In re Daly

Brief Fact Summary. Brennan C. Daly (Child) is a mentally and physically disabled child whose medical needs are met by the proceeds of a $1.6 million dollar medical malpractice settlement. Petitioner Guardian Conservator (Petitioner) recommends annual gifts of $10,000 to each of his three siblings and parents in order to consume his surplus yearly income and accomplish tax-free inter vivos transfers. Petitioner seeks authorization to make these annual gifts from Child’s excess income.

Synopsis of Rule of Law. In the situation of a disabled child potentially subject to increased future care expenses, a court is required to employ an objective standard and inquire as to what a reasonable and prudent person would have done in the circumstances before authorizing gifts from the child’s excess investment income.

Facts. Child was disabled both physically and mentally since birth. Child was cared for by his parents until five months of age, and subsequent to this by loving foster parents. Child is eleven years old and has a life expectancy of fifteen years, although this is not a definite prognosis. Child’s substantial care needs are currently satisfied by his foster parents, but in the future it may be necessary for increased care at a residential medical institution. Child’s medical expenses are currently paid from a $1.6 million medical malpractice settlement and his medical insurance paid through his father’s employer. Currently Child’s investments yield an excess income of $60,000 annually. In order to consume this excess income and accomplish tax-free inter vivos transfers, Petitioner seeks authorization to transfer $10,000 annually to each of Child’s three siblings and two parents, thereby consuming the majority of the excess income.

Issue. In the situation of a disabled child potentially subject to increased future care expenses, is a court required to employ an objective standard and inquire as to what a reasonable and prudent person would do in the circumstances before authorizing gifts from the child’s excess investment income?

Held. Yes. In the situation of a disabled child potentially subject to increased future care expenses, the Court must employ an objective standard and inquire as to what a reasonable and prudent person would do in the circumstances before authorizing gifts from the child’s excess investment income. Although Child’s current care needs are adequately satisfied by his dedicated and loving foster parents, there may come a point in the future at which the Child must be placed in a residential medical care facility. This would require greater medical payments. Although Child’s life expectancy is currently 15 years according to medical expert testimony, this is not a definite prognosis. In this situation, the Court must not rely upon archaic and inflexible rules, but instead inquire as to what a prudent and reasonable person would do in the circumstances. Here, on-time gifts to Child’s siblings for the current year are appropriate. Petitioner can then pursue estate planning objectives on be
half of Child, and, if possible, adopt a plan to limit the tax impact upon Child’s property at death. This one-time authorization does not preclude a later finding that more annual gifts would be appropriate.

Discussion. The Court employs the Reasonable Prudent Person standard to determine what the most appropriate use of Child’s excess income is in these circumstances. Petitioner is required to act on behalf of Child’s best interests, and because of the impending medical expenses, the Court here finds that a reasonable prudent person would retain the excess income and make tax-limiting estate plans.