In the recent case of Mencer v. Ruch, the Superior Court held that the income from a supplemental needs trust created pursuant to New York state law from the proceeds of a personal injury action should be considered income for child support purposes.
Mencer, mother of Elizabeth (born Feb. 18, 2003), filed a support action on April 3, 2003, against putative father, Gary Ruch. Genetic testing established that Ruch was Elizabeth'
At the time of the support conference on Mencer's support action against Ruch, he was on public assistance in New York and had applied for Social Security disability. Because Mencer had no knowledge of any other sources of income for Ruch other than his public assistance in New York, on July 11, 2005, the parties reached an agreement that Mr. Ruch's support obligation would remain at zero unless he became eligible for Social Security disability, "in which case a support order would be entered and made retroactive to April 3, 2003."
On May 19, 2006, a review conference was held regarding Mencer's support action. Both parties were present and represented by counsel at the conference. At that time, Ruch remained on public assistance, and his claim for Social Security disability benefits was still unresolved. At the conference, Mencer established Ruch was the beneficiary of the supplemental needs trust created for him in New York. Ruch claimed at the conference that the amounts that he received from the trust should not be considered income for purposes of child support.
On May 31, 2006, the hearing officer entered "another nonmonetary award that could be modified retroactively if Mr. Ruch's claim for Social Security disability benefits was eventually approved." Mencer appealed the hearing officer's recommendation and requested a hearing before the trial court "based upon her position that the income and principal of the trust should be included in [Mr. Ruch's] income available for Elizabeth's support."
At the Aug. 16, 2006, hearing before the trial court, Ruch presented telephone testimony of a New York attorney who indicated that the trust was a "supplemental-needs trust" created pursuant to New York state law from the proceeds of the personal injury action that allows a disabled person to keep trust distributions without disqualifying a beneficiary from receiving governmental benefits. The trustee of a supplement-needs trust is not permitted to make distributions "that do not benefit the beneficiary directly but will pay for housing and other items that enhance the beneficiary's life."
Interestingly, when Ruch's supplemental- needs trust was set up, child support arrearages had accrued prior to 2001 for another child born to another woman were paid from Ruch's personal injury proceeds and that mother received child support payments of $208 per month from the trust for one year until the child reached age 18. As of the date of the hearing, after the purchase of an annuity that provides monthly income to the special needs trust in the amount of $678.82, the trust had a principal balance of approximately $55,000.
At the hearing before the trial court, the following evidence was produced:
Ruch receives public assistance from the state of New York of approximately $350 per month. He had been denied Social Security disability benefits but had appealed that decision. During the prior school year, Ruch worked as a crossing guard for $25 a day. He decided to cease that employment because it reduced the amount of public assistance that he received.
From July 2004 to July 2005, the special-needs trust distributed $19,145.80 to Ruch, and from July 2005 to July 2006, it distributed $16,729.12 to him. Among other items, the special-needs trust has paid for Ruch's cellular telephone and cable television service. Mencer testified that she earns $8 per hour and qualifies for subsidized daycare of $30 per week for Elizabeth. Due to her meager earnings, she experiences difficulty feeding and clothing her child.
After the hearing, the trial court entered and order on Sept. 1, 2006, adopting the hearing officer's order. Mencer filed a timely appeal of that order presenting three issues for review:
Whether the trial court erred in failing to assess income to Ruch for purposes of child support from distributions that he receives from his supplemental needs trust;
Whether the trial court erred in failing to assess income to Ruch for purposes of child support in the amount of the principal of Ruch's supplemental-needs trust; and
Whether the trial court erred in failing to assess an earning capacity to Mr. Ruch.
The Superior Court held that the trial court misapplied the law by failing to consider as income the distributions made by the trust for Ruch's benefit and neglecting to calculate Ruch's child support obligation based on his earning capacity. The Superior Court reiterated: "[e]ach parent has an absolute obligation to support a child, and that obligation 'must be discharged by the parents even if it causes some hardship.' . . . The principal goal in child-support matters is to serve the best interest of the children through the provision of reasonable expenses."
