Battaglia Bailiff Instructions to the Jury; Battaglia Bench Book on Minors Compromise; Battaglia Civil Procedures; Battaglia Criminal Chambers Rules; Battaglia Disclosure and Discovery Manual Under the Federal Rules of Civil Procedure; Battaglia Questions to be Asked on Voir Dire by the Court in a C

=== Battaglia Bailiff Instructions to the Jury ===

BAILIFF INSTRUCTIONS TO THE JURY I. COMMUNICATIONS WITH THE COURT A. B. C. D. E. F. All communications with the Court must be in writing, signed by the foreperson of the jury, and passed to the Judge through one of the bailiffs. To contact a bailiff, push the button on the wall for one to two seconds. A buzzer is located in the Judge’s chambers and a bailiff will respond as soon as possible. Bailiffs are also the Judge’s staff. They have other duties and may not be able to respond immediately. If there is no response within ten to fifteen minutes, you should buzz again. When a bailiff responds to your call or needs to contact you for any other reason, they will knock loudly three times on the door. Bailiffs are not permitted to hear any of your deliberations, and this is the indication that you should stop deliberations. If a jury note requires the attendance of the attorneys and parties, it may take some time for everyone to return. Therefore, you should continue your deliberations while waiting for an answer to the note. Please remember that the notes must be dated and signed by the foreperson. You may not leave the jury room unless a bailiff comes for you. During breaks and lunch, everyone must leave. No juror is permitted to remain in the jury room alone. II. TIME SCHEDULE A. B. C. D. E. The jury should convene each day at 9:00 a.m. and will be met by a bailiff in the front of the courtroom. Any change in starting time should be discussed with the Bailiff in advance. You may have a morning and an afternoon break (fifteen minutes each) at your discretion. During the break, you may go outside. You may take a one hour lunch break at around noon, at your discretion. Deliberations will recess for the day at around 4:30 p.m. When you are ready for a break, for lunch or to leave at the end of the day, please press the buzzer and a bailiff will arrive to escort you out of the courtroom.

=== Battaglia Bench Book on Minors Compromise ===

Bench Book on Settlement of Claims Involving Minors and Incompetents U. S. District Court, Southern District of California by Anthony J. Battaglia, U.S. District Judge September 2019 Copyright © September 1999-2019 by Anthony J. Battaglia Table of Contents I. PURPOSE ............................................................................................................................................... 6 II. ROLE OF THE DISTRICT COURT.............................................................................................................. 7 A. State Law Principles ...................................................................................................................... 7 B. C. Federal Jurisdiction ....................................................................................................................... 7 Federal Rule 17 ............................................................................................................................. 7 D. Local Civil Rule 17.1 ....................................................................................................................... 8 E. Issues Presented ........................................................................................................................... 8 F. Document Approval ...................................................................................................................... 8 III. COORDINATION WITH STATE COURT AND STATE STATUTES .......................................................... 8 A. In General ...................................................................................................................................... 8 B. Out of State Residents .................................................................................................................. 9 C. State Court Review ........................................................................................................................ 9 IV. SETTLEMENT ALTERNATIVES UNDER THE CALIFORNIA PROBATE CODE (§ 3600. et. seq.) ............. 9 A. Blocked Account or Deferred Annuity .......................................................................................... 9 1. 2. In General .............................................................................................................................. 9 Deferred Annuities ............................................................................................................. 10 B. Payment to a Guardianship or Conservatorship ............................................................................ 11 1. 2. 3. 4. In General ............................................................................................................................ 11 Limited Authority of the Guardian Ad Litem ...................................................................... 11 Filing of Letters of Guardianship or Conservatorship ......................................................... 12 Use of an Existing Guardianship .......................................................................................... 12 C. Payment to a Regular Trust ............................................................................................................ 12 1. 2. 3. 4. 5. 6. 7. 8. 9. General Requirements ........................................................................................................ 12 Comparison to State Law .................................................................................................... 14 Revocable Nature of the Trust ............................................................................................ 14 Testamentary Provisions ..................................................................................................... 14 Substituted Judgment ......................................................................................................... 