A recent court case in South Dakota reinforces the idea that a special needs trust must be created in the proper way in order to avoid issues regarding Social Security benefits. Although the parents of a disabled child meant well, the technicalities of special needs trust creation prevented them from providing the maximum benefits to their child.
Facts of the Case
In the case of Draper v. Colvin, Stephany Draper was 18 when she suffered a traumatic brain injury in a car accident in 2006. She executed a durable power of attorney, naming her parents and authorizing them to “demand, sue for, recover, collect, and receive” every sum of money belonging to Stephany, “compromise or compound every claim or demand,” and “fund, transfer assets to, and to instruct or advise the trustee of any trust wherein [Stephany] is or may be the trustor or beneficiary.”
Stephany began receiving Social Security disability payments in July 2007, and in February 2008 her parents signed a personal injury settlement on her behalf in the amount of $429,259.41. Later that day, her parents signed documents that created the Stephany Ann Draper Special Needs Trust, without referencing their power of attorney forms. The special needs trust was meant to qualify as a 42 U.S.C. § 1396p(d)(4)(A), which means that it would provide for Stephany’s needs without “displacing or supplanting public assistance or other sources of support that may otherwise be available.”
In September 2008, the Drapers were informed that the Social Security Administration found that she had been overpaid in benefits because her assets in the special needs trust exceeded her eligibility. The administration specifically found that Stephany’s parents had to act as third-party creators when establishing the trust but instead acted under the power of attorney. The Social Security appeals process denied their claim to change the settlor of the trust, and the district court affirmed. The Drapers then appealed to the Eighth Circuit Court of Appeals.
Ruling of the Court
The Court of Appeals found in favor of the district court, agreeing that the special needs trust created by the Drapers did not qualify as a 42 U.S.C. § 1396p(d)(4)(A) because they enacted it under the guise of the durable power of attorney. While the statute itself does not speak directly to the issue in the Drapers’ case, the judges did agree that the Social Security Administration has the power to interpret the statute and provisions of the Program Operations Manual System (POMS) that the special needs trust operated under.
As a result of the deference given to Social Security on permissible interpretations of the statute, the trust was not considered exempt for Stephany. Furthermore, the attempts that the Drapers made to bring the trust into compliance were not effective. Therefore, the ruling of the district court stands.
Contact an Estate Planning Attorney
If you or a loved one is in need of a special needs trust or has other estate planning issues in Trumbull, Mahoning, Columbiana, Portage, or Summit County, let the experienced Law Office of John C. Grundy help. Call or contact the office today for a free and confidential consultation of your case.