The 8th Circuit Court of Appeals upholds the Social Security Administration's (SSA's) rejection of a (d)(4)(A) trust designed to hold a woman's personal injury settlement, finding that the beneficiary's parents did not create an empty trust because the trust was immediately funded with the settlement proceeds, and that the parents were acting only as their daughter's agent when they created the trust. The court also determines that a subsequent state court order making the court the trust's creator does not cure these problems because the court did not originally order the trust’s creation. Draper v. Colvin (8th. Cir., No. 13-2757, March 3, 2015).
Stephany Draper was injured in car crash in 2006. Ms. Draper signed a durable power of attorney (DPOA) naming her parents, John and Krystal Draper, as her agents to file suit and settle claims on her behalf and to fund any trust in which Ms. Draper was a trustor or beneficiary. Ms. Draper began to receive SSI in July 2007, and in February 2008 her parents, acting under the DPOA, executed a $429,259.41 settlement agreement for Ms. Draper. On that same day, Ms. Draper's parents, acting individually, created a trust "pursuant to 42 U.S.C. § 1396p(d)(4)(A)." The trust stated that it was "funded with the proceeds of the settlement of a liability claim." Ms. Draper's parents, acting under the DPOA, then placed the settlement into the trust.
In 2008, the SSA terminated Ms. Draper's SSI benefits, finding that her trust was not an exempt asset. An administrative law judge (ALJ) determined that Ms. Draper's parents were acting under the DPOA when they established the trust and therefore failed to act as third parties when setting up the trust, rendering it countable. While Ms. Draper's appeal of the ALJ's decision was pending before the Appeals Council, a state court modified the trust nunc pro tunc, effective as of the date of the trust's creation, to name the court as the trust's creator. The Appeals Council denied Ms. Draper's appeal and the U.S. District Court for the District of South Dakota upheld the SSA's decision. On appeal to the 8th Circuit Court of Appeals, Ms. Draper argued that the trust was created without a res as an empty trust by her parents acting in their individual capacities and was subsequently funded with the settlement, meeting the requirements of POMS Section SI 01120.203B(1)(f) for a valid dry trust.
The U.S. Court of Appeals for the Eighth Circuit upholds the district court's decision. Although the court admits that "some evidence in the record supports Ms. Draper's claim that her parents intended to act in their individual capacities" since they "identified themselves individually as settlors and trustees, and the trust document explicitly states that it was established 'pursuant to 42 U.S.C. § 1396p(d)(4)(A)'," it finds that her parents "necessarily were acting as her agents when they incorporated all of her settlement proceeds and thus when they established the [trust]." The court also finds that the trust was not an empty trust because "[t]he trust agreement . . . made this fact explicit, stating that '[t]his trust is funded with the proceeds of the settlement of a liability claim’ (emphasis added) . . . " Finally, the court determines that the state court's action to modify the trust does not affect the SSA's determination because the court "did not order the special-needs trust's creation. Instead, the court merely assigned itself a retroactive role in the already-established [trust]."
The National Academy of Elder Law Attorneys and the Special Needs Alliance filed amici briefs on behalf of Ms. Draper.
Read the full text of the court's decision at: https://media.ca8.uscourts.gov/opndir/15/03/132757P.pdf
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