15 Surety Bonds ....................................................................................................................... 15 Trustee Selection ................................................................................................................ 15 Trustee and Trust Attorney Fees ........................................................................................ 16 Investment Duties of the Trustee ....................................................................................... 16 2 10. Accountings ......................................................................................................................... 17 D. Special Needs Trust ..................................................................................................................... 17 1. In General ............................................................................................................................ 17 2. 3. 4. 5. 6. 7. 8. 9. Applicability and Purpose ................................................................................................... 18 Notice to Public Agencies .................................................................................................... 20 Agency Response ................................................................................................................ 20 Constructive Receipt Issue .................................................................................................. 20 Attorney Trust Accounts ..................................................................................................... 20 Amount in Trust .................................................................................................................. 20 Applicability to Disabled Competent Adults ....................................................................... 21 Expenditures ....................................................................................................................... 21 10. Trustee Selection ................................................................................................................ 22 11. Surety Bonds ....................................................................................................................... 23 12. Accounting .......................................................................................................................... 24 13. Subsequent Settlements and Other Additions to the Trust. .............................................. 24 14. Irrevocable Nature of the SNT ............................................................................................ 25 15. Testamentary Provisions ..................................................................................................... 25 16. Trustee and Trust Attorney Fees ........................................................................................ 25 17. Investment Duties of the Trustee ....................................................................................... 25 E. California Uniform Transfers to Minors Act (“CUTMA”) ............................................................. 25 1. 2. 3. 4. Applicability ......................................................................................................................... 25 Uniform Gift Acts ................................................................................................................ 26 Transfer Dates to the Minor ............................................................................................... 26 Lack of Court Supervision .................................................................................................... 26 F. Payment to a Minor’s Custodial Parent. ..................................................................................... 26 1. 2. Applicability ......................................................................................................................... 26 Probate Code § 3401 Requirements ................................................................................... 26 3. Legal Effect .......................................................................................................................... 27 V. PAYMENT TO A MINOR’S CUSTODIAL PARENT IN MEXICO ................................................................ 27 A. In General .................................................................................................................................... 27 B. The Role of the Parent as Guardian in Mexico ........................................................................... 27 C. Ownership of the Property of a Child in Mexico ......................................................................... 28 3 D. Mexico’s Requirement for Accounting, Management of the Funds, and Payment on Majority 28 VI. THE QUALIFIED SETTLEMENT FUND “QSF” UNDER 26 U.S.C. § 468(B). ........................................ 28 A. In General .................................................................................................................................... 28 B. Application .................................................................................................................................. 29 C. Requirements .............................................................................................................................. 30 D. Advantages .................................................................................................................................. 30 E. Practical Concerns ....................................................................................................................... 30 VII. ATTORNEY FEES, COSTS AND LIEN CLAIMS .................................................................................... 31 A. Typical Fees ................................................................................................................................. 31 1. Federal Tort Claims Fee Statute .......................................................................................... 31 2. Medical Malpractice Claims ................................................................................................ 