Topic: Self Settled Special Needs Trusts, aka Medicaid Payback Trusts, aka d(4)(A) Trusts.
Legal Background: When a person under 65 meets the requirements of being disabled for the purposes of qualifying for needs-based government benefits (most notably Medicaid and Supplemental Security Income), they have the ability to meet the financial eligibility requirements of those programs by transferring assets they may have into a trust for their own benefit, provided those trusts meet the requirements of 42 U.S.C.§ 1396p(d)(4)(A). The law provides that once they put their own assets in these trusts, those assets will not be considered as part of their resources in determining eligibility for the aforementioned benefits. The law allows the property held in such trusts to be used for the benefit of the disabled person during their life, but upon the death of the disabled person/trust beneficiary, the state(s) that paid for medical expenses for that disabled person are entitled to be reimbursed for those expenses from whatever trust property has not been distributed during the disabled person’s life. The law does not currently allow the disabled person themselves to create these trusts, rather it says such trusts must be created by a parent, grandparent, guardian or court order. It is this “who can create the trust” issue that is the subject of this surprising case. These trusts are useful in all sorts of situations, including, where the person who is disabled became disabled as a result of medical malpractice or a car accident and receives a settlement or judgment as a result. This allows the injured party to receive the lawsuit proceeds and use them to enhance their quality of life while remaining on government benefits, most importantly Medicaid.
This Case: Click here to read Stephany Draper v Social Security Administration. Stephany Draper is a person under the age of 65 who received a personal injury settlement. The parents of Ms. Draper created a d(4)(A) trust by signing it in their individual capacities, clearly attempting to satisfy the requirement option that the trust be created by a parent. The parents, coincidentally, were also agents for Ms. Draper under a financial power of attorney. The parents used their authority as Ms. Draper’s agents to sign the personal injury settlement documents and transfer the settlement proceeds to the Trustee of the d(4)(A) trust they created in their individual capacity.
The Social Security Administration said that this trust did not protect these funds because the parents were really acting as their daughter’s agent when they created the trust. The 8th Circuit Court upheld the Social Security Administration’s decision, noting that Courts must give significant deference to the Social Security Administration with respect to the interpretation of the Social Security Act.
The fact that the Court upheld the conclusion that even though the parents signed the trust individually, and not as agents under the power of attorney, they were in fact acting as Ms. Draper’s agents in doing so; and notwithstanding the fact that the law itself expressly authorizes a parent to create such a trust, is more than troubling. But the analysis gets even stranger. The Court goes on to support this conclusion by asserting that even where State law allows the creation of an unfunded (or “dry”) trust, if someone creates an unfunded trust that trust is not valid because of the requirement that to create a valid trust the party creating it must have a financial interest in the trust, citing the Restatement of Trusts 3rd for that proposition. The Court says, it seems, that they could either have concluded that the trust itself was not valid because the parents could not have created a trust in which they had no financial interest, or, alternatively, that the parents must have been acting as their daughter’s agents in creating the trust. Since the Social Security Administration concluded the latter, they upheld that conclusion.
Obviously the Draper case will impact the way attorneys help clients create d(4)(A) trusts in the future. The 8th Circuit Court of Appeals is a Federal Court of Appeals, one step below the United States Supreme Court. So this is not an insignificant decision. However, Michigan is not part of the 8th Circuit. Rather Michigan sits in the 6th Circuit. Technically, Michigan Courts are not bound by this decision. However, in reality, Social Security Administration offices all over the U.S. will be emboldened by this “victory” and we will no doubt see an increase by the Social Security Administration with respect to aggressive challenges to self-settled special needs trusts as a result.