Draper v. Colvin: The Pitfall of Using a Parent to Establish a Special Needs Trust When That Parent Is Also An Agent Under A Power Of Attorney
While a special needs trust is usually an exempt resource for public benefit purposes, attorneys must be careful in ensuring the trusts are established pursuant to the requirements of 42 U.S.C. § 1396p(d)(4)(A). To satisfy the requirements of 42 U.S.C. § 1396p(d)(4)(A), the trust must (1) be for the sole benefit of a “disabled” beneficiary, as defined by the Social Security Administration (“SSA”), (2) be funded with assets of the beneficiary prior to age 65, (3) be irrevocable, (4) have a Medicaid pay-back provision, and (5) be established by a parent, grandparent, guardian, or court. The United States Court of Appeals for the Eighth Circuit recently upheld a Social Security Administration’s decision that a special needs trust established by a parent, who also serves as agent, was a countable asset when determining benefit eligibility.
As a result of a traumatic brain injury suffered during an automobile accident, John Draper, the father of Stephany Draper (“Stephany”), as agent under power of attorney, settled a personal injury suit netting Stephany $429,259.41. On the date of settlement, Stephany’s parents executed the Stephany Ann Draper Special Needs Trust (the “Trust”), which was intended to comply with 42 U.S.C. § 1396p(d)(4)(A). In September 2008, Stephany received a notice of overpayment from the SSA because the funds in the Trust exceeded the SSI-eligibility limit of $2,000 and that her benefits were terminated. On appeal, the Administrative Law Judge confirmed that the Trust was not an exempt resource because, pursuant to SSA policy, a parent must act as a “third-party creator” when establishing a special needs trust and that Draper’s parents acted as Draper’s agent, and not as a third-party creator. Stephany requested a review by the SSA Council, and while on appeal obtained a court order modifying the trust to retroactively listed the court as having established the trust. It was determined that the court order was not appropriate, and the court affirmed the Administrative Law Judge’s decision.
On appeal, the United States Court of Appeals for the Eight Circuit reviewed whether parents acting under a power of attorney may create and fund a qualifying trust and whether a court’s order may sufficiently modify a trust to retroactively establish a qualifying trust. In upholding the lower courts’ decisions, the court determined that the language of 42 U.S.C. § 1396p(d)(4)(A) does not speak to the issues at hand and are ambiguous issues for which the SSA is provided deference to interpret pursuant to statute and SSA policy.
SSA policy clearly provides that the special needs trust exemption does not apply to a trust established through the actions of the person with a disability and that a trust established by an agent under power of attorney is the act of the person with a disability. While Stephany attempted to argue that the trust was an empty trust established by her parents and later funded with proceeds from the settlement, the court found that the trust clearly indicated that the trust was funded with the proceeds from the settlement and that such proceeds were transferred into the trust through bank deposit on the date the trust was established – thus the trust was not an empty trust. Stephany also argued that her parents acted in their individual capacities when establishing the trust, to which the court determined that, because the trust was not an empty trust, then Stephany’s parents, individually, had no interest in the settlement funds. Furthermore, the court stated the trust would be invalid unless Stephany’s parents acted in their capacity as agent when they incorporated the settlement proceeds into and established the trust. The court specifically mentioned that, to satisfy the requirement under SSA policy, to act in an individual capacity, a parent needs to establish an empty or seed trust with their own assets as initial funding.
With regard to retroactive establishment of a trust by a court, SSA policy requires a court-created trust to be “required.” The court simply found that, since the state court did not require the creation of the trust, it merely established a retroactive role in an already established trust. As a result, the court order merely “approved” the trust and did not, therefore, establish the trust pursuant to 42 U.S.C. § 1396p(d)(4)(A).
It is not uncommon for parents to establish a special needs trust on behalf of their children, and in cases of an adult child with a disability, that same parent may also be appointed as an agent under a power of attorney. It is clear that the Draper decision is a cautionary tale outlying that special precautions must be used when using parents to establish special needs trusts. The attorneys of the Hook Law Center are led by Andrew H. Hook, a founding member of the Special Needs Alliance, and remain current on issues surrounding the creation and administration of special needs trusts.