31 3. Local Custom and Practice .................................................................................................. 31 B. Confirmation of Costs ................................................................................................................. 32 C. Third Party Liens .......................................................................................................................... 32 1. 2. Constructive Receipt Issue .................................................................................................. 32 Payment options ................................................................................................................. 32 3. Outstanding Liens ............................................................................................................... 32 VIII. ISSUES REGARDING APPOINTMENT OF THE GUARDIAN AD LITEM ............................................... 33 A. In General .................................................................................................................................... 33 1. When a Guardian Ad Litem Is Required .............................................................................. 34 2. 3. 4. 5. 6. 7. The Next Friend ................................................................................................................... 34 Proper Procedure ................................................................................................................ 35 State Court Representatives ............................................................................................... 35 Is Counsel a Sufficient “Representative.” ........................................................................... 36 State Law ............................................................................................................................. 36 Emancipated Minors ........................................................................................................... 36 B. Selection of the Guardian Ad Litem ............................................................................................ 36 1. 2. 3. Case Law Standards ............................................................................................................ 36 In General ............................................................................................................................ 36 Limitations ........................................................................................................................... 37 C. Conflicts of Interest ..................................................................................................................... 37 1. State Law ............................................................................................................................. 37 4 2. Federal Law ........................................................................................................................ 37 D. Scope of Duties ........................................................................................................................... 38 E. Pro Se Representation ................................................................................................................ 38 VIII. NOTICE OF SETTLEMENT (OR SUIT). .............................................................................................. 38 IX. APPROVAL PROCEDURE IN THE SOUTHERN DISTRICT OF CALIFORNIA ......................................... 39 A. The Petition(s) ............................................................................................................................. 39 B. Consent to Magistrate Judge for all purposes ............................................................................ 40 C. The Petition for Approval ............................................................................................................ 40 A. The Proposed Order for Approval ............................................................................................... 42 APPENDIX A ................................................................................................................................................. 44 Civil Rule 17.1 Actions Involving Minors or Incompetents ................................................................. 44 a. b. Order or Judgment Required ............................................................................................. 44 Payment and Disbursement of Funds. ................................................................................ 44 APPENDIX B ................................................................................................................................................. 47 Rule 2.4.6 Minors/Incompetents/Conservatees (Rev. 1/1/2017) ...................................................... 47 1. 2. Guardian ad Litem ............................................................................................................... 47 Petitions to Compromise the Claim of a Minor .................................................................. 47 3. Trusts ......................................................................................................................................... 48 5 I. PURPOSE: This Bench Book is designed to provide an overview of the issues and procedures in dealing with approval of settlements in cases on behalf of minors or incompetents. The Bench Book was originally published in 1999 for use internally by the Judges of the Southern District of California as a guide. 