Planning for Life

Form Over Function: Court Decision Guts Special Needs Trust

Posted by Karen Mariscal on April 6, 2015

By Karen B. Mariscal

A recent federal court decision in South Dakota is a set-back for the special needs community, and illustrates the “gotcha!” mentality sometimes adopted by the Social Security Administration when it comes to (d)(4)(A) trusts – i.e. trusts that are established with a disabled person’s own money pursuant to 42 U.S.C. § 1396p(d)(4)(A) in order to prevent the loss of government benefits.

In Draper v. Colvin, the 8th Circuit Court of Appeals upheld the Social Security Administration's (SSA's) rejection of a (d)(4)(A) trust designed to hold a woman's personal injury settlement, because, in the Court’s view, the disabled person created the trust herself.  Under the statute, a (d)(4)(A) trust is only valid if, among other requirements, it is created by the individual's parent, grandparent, legal guardian, or a court. (No one knows why Congress enacted this limitation and legislation has been introduced to correct it.)

Stephany Draper was injured in car crash in 2006. Ms. Draper signed a durable power of attorney (DPOA) naming her parents, John and Krystal Draper, as her agents to file suit and settle claims on her behalf and to fund any trust in which Draper was a grantor or beneficiary. Ms. Draper began to receive SSI in July 2007, and in February 2008 her parents, acting under the DPOA, executed a settlement agreement for Ms. Draper.  On that same day, Ms. Draper's parents, acting individually, created a trust "pursuant to 42 U.S.C. § 1396p(d)(4)(A)."  The trust stated that it was "funded with the proceeds of the settlement of a liability claim."  Ms. Draper's parents, acting under the DPOA, then placed the settlement into the trust.

The court found that Draper’s parents were acting under the DPOA when they established the trust and therefore were acting as Draper’s agent, rather than as her parents.  Because only parents, grandparents, guardians or courts can create a (d)(4)(A) trust, it failed, and the money in it was rendered countable.

The decision makes little sense –on its face the trust states that the parents created it individually as settlors and trustees.  To avoid this outcome, we initially have parents fund the trust with their own money, often taking a $10 or $20 bill from their wallet, which we then staple to the trust. The decision probably reflects the fact that courts like to defer to government agencies to interpret their own rules (here the SSA). 

We note that advocates currently are attempting to change the rule so that disabled people can establish a (d)(4)(A) trust themselves by introducing the Special Needs Trust Fairness Act of 2015 into the U.S. House (H.R. 670) and Senate (S. 349).  The law would add the words “the individual” to the list of people who can create (d)(4)(A) trusts. A previous version of the bill, failed to become law in the previous session of Congress, so it is not clear that this limitation will be removed anytime soon.

For more information on this and other special needs topics, please email or Karen Mariscal at kbm@margolis.com.

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