Hook Law Center: Kit Kat, are there really domestic cats that perform at the circus?
Kit Kat:Yes, there are. In fact, the Amazing Acro-Cats are a 14-cat circus which came to NYC July 16-19 and performed at the Muse Brooklyn. These cats are really smart, and they have the cutest names—Tuna, Alley, and Sookie to name a few. Tuna’s specialty is ringing a cowbell. Alley holds the Guinness World Record for the longest cat jump (6 feet). Sookie can push a shopping cart across the stage, though she has been known to get distracted and just lie down and sit. All are dressed in traditional circus attire like pointed caps, etc.
Their trainer, Samantha Martin, is quite an interesting subject herself. She has trained rats, chickens, as well as dogs. She switched to cats about 10 years ago. The circus-performing cats are all hers. Her theory is that friendly cats are more likely to get adopted. Over the years, she and her 2 assistants have trained 159 foster cats, which she turns over to shelters for adoption. She says, “So many cats end up in shelters because they have behavioral problems, and most behavioral problems are due to boredom. If you train your cat to do tricks, you make them use their brains. I hope to encourage people to expect more of their cats.”
Anyway, back to the Amazing Acro-Cats. The performance they give ends with the Rock Cats, a 6-piece ensemble, playing whatever they want using a miniature guitar, drum set, and other instruments. No two performances are alike. Humorously, Ms. Martin comments, ‘I am pretty much at the mercy of what they want to do.’ It’s ‘never the same, because the cats lead the show.’ Now that’s the right attitude, and it’s fun all around. Ms. Martin is based in Chicago, and she transports her performers around via a colorful bus. Maybe you can catch her at her next venue! (Jennifer A. Kingson, “Circus Cats Are Lions of Their Profession, but Domestic at Heart,” The New York Times (Theater section), July 9, 2015)
- July 30 & 31, 2015 – The Hook Law Center Seminar for July, What You Don’t Know Can Hurt You – Recent Developments in Estate, Long Term Care and Special Needs Planning, will be held at 10am on Thursday, July 30, 2015 at the Hilton Garden Inn – Harbour View and at 10am on Friday, July 31, 2015 at the Crowne Plaza Hotel – Towne Center. To register, please call 757-399-7506 and ask for Debbie or register online at hooklawcenter.com/seminars.
- August 12, 2015 – Andrew Hook will be speaking to a group at Maryview Hospital in Portsmouth, Virginia.
- August 20, 2015 – Andrew Hook will be speaking on Veterans Benefits at The Chesapeake.
- August 21, 2015 – Andrew Hook will be speaking to a group at DePaul Hospital in Norfolk, Virginia.
- August 22, 2015 – Hook Law Center is sponsoring “Shred with a Purpose” to be held at our Virginia Beach office, 295 Bendix Road, from 9am until 12Noon. Donations to the Alzheimer’s Association for the “Walk to End Alzheimer’s” will also be accepted. For more information, please call 757-399-7506 or click the following link to view the event flyer: Shred With A Purpose Flyer.
- August 27, 2015 – Andrew Hook will be speaking to a group at Mary Immaculate Hospital in Newport News, Virginia.
- September 9, 2015 – Andrew Hook will be speaking at a Virginia Continuing Legal Education seminar.
- October 9, 2015 – Andrew H. Hook will be part of a panel discussion at the 2015 Art of Healthy Aging Forum & Expo on Friday, October 9, 2015, at the Virginia Beach Convention Center, 100 19th Street, Virginia Beach, VA 23451. The forum & expo runs from 9 a.m. – 2 p.m. Tickets are $15 until September 30th (limited seating). $25 at the door. To register for this event, please click registration.
- October 26, 2015 – Shannon Laymon-Pecoraro will be speaking at the National Business Institute’s seminar on The Probate Process from Start to Finish in Virginia Beach, Virginia.
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