1999 was also the year Local Rule 17.1 was amended to regularize procedure in settlement approval practice. Now twenty years later, the Bench Book is offered to the Bench and Bar alike in the hopes of facilitating the settlement approval process. Unless supported by citation to a statute, rule, or case, all opinions, statements and suggestions are from the author and based on 45 years of experience in these matters. Users of this Bench Book are urged to always check cited authorities to ensure that they are current. Settlement approval involves two distinct issues: (1) the “fairness” of the settlement, often considered in terms of the best interests of the minor or incompetent and, (2) the structure or format of the plan for the payment and distribution of the assets for the benefit of the minor or incompetent. It is important to note, that the requirement to consider the structure or format of a payment plan or payout is not limited to trusts or other sophisticated arrangements. This requirement applies to cash settlement as well, both large and small. The focus here is specifically the format or structure for the payment and distribution of settlement proceeds. No attempt is made to deal with the issue of “fairness” of the settlement. The policy of the court is to reasonably protect the assets belonging to minors or incompetents. The policy is promulgated and implemented in Local Civil Rule 17.1. Principles related to Special Needs trusts are also applicable to severely disabled, but competent, adults who wish to protect their eligibility for public benefits. The need for court review can arise by request from the disabled individual who wants to utilize a Special Needs Trust in a settlement of a federal case. The same review concepts set forth herein would apply in order for the Special Needs trust to have its contemplated effect. While California Probate Code § 3600, et. seq. does not address this circumstance specifically; federal law does not limit Special Needs Trusts to minors and incompetents (See 42 U.S.C. §§ 1381-1383d). Absent a request by a litigant, however, there is no duty for the court to require a petition for approval of a settlement of a competent disabled adult. 6 II. ROLE OF THE DISTRICT COURT: State Law Principles. State law generally provides that minors and A. incompetents cannot sue or defend an action brought against them in their own names. Instead, litigation ordinarily must be conducted through a court appointed guardian or conservator of the estate of the minor or incompetent or a guardian ad litem. Cal. Code Civ. P. § 372 (“CCP”). Federal Jurisdiction. Federal courts are courts of limited B. jurisdiction. Unlike state courts, they have no inherent or general subject matter jurisdiction. They can only adjudicate those cases which the Constitution and Congress has authorized. Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 377 (1994). Jurisdiction is also subject to special jurisdictional limitations. These include the case or a controversy requirement, standing, mootness and ripeness. Unlike the state court, which has general and inherent jurisdiction to deal with all issues dealing with minors and incompetents, the federal court can only act where jurisdiction is appropriate. Subject matter jurisdiction is usually well established by the time of a settlement under traditional concepts. In the case of American General Life Insurance v. Saad, 03cv1621 K (POR), an insurance company sought direction on the payment of undisputed proceeds to a minor. In an attempt to avoid the California Probate Code scheme for distributions to a minor, the insurance company sought the federal court’s approval to distribute a significant sum of money directly the custodial parent. In ruling that the situation lacked actual case or controversy within the meaning of Article III, Judge Keep dismissed the case for lack of jurisdiction. The parties should have taken the case to the probate court, where general and inherent jurisdiction existed to resolve the dispute. Federal Rule 17. The federal courts also require an appointed C. representative. Fed. R. Civ. P. 17(c) (“FRCP”). Under FRCP 17(c), a general guardian or conservator (appointed in a state court proceeding) or a guardian ad litem appointed by the district court will sue or defend on behalf of the minor or incompetent. 7 Local Civil Rule 17.1. Under Civil Local Rule 17.1 (“LR”), no D. action brought on behalf of a minor or incompetent can be settled, compromised, voluntarily discontinued, dismissed or terminated without court order or judgment. The question of the best interests of the minor or incompetent is therefore placed in the responsibility of the judges of the court. Issues Presented. Regarding settlement, the court is called upon E. to consider not only the fairness of the settlement, but the structure and manner of how the settlement is to be paid, held and maintained for the minor or incompetent. The 1999 amendments to LR 17.1 have placed the responsibility to review the structural components of the settlement in the jurisdiction of magistrate judges. Under LR 17.1, parties must submit the settlement to a magistrate judge for preliminary review of the structural components. The structural considerations include how and where the settlement funds will be held for the minor or incompetent and how and when it will be dispersed. This would include annuities to be purchased and the schedule for disbursements therefrom. The parties may also consent to the jurisdiction of the magistrate judge to approve the entire settlement under 28 U.S.C. § 636(c). Where the party’s consent, the magistrate judge also considers the issue of fairness to the minor or incompetent under the facts and circumstances in the case. Document Approval. The preliminary review will include the F. approval of the documents creating the necessary and proper trusts and special needs trusts. Guardianship petitions would be reviewed and acted upon by the appropriate state court prior to disbursement of the settlement funds. [LR 17.1 (b)(2)]. The guardianship itself is under the supervision of the state court. III. COORDINATION WITH STATE COURT AND STATE STATUTES: In General. LR 17.1 incorporates California Probate Code § A. 3600 et. seq. regarding the various alternatives available to hold the funds of a settlement of a minor or incompetent. (See Appendix A.) These alternatives include: 1. Blocked Accounts or Deferred Annuities; 2. Payment to a Guardianship or Conservatorship; 3. Payment to a Regular Trust; 4. Payment to a Special Needs Trust; 8 5. Payments Under Transfers to Minors Acts; or, 6. Payment to a custodial parent. Out of State Residents. LR 17.1.b.1 provides that where the B. recipient of the money is not a California resident, disbursement shall occur pursuant to court restrictions which are similar to California Probate Code § 3600, et. seq. For this reason, this bench