The Not So New Rule 53(d) of the Arizona Rules of Probate Procedure and “Appropriate Trusts” Without Probate Court Supervision
Two years ago, new Rule 53 of the Arizona Rules of Probate Procedure (A.R.P.P.) became effective. This author, along with many other probate practitioners, was and remains enthusiastic about the new rule and the alternatives to conservatorship it offers. Rule 53 is not only a rule that should excite the probate practitioner, but also the personal injury attorney as it affords settlement options for minors and adults in need of protection that circumvent what has customarily been required in such instances-a conservatorship. For a refresher about the rule in relation to settlement of claims for persons in need of protection, see the inaugural article of the Advocate’s Probate and Public Benefits Corner in the November/December 2020 issue titled “Settlement Options Other Than a Conservatorship-Thank You, New A.R.P.P. Rule 53!” 1
In particular, A.R.P.P. Rule 53(d) provides for “permissible orders” the probate court may enter in those instances in which court approval of the settlement of a claim for a minor or adult protected person is required. One permissible order is the establishment of an “appropriate trust,” including a special needs trust. 2 The foregoing option pre-existed new Rule 53 in A.R.S. § 14-5424.D that sets forth the powers of a conservator. This particular statutory provision allows for deferral of payment of a settlement to a minor by way of a structured settlement annuity or an appropriate trust. In this author’s experience, the statutory authority to defer payment of a settlement with a structured settlement annuity has often been relied upon whereas doing so with the establishment of an appropriate trust has not been. Note, the two vehicles are not mutually exclusive. Rule 53(d) reminds us of the trust as an option and, not just for minors with a settlement, but also adults in need of protection who have a settlement.
The trust is a vehicle that not only provides for deferral of payment, which has particular appeal for minors, but a mechanism of protection and management for a person in need of protection of any age with or without judicial supervision or oversight in appropriate circumstances. Factors to be considered include the amount and nature of the settlement proceeds, the age and sophistication of the minor or adult in need of protection, and that person’s living arrangements and ongoing needs. 3
So, under what circumstances is the court willing to consider foregoing continued court supervision of a trust? In this author’s experience, the primary determinative factor is who is being named or nominated to serve as trustee of the trust arrangement. If a lay person, such as a parent or spouse, then the court will more likely than not treat the trust in much the same manner as a conservatorship, subjecting the trustee to the same requirements of those of a conservator, e.g., bond, court restrictions, and/or annual court accountings. The same is typically true of a professional fiduciary licensed by the Arizona Supreme Court. Why? Because such requirements are the primary means of guarding against mismanagement or misappropriation of the protected person’s settlement and resulting estate.
But if a corporate trustee is named or nominated to serve as trustee, the probate court may consider foregoing continued court supervision of a trust arrangement. A corporate trustee is a financial institution that is subject to regular examination and abundant regulation, providing a means by which a settlement and estate can be made secure and protected without judicial oversight.
The probate court may also be further persuaded to relinquish its continued supervision if the trust document or agreement is drafted in such a manner so as to provide for checks and balances. Such checks and balances might include providing for a third party who is familiar with the protected person or trust beneficiary, such as a parent, to serve as trust protector or advisor to whom the trustee is accountable; requiring the trustee to informally account to the protected person or trust beneficiary and/or his/her legal representative; and, in the case of a minor who is anticipated to be a capable adult at the age of majority, transitioning control over the affairs of the trust to the then adult beneficiary over time including but not limited to providing for mandatory distributions of the trust to the adult beneficiary and, ultimately, providing for the adult beneficiary to serve as his/her own trustee and/or revoke his/her trust.
A settlement must be an amount that allows for a corporate trustee to manage the estate in a cost-effective manner. Like a professional fiduciary, a corporate trustee will charge fees. A professional fiduciary will charge fees based on an hourly rate and time expended whereas a corporate trustee will charge basis points or a percentage fee based on the market value of the estate. Most corporate trustees charge a minimum fee regardless of the value of the estate. Some corporate trustees will only entertain serving in such capacity if the investable assets are at a certain threshold amount. The foregoing help to ensure that it makes financial sense for both the corporate trustee and trust beneficiary to have such a trustee in place. These will also be considerations for the probate court in approving a proposed trust arrangement for a settlement and the appointment of a corporate trustee to manage such an arrangement.
In the end, this is just a friendly reminder of the now not so new A.R.P.P. Rule 53(d) and its permissible orders that include an “appropriate trust” as an option along with structured settlement annuities for the settlements of your clients who are minors and adults in need of protection along and, in the right circumstances, a corporate trustee to serve as trustee without continuing court supervision.
- Log into the Association website and go to 1770780.pdf.[↩]
- This reference is to a special needs trust established pursuant to 42 U.S.C. § 1396p.d.4.A for purposes of maintaining the financial eligibility for needs-based governmental assistance of an individual with a disability, namely Medicaid, the Arizona Health Care Cost Containment System, AHCCCS, in Arizona, and Supplemental Security Income, SSI.[↩]
- A.R.P.P. Rule 53.[↩]