In determining each party's income available for support, "[t]he court must consider all forms of income." The Superior Court cited the very broad definition of "income" as it is applied in support cases. Ruch contended that any payments made from the trust for his benefit "are not income for child support purposes because he has no ability to control the payments."
The Superior Court rejected his position because the definition of income is "simply not dependent upon whether the recipient has the ability to control receipt of that income." The Superior Court further highlighted that other forms of income, such as employer-provided perquisites "are considered income, yet the recipient has no control over his receipt of the sums paid on his behalf."
The Superior Court further stated: "Section 4302 expressly provides that income from an interest in an estate or trust is income for child support purposes. . . . The fact that the instant trust was created under state law rather than a private trust instrument is irrelevant.
Simply put, the fact that [Ruch] has no ability to control his receipt of funds is not pertinent to whether the payments made for his benefit are income." The Superior Court stressed that there is no "limiting phrasing" in the statutory language that requires a person to have control over his or her receipt of money in order for it to be included in the definition of income. "The definition is expansive rather than restrictive." Therefore, the Superior Court found the distributions that Ruch receives from the trust to be income since it falls within the legal definition of income under Pennsylvania law.
Interestingly, Ruch also claimed that the distributions could not be used in calculating child support because the trustee is not permitted to pay child support from the trust under applicable New York law, "which allows distributions from a special-needs trust only for the benefit of the beneficiary." However, the Superior Court held that the actual distributions from the trust to Ruch are income for purposes of calculating Ruch's support obligation and that Ruch, rather than the trustee, is obligated to pay the child support.
Because the Superior Court agreed with Mencer's first issue on appeal it found that her second issue became moot. The Superior Court held that though Mencer's second issue on appeal that the proceeds of a personal injury action should be considered income available for support "is in accordance with prevailing law," because the distributions from the trust are being considered income for support purposes, "the same money can not be included twice in [Ruch's] child-support obligation; the actual trust distributions on [Ruch's] behalf are more than the result of the calculation achieved by annualizing the settlement over the life of [Ruch's] support obligation."
Lastly, with regard to Mencer's third issue on appeal, regarding earning capacity, the Superior Court found that Ruch's admission that he was actually working as a crossing guard and voluntarily terminated his employment because it would result in a reduction in welfare benefits established his capacity to work as a crossing guard and earn some "modicum of money to support the child he has fathered." Therefore, the Superior Court held that the distributions pursuant to the trust were income for support purposes and that Ruch should be attributed an earning capacity in line with his prior job as a crossing guard.
At the conclusion of its opinion, the Superior Court stated: "[w]e feel compelled to make a closing observation. While we sympathize that [Ruch] may have a limited capacity to earn money, he acknowledged an ability to work at least a few hours a day as a crossing guard. Instead, he chose to do nothing, while enjoying the benefits of cable television and a cellular telephone, yet [Mencer] struggles to feed and clothe their child. This is a child he fathered after he suffered his head injury, which evidences an ability to perform at least some physical functions." The Superior Court then reversed the trial court's order and remanded the proceedings consistent with their opinion.
This case is a reminder that the definition of income for support purposes is very broad. Further, this case reminds the practitioner that though a party may be disabled, his or her obligation to provide some form of support to his or her child will remain. Because the courts will regularly look to the past to predict the future with regard to uncertain and inconsistent income, obligors, such as Ruch (who cannot predict what his trust income/distributions will be each year), may petition to modify the support order at the end of a year if a substantial fluctuation to his/her income occurred in that year.
MICHAEL E. BERTIN is an associate in the Philadelphia law firm of Obermayer Rebmann Maxwell & Hippel. Bertin is co-chairman of the custody committee and a member of the executive committee of the family law section of the Philadelphia Bar Association.
This article is reprinted with permission from the August 14, 2007 issue of The Legal Intelligencer © 2007 NLP IP Company
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