book will focus on the California statutes in these regards. State Court Review. The magistrate judge may require approval C. of the form of any necessary trusts by an appropriate judge of the state court in the jurisdiction where the minor or incompetent resides. LR 17.1. While general guardianships (as contrasted to a guardian ad litem status) can only be created by a state court after review by an appropriate state court judge, there is no requirement of a state court review before creation of a trust. In some cases, state court review of the trust document may be helpful. IV. SETTLEMENT ALTERNATIVES UNDER THE CALIFORNIA PROBATE CODE (§ 3600. et. seq.) A. Blocked Account or Deferred Annuity In General. Upon petition by the guardian/guardian ad 1. litem on behalf of the minor/incompetent, the funds may be deposited in an insured account or a deferred annuity subject to withdrawal only upon Court Order [(Probate Code § 3602(c)(1)]. a. Blocked Account. This method works best where a relatively small lump sum is involved that is not suitable for placement in an annuity, trust or other arrangement. Settlement proceeds under $100,00 are the norm. Where immediate need of the money is anticipated, they can also be quite useful. This may be the case where a non- disabled minor is close to age 18 and has some immediate use of the money for education or other valuable purposes. The money is available to the minor at age 18. Withdrawals are permitted before the minor is 18 years old by court order for good cause. Good cause is typically based upon some extraordinary circumstances 9 involving the welfare of the child. This can be medical or educational needs in special circumstances. The parents are under a general obligation for the support of the child, and requests for support type expenses or non- critical expenses should routinely be denied. The point of the blocked account is to protect the funds for the minor from improvident use by the parents. b. Insured Accounts. A federally insured bank account is often the default choice for blocked accounts. However, the interest rates are often too low (less than one percent) to make any meaningful growth. Brokerage houses and investment brokers can also handle blocked accounts. Companies like Morgan Stanley or U.B.S. for example. These securities type accounts are not federally insured and are subject to investment “risk.” They do, however, afford a better investment return over time. As such, care should be used in selecting a firm and evaluating the risk. 2. Deferred Annuities. Structured Settlements. Deferred annuities include a. the well-known concept of “structured settlements.” These can provide a stream of payments to or on behalf of a plaintiff over time. These are typically handled in a manner that provides a tax-exempt receipt of the settlement funds and future earnings on the annuity. The tax-exempt status is dependent upon the settlement occurring in an appropriate case 1 and where the settlement is within strict compliance of 26 U.S.C. § 130. Application. With minors, the structured b. settlement can provide future payments for education or other needs after the age of 18. It allows the funds to be protected in a custodial type setting deferring distribution until the age of majority. With minors, as well as 1 Damages for personal injury or sickness are excludable from gross income under 26 U.S.C. § 104(a)(2). This statute was held unconstitutional in so far as it permits taxation of an award of damages for mental distress and loss of reputation. Murphy v. IRS, 460 F.3d 79 (D.C. Cir. 2006). 10 incompetents, the stream of payments can be utilized for necessary expenses during the period of “incapacity” addressing various medical needs or other support issues. The most common use of interim distributions is funding special needs trusts so that public benefit status can be retained. See Section D, below. Payment streams can be created in any form that best serve the interests of the plaintiff. It is important to make sure that the interim payments of the annuity will be adequate for the precise needs of the beneficiary. In many cases, smaller amounts of the settlement should be annuitized allowing more ready cash for ongoing needs. Insurance Company Ratings. Deferred annuities c. through insurance policies should be placed with insurance companies rated A+ by the A.M. Best Co. Many times, these pay out in installments starting at age 18, or thereafter. The payment schedule is typically set to meet the future needs and desires of the minor by the guardian ad litem. Payout to Minors or Incompetents. If the annuity is d. going to payout during the minority or incapacity, then some other alternative like a guardianship or trust should be considered and used in conjunction with the annuity. The guardian ad litem is not authorized by law to receive or handle these funds, so an appropriate representative for that purpose must be established. B. Payment to a Guardianship or Conservatorship In General. The funds may be delivered to the appointed 1. guardian of the estate of the minor or conservator of the estate of an adult disabled person. The guardianship or conservatorship itself is created in a separate proceeding in state court for the purpose of administering the settlement funds. This places continued supervision in the state court for bond, accounting, budgets and investment issues [Probate Code § 3602(c)(2)]. Limited Authority of the Guardian Ad Litem. Note, the guardian 2. ad litem is not authorized by law to handle the proceeds of a 11 settlement or judgment once the litigation is concluded. CCP § 372, FRCP 17. The guardian ad litem is appointed as a representative to act for the minor in a case. Their limited authority is to engage counsel, file suit and to prosecute, control and direct the litigation on behalf of the minor. Dacanay v. Mendoza, 573 F.2d 1075 (9th Cir. 1978). Filing of Letters of Guardianship or Conservatorship. LR 3. 