This week, ICLE will be releasing an on-demand seminar
entitled “How and Why to Use Special Needs Trusts” that Art Malisow and I
recorded a few weeks ago. Since that recording, the Eighth Circuit Court
of Appeals issued a decision that impacts special needs planners establishing
so-called d4A Trusts (also called first-party standalone trusts) in Draper
v. Colvin, No. 12-2757 (March 3, 2015)
As we discuss in the seminar, if an individual with the
disability is establishing a trust and funding it with his or her own money,
the trust must comply with the specific provisions of either 42 USC 1396p(d)(4)(A)
(d4A standalone trusts) or 42 USC 1396p(d)(4)(C) (d4C pooled trusts) in order
for that individual to remain eligible for government benefit programs.
When establishing a d4A standalone trust, federal law clearly states that the
disabled individual cannot establish a d4A trust. Rather, it must be
established by a parent, grandparent, guardian, or a court (and not the
beneficiary him or herself). The Draper decision seemingly adds
yet another requirement – the person establishing the trust on the individual’s
behalf may now need to seed the trust with his or her own funds.
In Draper, Stephany Draper received a personal injury
settlement. (As discussed in the seminar, lawsuit settlements are one of
the common reasons why you may need to use a d4A trust.) Her parents
established the trust and used their authority under Stephany’s power of
attorney to transfer the settlement funds into the trust. This would have
been considered accepted practice for a parent to establish a d4A trust before this
Draper decision.
However, in Draper, the Social Security
Administration took the strange position that a parent cannot act as both a
parent and agent under a power of attorney for purposes of establishing a
special needs trust. The Administration argues that if a parent is acting
as an agent under a power of attorney, the parent is not acting as a parent –
rather is acting as an extension of the disabled individual himself or
herself. (See POMS SI 01120.203B(1)(g).) Because the disabled
individual cannot establish a d4A trust, neither can his or her agent under a
power of attorney even if that person is also a parent.
This would make sense if Stephany’s parents were acting as
agents under the power of attorney, but they signed the trust in their individual
capacities (i.e., as parents). Further, the Social Security
Administration has stated that a trust can be “dry” or “empty” if state law
allows it. (See POMS SI 01120.203B(1)(f).) Empty trusts are allowed
in Michigan and are also apparently allowed in South Dakota (the location of
the Draper case). If a dry trust is allowed, it would seem that
the trust was established when the trust was executed – not when it was
funded. Nevertheless, the Eighth Circuit found that because the parents
funded the trust with Stephany’s money before “seeding” it with their own
money, the trust was not properly “established” under the meaning of 42 USC
1296p(d)(4)(A).
Some attorneys may choose to read the Draper decision
narrowly. Because the Draper trust itself stated that the trust is
funded with settlement proceeds, the Eighth Circuit readily dismissed the
“empty” trust argument stating that the trust was never empty because of this
funding statement in the trust. An attorney could argue that if the trust
makes no mention of how it is being funded, the parent could still act in two
separate capacities: as a parent to establish the “empty” trust and as an agent
under the power of attorney to fund the “empty” trust. Indeed, this is a
reasonable interpretation of the Draper decision.
However, the prudent attorney will now take steps to avoid
this issue altogether. Even though this decision is not binding precedent
in Michigan, it is still an opinion of a Federal Circuit Court of Appeals and
the Social Security Administration argued for this result. Unless the
Social Security Administration changes the POMS or other courts take a
different position, attorneys should have the parent, grandparent, or guardian
put some of his or her own money (say $10) to seed the trust before disabled
individual’s own funds are put into the trust account. Better safe than
sorry.
As a quick aside, does Draper mean judges need to
seed d4A standalone trusts in order to establish them? Presumably no, but
one special needs practitioner relayed a story of giving the judge $10 in court
to seed the trust. A ridiculous and probably unnecessary step for
sure. But then again, many of us would have said the same about parents
establishing trusts before the Draper decision.
You can read the full Draper decision here: http://media.ca8.uscourts.gov/opndir/15/03/132757P.pdf.