Acting as Agents Under Power of Attorney, Parents of Disabled SSI Recipient Did Not Create Valid Special Needs Trust

A Federal court held that a special needs trust is not valid because it was created by the parents of the beneficiary while the parents were acting as the beneficiary’s agents under a power of attorney. Draper v. Colvin (U.S. Dist. Ct., D. S.D., No. 12-4091-KES, July 10, 2013).

Stephany Draper suffered a traumatic brain injury following a car accident. She applied for Supplemental Security Income (SSI) benefits and was ultimately approved based upon her disability. Soon thereafter, Stephany named her parents as her agents under a durable power of attorney. The power of attorney gave Stephany’s parents the power to “fund, transfer assets to, and to instruct and advise the trustee of any trust wherein [Stephany Draper is] or may be the ..,. beneficiary.” Two years later, her parents attempted to create a special needs trust and fund it with $429,259.41, the net proceeds of Stephany’s personal injury settlement from the car accident. Several months later, the Social Security Administration (SSA) sent a notice informing Stephany that her special needs trust “[did] not meet the criteria to exclude the principal of the trust as a resource for [SSI] purposes.” SSA claimed that the trust did not meet the criteria for a special needs trust, so the principal of the trust was not shielded as a resource.

Stephany appealed, and the hearing official ruled that the trust did not fulfill all of the requirements necessary to qualify as a special needs trust. In that regard, the ALJ found that Stephany’s parents were acting as her agents under the durable power of attorney, rather than as her parents, when they established and funded the trust. To be valid, a special needs trust cannot be created or funded by the beneficiary. Because Stephany’s trust was not a valid special needs trust, the trust corpus was considered to be a resource, pushing Stephany’s assets above SSI’s $2,000 resource limit and making her ineligible for SSI. Stephany appealed to federal court, arguing that her parents were acting as parents when they set up the trust, not as her agents under the power of attorney.

The U.S. District Court for the District of South Dakota affirmed, holding that the agency’s interpretation of the trust is entitled to deference. The court ruled that the parents were acting as Stephany’s agents under the power of attorney because the power of attorney gave the parents the power to create a trust and the parents could not have exercised control over Ms. Draper’s resources without the power of attorney. The court found legal control to be essential because:

[T]he person establishing the trust with the assets of the individual . . . must have legal authority to act with respect to the assets of that individual. Attempting to establish a trust with the assets of another individual without proper legal authority to act with respect to the assets of the individual will generally result in an invalid trust.

The case is attached here – Draper v. Colvin