17.1(b)(2) requires that a certified copy of the guardianship or conservatorship “letters” be filed in federal court before the settlement funds are distributed. This will help insure that an adequate bond has been filed and that the requisite state court requirements have been met. Future supervision in state court is also assured. Use of an Existing Guardianship. Another approach for 4. holding and administering the funds is for an already existing guardian/conservator to petition the state court to establish a regular trust or a special needs trust. Probate Code § 3602(d). In these circumstances the state court would have the jurisdiction to review and approve the petition to establish the trust. The issue of fairness of the settlement would still be before the federal court. A copy of the trust must be filed with the federal court before settlement proceeds are distributed. LR 17.1(b)(3)(c). C. Payment to a Regular Trust.2 General Requirements. Where no guardian or conservator 1. has been appointed, the court may authorize the transfer of funds to the trustee of a trust created for that purpose. [Probate Code § 3611(g)]. This is a suitable vehicle where the beneficiary is not disabled and on public benefits. If disabled and on public benefits, a special needs trust may be more appropriate. See, Section D, below. LR 7.1(b)(3) sets out the basic requirements of the petition for approval and the terms of the trust, as follows: 2 For these purposes, a regular trust would be something other than a special needs trust. The Special Needs Trust is discussed in further detail in Section D, below. 12 The Ex Parte Petition For Approval of Terms of a. Trust should generally contain the following information: i. Identity of the petitioner; ii. The terms and total amount of the settlement and the amount to go into the trust; iii. The circumstances giving rise to the settlement or judgment, and a general description of the plaintiff’s injuries and needs; iv. Suggested amount of bond; v. Any other information that may be required. A Proposed Order must be submitted by the b. attorney for the petitioner and must comply with the requirements of this rule and California Probate Code § 3600, et seq., and include the following: i. An order for the appropriate bond; ii. An order that the first accounting, if required, be filed within one year of the establishment of the trust with the San Diego Superior Court. If the recipient of the money or property is not a California resident, the accounting must be made to the appropriate court in the jurisdiction where the minor or incompetent resides; iii. If the order is for the approval of the terms of a Special Needs Trust, it should contain: (A) A statement that the petitioner will provide proof that all liens have been satisfied prior to the 13 establishment of the trust by the court; and, (B) A statement that the “court makes no specific finding or order with respect to whether the Special needs trust for the Benefit of satisfies or complies with applicable federal laws or regulations.” iv. The order must provide that the terms of the trust are approved, and those terms will be fully set forth within said Order, not as an attachment. The parties are further directed to proceed with settlement approval hearings or the entry of judgment as appropriate. See Appendix E for a sample order. Comparison to State Law. LR 17.1 closely follows San 2. Diego Superior Court Local Rule 2.4.6 and the San Diego Superior Court Guidelines. (See Appendix B.) Revocable Nature of the Trust. A trust under Probate Code § 3. 3602(c)(3) is revocable by the minor upon attaining the age of 18 years. If the minor is incompetent at age 18, a conservatorship would need to be established through a state court proceeding, and the state court could continue the trust under the power of “substituted judgment” under Probate Code § 2580. A trust of this type for an incompetent is revocable if competency occurs. As noted hereinafter, Special Needs Trusts are irrevocable. Testamentary Provisions. Sometimes trusts will contain 4. provisions disposing of the remaining assets in the trust upon the minors/incompetent’s death. A disposition other than to the “heirs at law” is contrary to law. A minor/incompetent lacks testamentary capacity and the estate must pass by intestate succession. The only exception to this rule is where the Court exercises “substituted judgment” as discussed below. 14 Substituted Judgment. The California Superior Court has 5. authority under Probate Code § 2580 to allow testamentary provisions in an existing guardianship or trust. This concept is called “substituted judgment.” This issue should be left for the state court to handle under their prescribed procedures. For purposes of federal court approval, no testamentary provisions other than passage by intestate succession should be allowed. Surety Bonds. The Superior Court typically requires a 6. surety bond in an amount at least equal to the amount of the settlement funds plus one year of income. The amount of the surety bond is within the discretion of the court and can be waived. Factors to be considered include the financial strength and sophistication of the surety whether an individual or a corporate entity. The cost is typically $50 per $10,000 in coverage (i.e. $500 for $100,000 coverage) and would be an appropriate expense of the trust or an appropriate reimbursement to the trustee. 7. Trustee Selection: Corporate Trustees. Large settlements typically a. require corporate trustees given the risk, investment needs, record keeping, tax returns and court accounting requirements. A corporate trustee is typically a bank or trust company. It is difficult to locate a corporate trustee in settlements under $500,000.00. Surety bonds are not necessary when a corporate trustee is involved. b. Professional Fiduciaries. Professional fiduciaries are available to serve as trustees as well. They typically handle settlements from $200,000.00 and above. Surety bonds are required where a professional fiduciary is involved. Individuals. Smaller settlements and high special c. needs (i.e. a lot of activity) may be better handled by a family member as trustee. This also saves on the expense of trustee’s fees. Even though bonded, there is increased risk in these situations. Care should be used to find a family member with some degree of professional sophistication and financial stability. 