The Eighth Circuit: Rockin’ Your (Special Needs Trust) World

The U.S. Eighth Circuit Court of Appeals last month (March 2015) rocked the special needs trust world (and not in a good way) with its decision in Draper v Colvin (“Colvin” is the acting director of the Social Security Administration). Even though Massachusetts is in the U.S. First Circuit Court of Appeals, this case affects everyone who cares about self-settled special needs trusts – also known as “d4A Trusts”.

Here’s the story:

Stephany Draper of South Dakota was 18 years old in 2006 when she suffered head injuries in a car accident. She applied for and began receiving Supplemental Security Income benefits from Social Security. These benefits require the recipient to have less than $2,000 of countable assets. Several months after the accident, her father, using the Durable Power of Attorney Stephany had executed, entered into a personal-injury settlement agreement for Stephany for over $400,000. Later that same day, her parents signed, in their individual capacities, a d4A Trust for Stephany’s benefit. They put none of their own funds in the trust. The trust, however, listed as its sole funding source “the proceeds of the settlement of liability claim.” The settlement funds were deposited later that same day.

A few months later, the Social Security Administration terminated SSI and claimed that Stephany owed the Agency for all SSI received after the settlement funds were received. Why? Because Stephany’s d4A Trust wasn’t properly created.

Many of our clients know what a self-settled special needs trust is, but a little background here won’t hurt. A “d4A” trust is a trust authorized by a 1993 Congressional statute, and is found at 42 U.S.C. §1396p(d)(4)(A). The idea is this: many public benefits programs, such as Social Security Supplemental Security Income (“SSI”) and some forms of Medicaid have asset limits: the person receiving benefits cannot have more than $2,000 of countable assets (such as cash in the bank). A d4A Trust offers this tradeoff: A person under age 65 who meets the definition of disabled for social security purposes can put their assets in a d4A Trust, and the assets won’t count for Medicaid or Social Security SSI purposes; but when the beneficiary dies, the d4A Trust has to pay back Medicaid for all it has spent on the beneficiary.

Unfortunately the way the d4A statute is written requires a high degree of technical compliance to set one up. The trust has to be “established” by the disabled beneficiary’s parent, grandparent, guardian, or a court. “Established” means the person has to act to create it (for example, sign the trust agreement). State law may or may not require the trust to own something in order for the trust to exist. Regardless of state law, the Federal statute requires the creator to at least nominally fund it with their own funds. The Eighth Circuit was unsure of this, but instead deferred to Social Security’s internal operations manual (the “POMS”) to say that even if state law does not require the trust to own anything to exist, and even if the statute does not require the creators to fund with their own funds, the d4A Trust must be in existence under state law before being funded with the disabled beneficiary’s funds.

Now, while I disagree with the Eighth Circuit’s rationale for why the trust must exist first, I do agree that with the court that it must exist first … before funding by the disabled person. And the only safe way to make sure the trust exists before funding with the disabled person’s funds is to have the creator at least nominally fund it. For this reason, Special Needs Law Group always has the trust creator nominally fund the d4A Trust first with the trust creator’s own funds, and collect all the necessary documentation to prove the steps were correctly sequenced to present to Social Security later.

Unfortunately the really fatal fact for Stephany was this: even with the assumption that a trust in South Dakota need not own anything in order to exist, the trust instrument precluded the possibility of the trust existing for even an instant prior to funding with Stephany’s settlement proceeds because the trust itself listed the settlement proceeds as its sole property.

Be warned that the Social Security Administration is known for and is very skilled at engaging in what a Georgia estate planning lawyer refers to as “disqualification by bushwack”. A great example of this was Thompson v. Barnhart, (Vermont Supreme Court, unpublished Civil Action No. 2:02-CV-141, July 17, 2003), where Social Security resurrected a medieval rule known as the Doctrine of Worthier Title to kill a d4A Trust that named “heirs at law” as the trust remaindermen after the Medicaid payback. This area of law is not for the faint of heart, nor for the do-it-yourselfer!

Conclusions:

  • While it is clear that the result in Draper was not and could not have been the Congressional intent, the Social Security Administration has demonstrated a remarkable propensity to defeat d4A Trusts on the most technical imaginable grounds. Even though this is reprehensible of the Agency, I also believe the Eighth Circuit reached the correct result.
  • If you are concerned about a Draper situation in your own family, the solution is not to go to court to get some sort of nunc pro tunc ruling (that is, a ruling with retroactive effect), which is what Draper tried. Consult with your special needs attorney to discuss a viable solution for your individual case.
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