Estate Planning: Upheaval In The World Of First Party Special Needs Trusts

The Social Security Administration is more aggressively challenging the validity of first party special needs trusts.

This in turn affects the beneficiary's eligibility for Supplemental Security Insurance and Medi-Cal benefits.

The challenges involve the following first party special needs trusts requirements: (1) pay back; (2) seed trust; (3) sole benefit.

A first party special needs trusts, unlike a third party special needs trusts, is established by a parent, grandparent, conservator or the court to receive assets belonging to the beneficiary.

The first party special needs trusts must contain certain required provisions related to eligibility to receive SSI and/or Medi-Cal benefits.

A person with special needs – someone who cannot support themselves due to a disability – can transfer assets they receive in a lawsuit settlement or from an inheritance to trust and remain eligible for such programs.

The trustee may use the assets for the sole benefit of the beneficiary to supplement, but not to replace, any needs based government benefits, including SSI and Medi-Cal, being received by the beneficiary.

Federal law requires that when the trust terminates that the remaining assets be first used to reimburse the Social Security Administration and DHCS for the dollar value of what the beneficiary received in SSI and Medi-Cal benefits.

Unfortunately, many first party special needs trusts written in California provide only for the payback of California Medi-Cal claims.

Now, all first party special needs trusts must expressly provide for the payback of all states which provided SSI or Medi-Cal benefits, not only California, even if beneficiary never moves out of California.

Second, while the assets used to fund the first party SNT come from the special needs beneficiary, the actual trust itself must first be established by a parent, grandparent, conservator or the court for the beneficiary.

This has been understood to require that a so-called "seed trust" be established by one of these persons signing the trust or the trust being required to be established under a court order.

Recently, in Draper vs. Colvin case, (D SD, July 10, 2013, No. 12-4091-KES, the Eighth Federal Circuit Court held that because the parents of the disabled girl were also the child's agents under a broad power of attorney, that allowed them to create trusts for her, that they did not act as the girl's parents but as her agent in signing the First Party SNT.

This distinction invalidated the first party SNT. The parents then sought and obtained a South Dakota district court order amending and approving the amended trust in an attempt to make the amended trust one established by court order.

This also failed. The Eighth Circuit held that all the order did was to amend the trust and not to establish the trust.

Third, the application of "sole benefit" rule – which requires that the trustee only use the trust assets for the sole benefit of the special needs beneficiary – has been tightened.

The trustee may no longer pay travel expenses of family and friends to visit the beneficiary. Nor may the trustee pay the beneficiary's family members to serve as the beneficiary's care providers if they are not medically certified, medically trained or approved to provide such care. Any trust that provides to the contrary is automatically disqualified.

Advocates of persons with disabilities are meeting with the SSA to discuss and address the foregoing problems.

One recent success is that the SSA will not review any SNTs it has already approved unless a triggering event occurs (such as a trust amendment).

The limitations imposed on First Party SNTs should motivate families to act proactively by establishing Third Party SNTs that are not subject to the payback, seed trust and sole benefit limitations.

Dennis A. Fordham, Attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at dennis@DennisFordhamLaw.com and 707-263-3235. His Website is http://ift.tt/1Jp3HsZ .

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