15 Trustee and Trust Attorney Fees. Fees for the services of 8. trustees and trust attorneys associated with the administration and accounting for the trust will seldom be the concern of the federal court. Since it is the court’s custom and practice to require accountings and administrative issues to be heard in the appropriate state court, the state court will deal with those issues. There are, however, several old cases in the courthouse where accounting to the federal court was required by a district judge. In those cases, you can encounter requests for trustee’s fees and attorney’s fees for accounting and trust administration issues. The trustee fees for corporate or professional fiduciaries are typically one percent of the value of the trust assets per annum. Nonprofessional trustees are typically compensated for the reasonable hours spent at minimum wage or other reasonable appropriate rates concerning their particular skill or expertise as well as the services provided. Extraordinary fees can be awarded for appropriate reasons and upon a declaration detailing the efforts provided and the reasonable value of those fees. 9. Investment Duties of the Trustee. a. California Law. The Probate Code sets forth the statutory duties for trustees (Probate Code §§ 16045- 16054) as well as the trustee powers (Probate Code §§ 16200-16490). The Probate Code provisions §§ 16045- 16054 are known collectively as the California Uniform Prudent Investor Act. These provisions are extensive and rarely come into issue before the federal court. The Probate Code does allow the settler of the trust to expand or restrict the prudent investor rule by express provisions in the trust document. Since the court deals with incompetents and minors the majority of the time, it is hard to justify allowing the exercise of any discretion in this regard, and the prudent investor rule should be applied as promulgated by statute. b. Federal Law. Portions of the IRS Code and regulations relate to trustees. These include requirements to file annual income tax returns; and, personal liability 16 for payment of any unpaid estate tax on assets directed elsewhere, e.g., distributed to trust beneficiaries. Accountings. LR 17.1(b)(4)(B)(iii) requires that the order 10. approving the trust include a provision that the first accounting be filed within one year of the establishment of the trust with the San Diego Superior Court for California residents, or other appropriate court for non-residents. This requirement ensures that the trust will be brought within the jurisdiction of the appropriate state court for future management and oversight. Filing for the first accounting will be a new petition to the state court and an initial filing fee will apply, where applicable. D. Special Needs Trust. In General. The court may authorize the transfer of funds 1. to a Special Needs Trust (SNT) created for that purpose. Basic requirements for the petition and the order for approval are found in LR 17.1(b)(4). Special requirements for these trusts are set forth in paragraphs 17.1(b)(4)(A)(V) and 17.1(b)(4)(B)(iii). These relate to the allegations in support of the determination required under California Probate Code § 3604(b) as well as the proof of satisfaction of liens prior to establishment of the trust as well as specific provisions which must be included in the order of approval. Special Notice Required. Specialized language a. and fifteen (15) days’ notice to the appropriate government agencies are essential to ensure that public benefits (Medi-Cal, Medicaid or SSI), otherwise payable, are not lost. [See Probate Code §§ 3602(e), 3604 and 3611(c)]. b. Required Court Findings. The Court must make specific findings pursuant to Probate Code § 3604(b). These are: That the minor or incompetent person i. has a disability that substantially impairs the individual’s ability to provide for the individual’s own care or custody and constitutes a substantial handicap; 17 That the minor or incompetent person ii. is likely to have special needs that will not be met without the trust; That money to be paid to the trust iii. does not exceed the amount that appears reasonably necessary to meet the special needs of the minor or incompetent person. Pleading Requirements. The Petition for Approval c. and any proposed order must comply specifically with L.R. 17.1. See, Section C.1., supra. in this regard. Applicability and Purpose. The SNT allows a disabled 2. individual to retain eligibility for needs based government assistance programs. Properly created, the SNT assets are excludable from the $2,000 limit on resources imposed for SSI eligibility. 42 U.S.C. § 1396p (d)(4)(A) or for individual trusts or ©) for pooled trusts. Statutory Limits. The statute describes the trust as a. one: containing the assets of an individual under age 65 who is disabled and which is established for the benefit of such individual by a parent, grandparent, legal guardian, or the court3 if the state will receive all amounts remaining in the trust on the death of such individual up to an amount equal to the total medical assistance paid 3While others may create the trust under the statute like the parent, grandparent or legal guardian of the individual, in a settlement context it is the court directed trust that is the focus of this bench book. 18 on behalf of the individual under a state plan... b. Requisite Disability. The definition of “disabled” is the same as used for eligibility for SSI. See 42 U.S.C. § 1382c(a)3(A). i. Specifically, “the individual must be unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment 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 twelve months” (or, in the case of a child under the age of 18, if he suffers from any medically determinable physical or mental impairment of comparable severity). ii. There is a difference between the federal definition of “disabled” and the California Probate Code section definition supplied in Probate Code § 3604(b)(1). The state definition is more onerous. Custom and practice is that a claimant who has satisfied the federal standard and is receiving SSI or SSDI and Medi-Cal (Medicaid) satisfies the state court definition. Benefit. The individual doesn’t have to give c. up all the public benefits due to the settlement, since the assets in the SNT are