Special Needs Trust Defective Because Arbitrary Rules Not Followed

JULY 22, 2013 VOLUME 20 NUMBER 27

We often find ourselves reassuring clients that the law makes sense. It may not be obvious or intuitive, but we can usually explain why some legal principle developed the way it did, and why it would be a bad thing if it were otherwise — even if that might mean problems for a given case in which we are involved. Once in a while, though, the system is just arbitrary, foolish and misguided. What really hurts is when a judge declares that an arbitrary corner of the law should be that way because it is not arbitrary.

Case in point (literally): Sandi Dowling (not her real name), a 26-year-old woman living in South Dakota. Sandi was in a terrible auto accident in 2006, when she was 19. As a result of a traumatic brain injury suffered in that accident, Sandi qualified for Supplemental Security Income (SSI) and her state’s Medicaid program. She also filed a civil lawsuit, seeking to recover at least some of the costs of her care, pain, suffering and future lost income.

Sandi gave her parents a power of attorney so that they could handle her lawsuit and any other financial issues she might face. So far, there is nothing in Sandi’s story that would not be faced by thousands of other young people injured in an auto accident.

Then Sandi’s lawsuit was settled. She netted $429,259.41 from the settlement — a sum which would normally knock her off SSI and probably cost her Medicaid eligibility, as well. That amount, though large, was not enough to provide the care Sandi actually needed, however, and so it was important for her to continue to qualify for SSI and Medicaid.

Fortunately, there is a way to do that. A self-settled special needs trust can be set up for someone in Sandi’s circumstance, and the money transferred to it. The transfer is not disqualifying, and the contents of the trust are not counted as available for SSI or Medicaid eligibility purposes. But the trust has to be set up properly.

One key rule about such trusts: they must be established by a parent, grandparent, guardian or court. Fortunately, Sandi’s parents were both deeply involved in her life and her care; they could sign the trust documents, and they did. They established the trust and, using their power of attorney, transferred her settlement proceeds to the trust’s name.

Imagine their surprise when the Social Security Administration ruled that the trust disqualified Sandi from SSI benefits. The eligibility worker, relying on directives from the SSA central office, ruled that when her parents established Sandi’s trust they weren’t her parents — they were her agents under the power of attorney. Her SSI was cut off (and, presumably, her Medicaid eligibility as well) and she was ordered to repay Social Security the money she had received since her personal injury settlement arrived.

Two years of legal wrangling ensued, with the Social Security Administration insisting that it makes sense to rule that Sandi’s parents weren’t her parents when they signed the trust. An Administrative Law Judge did (graciously) rule that she did not have to repay the money she had received before the family received notice of the overpayment, but the denial of eligibility persisted.

Finally, in an attempt to resolve the impasse, Sandi and her parents turned to the local courts. They sought and obtained a court order approving the trust and amending it in some technical ways; the judge also ruled that the modification of the trust should date back to the original trust date (what is called “nunc pro tunc” in lawyer-talk). Problem solved, right?

Not at all. The Social Security Administration, continuing to apply its rules rather than the English language, ruled that the court had not “established” the trust, but only “approved” it. Two more years of legal wrangling ensued, with the Social Security Administration insisting that this interpretation of language also made sense.

Eventually Sandi and her parents exhausted their appeals through the Social Security Administration, and they finally turned to the Federal District Court in South Dakota. They filed an appeal of the final Social Security ruling, and argued that it was arbitrary and capricious of Social Security to insist that (a) Sandi’s parents weren’t her parents when they signed the trust and (b) the local court had not “established” the trust but only “approved” it. Finally, they thought, they were going to get a decision from someone who would apply some common sense rather than absurd rule interpretations.

There’s still no joy in Madison. District Judge Karen E. Schreier upheld the Social Security position, finding that its interpretation of the language of the federal statute was not arbitrary. In fact, she held, having clear rules is the opposite of arbitrary — never mind that the clear rules are silly. Draper v. Colvin, July 10, 2013.

What are the lessons to be learned from Sandi’s story, and why are we telling you about it? Normally we do not report on trial court decisions here — and even though this is an appeal from a Social Security ruling, it is the lowest level of the federal court review of that ruling. It might well be appealed; in the meantime, it should not be cited as precedent in other cases (and especially in other jurisdictions, like the Federal District Courts in Arizona). But it still gives us pause and an opportunity to point out several important principles:

1. Creating (“establishing,” in the language of the federal statute) special needs trusts can be difficult to do correctly, and technical rules have to be followed.
2. Though it may seem obvious that something ought to be done in an efficient, effective and legal way, sometimes the requirements are actually counter-intuitive, or are interpreted in a counter-intuitive way.
3. The Social Security Administration (and, often, state Medicaid agencies) are always on the lookout for ways to challenge special needs trusts.
4. Doing things wrong not only causes problems with government programs, but is hard to fix. Witness Sandi’s odyssey, with four years of litigation and multiple attempts to satisfy Social Security’s arcane rules — all the while with Sandi not qualifying for or receiving SSI until first the agency and then the courts work through their interpretations.
5. Even when a fix is finally found, it likely will not relate back to the original date of the problem. Legal expertise is important early and throughout the administration of a special needs trust.
6. Much of the court opinion in Sandi’s case deals with the language of the POMS — Social Security’s “Program Operations Manual System.” That’s where the worst language offenders live, and it is crucial for practitioners to be familiar with the structure, holdings and, yes, silliness built into the POMS.

“When in doubt about who’s to blame,” Craig Ferguson is reported to have said, “blame the English.” We aren’t sure he meant the language, but still it seems apt.