into an agreement which affects Lorraine's rights and effectively modifies the order of the Missouri court. The duty of support which is applicable is that of the law of the state where the obligor is present, in this case the father's domiciliary state of Missouri. See 750 ILCS 20/7. Illinois law also recognizes a child support order issued in another state, if it is the only such order. 750 ILCS 22/207. In addition, a post-majority child support obligation entered into pursuant to a divorce settlement agreement will be recognized by Illinois courts. See In re Marriage of Leming, 590 N.E.2d 1027, 1028 (Ill. App. 1992). Thus, the support order encompassed by the Missouri court's divorce decree is controlling and would be recognized by an Illinois court.
Under Missouri law, a party cannot, by contract or agreement, alter his obligation to pay future child support. Because child support payments are for the benefit of the child, the parties cannot settle or compromise future payments without judicial modification of the support decree. Only a court has the power to alter future child support payments. Mora v. Mora, 861 S.W.2d 226, 227 (Mo. App. 1993); see also, Boland v. State of Missouri, Dept. of Social Services, 910 S.W.2d 754, 758 (Mo. App. 1995), McLaughlin v. Horrocks, 883 S.W.2d 95, 97 (Mo. App. 1994).
Illinois case law is in accord. See Blisset v. Blisset, 526 N.E.2d 125, 127 (Ill. 1988) (parents may modify an agreement for child support only by petitioning the court for modification); Miller v. Miller, 516 N.E.2d 837 (Ill. App. 1987)(mother could not consent to modification of settlement, incorporated into divorce decree, which provided that father would pay college expenses for child, even after age 18).
Although David signed the Statement of Intent prior to the date of the divorce decree, in the divorce decree the court refers only to the settlement agreement. There is no indication that the court was aware at that time, or was subsequently informed, of the Statement of Intent or the plans to create a discretionary trust. Since payment of the support into the discretionary trust amounts to a modification of the court's support order, we conclude that such modification would not be valid without court approval. Therefore, the payments made by David to the trust in lieu of the court ordered support payments should be considered Lorraine's income, available for her support and maintenance, the purpose apparently intended by the Missouri court's divorce decree.
Even if the Statement of Intent were found to be valid, we believe that the portion of the trust assets derived from the payments made pursuant to the Statement of Intent should, nevertheless, be treated as Lorraine's income for SSI purposes. We also think it reasonable to conclude, in the absence of any indication that the rest of the trust assets were derived from property belonging to someone other Lorraine, that all of the trust assets should be considered Lorraine's resource. This is especially true since the Declaration of Trust suggests that Deborah, as settlor, contributed only $10.00 to the trust.
Under Illinois law, a discretionary trust for the benefit of a disabled person is not liable to pay or reimburse the State or any public agency for financial aid or services to the disabled person, except to the extent that the trust was created by the disabled person or the trust assets are distributed to, or under the control of, the disabled person. 760 ILCS 5/15.1 (1996 Supp.). Although the exception is not applicable where the trust complies with federal Medicaid reimbursement requirements, id., the declaration in this case, while referring to the applicable Illinois statute, see 1, does not provide for Medicaid reimbursement. See POMS SI 01730.048.
Under the terms of the declaration of trust, Lorraine does not, herself, have any right to revoke the trust or direct use of the trust assets for her support. Nor is Lorraine named as the person who created the trust (settlor). However, Lorraine's mother and guardian, Deborah, has virtually total control over use of the trust assets. As settlor, Deborah retained the right to amend the trust, in whole or in part, for any reason, which amounts to the power to revoke. See Bogert, Trusts 516 (6th ed. 1987)(under a power to amend, an irrevocable trust may be made revocable).
Deborah is also Lorraine's guardian. Where a guardian holds legal title, on behalf of a sole beneficiary of a trust, to assets which are subsequently transferred into a trust, the trust beneficiary is, in effect, the settlor of the trust. See In re Estate of Hickey, 635 N.E.2d 853, 855 (Ill. App. 1994), cert. denied, 642 N.E.2d 1281 (one who furnishes consideration is the settlor of the trust). Therefore, if Lorraine is the sole beneficiary of the trust, she is the settlor, at least with regard to whatever portion of the trust res was derived from assets which were hers or which her guardian held for her benefit. As we discuss below, contributions of the support payments to the trust should be considered contributions from Lorraine.
In this case, it is not clear from the documents submitted whether Deborah created the trust in her own right or in her capacity as Lorraine's guardian; nor is it clear what portion of the trust assets were derived from property which had been owned by Lorraine or which Deborah held on Lorraine's behalf. The declaration does not indicate whether even the $10.00 that initially funded the trust was Deborah's money or Lorraine's money. Nor is there any information about additions to the trust other than the payments made by David pursuant to the Statement of Intent. If Deborah created the trust as Lorraine's guardian, or if all of the assets of the trust derived from property previously held by Lorraine or by Deborah on Lorraine's behalf as guardian, then Lorraine is the true settlor of the trust and can revoke the entire trust, or amend it to allow access for her support and maintenance. Thus, all of the trust assets would be her resources for SSI purposes.
Under the agreement between Lorraine's parents, Deborah receives the "support" payments as trustee for Lorraine. Nevertheless, those support payments are, in effect, Lorraine's income. Thus, as to the portion of the trust res traceable to those "support" payments, Lorraine is actually the settlor of the trust. Through her guardian, she has the power to revoke the trust by virtue of Deborah's retention of the unconditional power to amend the trust. If she is the sole beneficiary of the trust, Lorraine also has the power to revoke any portion of the trust for which she can be considered the settlor. See Stewart v. Merchants National Bank of Aurora, 278 N.E.2d 10, 12 (Ill. App. 1972) (trust settlor who is also the sole beneficiary can revoke the trust without the trustee's consent, even though no power of revocation was reserved when the trust was created). Thus, the portion of the trust which is derived from the "support" payments should be considered Lorraine's resource for SSI purposes.
That the declaration calls for disbursement, upon termination of the trust, to Deborah in her own right, rather than on Lorraine's behalf does not change the result. Since Deborah retained the unconditional right to amend the trust, including the right to amend the provisions for disbursement upon termination of the trust, no intent to create a remainder interest in someone other than Lorraine can be implied. Thus, Lorraine is the sole beneficiary of the trust and has the power to revoke the portion of the trust as to which she is the settlor. Furthermore, as Lorraine's guardian, Deborah would have a fiduciary duty to use that portion of the trust assets which derived from Lorraine's assets not for her own benefit, but for Lorraine's benefit. To receive the assets of the trust in her own right would be a violation of Deborah's fiduciary duty as Lorraine's guardian.
While the declaration recites that Deborah paid $10.00 into the trust at its creation, there is no clear indication whose funds were used to create the trust, nor is there any indication as to whether there were any subsequent additions to the trust res. We think it unlikely that Deborah, who would have to provide an accounting as guardian, would combine Lorraine's property with another person's property in forming the trust res. Deborah is receiving additions to the trust from David in lieu of the court ordered support payments, additions which are actually Lorraine's property. This implies that the trust was created by Deborah as Lorraine's guardian with Lorraine's assets and that Lorraine is, therefore, the true settlor. As settlor, Lorraine would have the power, through her guardian, to revoke the trust or to compel payments from the trust for her support and maintenance. We conclude that, unless Deborah can show that she did not create the trust in her capacity as guardian and that certain trust assets were derived from sources other than Lorraine's property, all of the assets of the trust should be considered Lorraine's resources for SSI purposes.