not counted as assets when calculating financial need, and the settlement funds can be used for medical needs and services not covered by public benefits in whole or in part. d. Burdens and Limitations. There are substantial limitations on the use of the funds as described herein, the lien for Medicare and 19 Medicaid must be paid at the time of settlement, the trust is irrevocable, and on termination, the public agency is entitled to be repaid for benefits extended during the life of the individual. The right to be repaid is limited to the amount remaining in the trust. Notice to Public Agencies. Fifteen (15) days’ notice of the 3. time and place of hearing and a copy of the petition to approve the compromise and create the SNT must be given to the State Director of Health services, the Director of Mental Health, and the Director of Developmental Services at the office of each director in Sacramento. Prob. Code § 3602(f). The general 30- day notice provision of Probate Code § 17203 does not apply to these matters. For out of state resident minors/incompetents notice must be given to the appropriate public benefit state or federal office. Failure to provide notice will lead to the settlement being considered a resource for eligibility purposes and the disqualification of the individual until the settlement proceeds are otherwise spent. Agency Response. The agency will typically provide a 4. written response acknowledging notice and commenting upon their review of the trust. The agencies are keenly interested in payment of the current lien and a future reimbursement for further expenses on the death of the individual covered by the trust. Constructive Receipt Issue. Proceeds establishing the trust 5. should pass from the defendant to the trust without receipt, constructive or otherwise, by the plaintiff. Receipt will compromise eligibility for public benefits. Attorney Trust Accounts. Placing the settlement proceeds in 6. an attorney’s client trust account is constructive receipt by the client. Amount in Trust. The proceeds paid into a SNT should be in 7. an amount reasonably necessary to meet the special needs of the minor/incompetent. Excess funding could render the SNT invalid as an exempt asset for eligibility for public benefits. In order to evaluate this potential, the petition to approve the 20 compromise should provide the necessary details in this regard. This is usually done by presenting a copy of a “life care plan” or a financial analysis regarding the needs of the minor/incompetent. Applicability to Disabled Competent Adults. SNT’s are available 8. to competent disabled adults who wish to preserve their eligibility for public benefits. They are subject to all the same requirements and considerations set forth herein. These may arise in settlements in federal cases. Where a litigant seeks approval of a settlement and the creation of an SNT, the same procedures for approval of the trust must be followed. The specific findings required by Probate Code § 3604(b)(1) must be met. As previously noted, qualification for SSI and Medi- Cal is accepted by the San Diego Superior Court as evidence sufficient to make the finding relative to the requisite disability and the finding that a SNT is required. 9. Expenditures: a. Authorized Expenses. The trustee is authorized to exercise discretion to pay for medical costs not typically provided by public benefits. These include expenses for attendant care, rehabilitation, special facilities and equipment, and transportation. Because payment is discretionary, the government remains the primary payer. Inappropriate Expenses. Expenditures for food or b. shelter, can be counted as “income” to the recipient, reducing their public benefit. c. Automobiles. An automobile of any value if modified for operation by or transportation of a disabled person are excluded from the eligibility analysis. 20 C.F.R. § 416.1218(B)(2). d. d. Real Property. A home is not counted for eligibility purposes if it is the person’s principal place of residence.4 20 C.F.R. §416.1212 (a). 4Note, some severely disabled individuals are not able to live at home. 21 California allows the trust to own the home. i. The advantage here is that the trust can then pay the upkeep expenses. The disadvantage is that the home would be subject to the government reimbursement right on the disabled person’s death. ii. If the disabled person owns the home, the home is free of the reimbursement claim by the government. In this case, however, payment of the ongoing expenses or upkeep for the home (versus special improvements to accommodate the disabled person) will be treated as income. 10. Trustee Selection: Corporate Trustees. Large settlements typically a. require corporate trustees given the risk, investment needs, record keeping, tax returns and court accounting requirements. It is difficult to locate a corporate trustee (typically a bank or trust company) in settlements under $500,000.00. Surety bonds are not necessary when a corporate trustee is involved. b. Professional Fiduciaries. Professional fiduciaries are available to serve as trustees as well. They typically handle settlements from $200,000.00 and above. Surety bonds are required where a professional fiduciary is involved. Individuals. Smaller settlements and high special c. needs (i.e. a lot of activity) may be better handled by a family member as trustee. This was particularly prior to 2006, when no option for a pooled trust existed locally. See Special Need Trust Foundation, below. Having a family member as trustee also saves on the expense of trustee’s fees. Even though bonded, there is increased risk in these situations. Care should be used to find a family member with some degree of professional sophistication and financial stability. Misfeasance or malfeasance are very real issues with family members. 22 The lack of sophistication is a big part of the issue, especially in investment strategies, fiduciary duties and accounting requirements. The other issue is a tendency to stick to the discipline of use of the funds for the beneficiary’s use, and not the use of the family as a whole. d. Special Needs Trust Foundation. The Special Needs Trust Foundation (SNTF) was formed in 1991. It is a co