Special needs trust terminated when beneficiary moved

Special Needs Trust Terminated When Beneficiary Moved

What happens to a special needs trust when the beneficiary moves to a new state? Will the trust continue, or transfer to the control of the new state? One special needs trust beneficiary in Colorado discovered the Centennial State’s odd rule: a special needs trust is terminated when the beneficiary moves.

Parker Wilson’s story

Young Parker Wilson was injured in an auto accident in Colorado. His mother died in the same accident. Parker was left a 10-year-old paraplegic, and a personal injury settlement led to creation of a special needs trust.

As expected, the special needs trust allowed Parker to qualify for Medicaid benefits in Colorado. Of course, upon Parker’s death that trust would terminate, and Colorado would be entitled to repayment of its Medicaid payments for his benefit. That’s the basic way a self-settled special needs trust works. A beneficiary can continue to receive Medicaid coverage and trust assets can provide other services, supplies and benefits.

Parker and his father moved to South Carolina in 2017. Under Colorado’s unique approach to self-settled special needs trusts, that would mean that the trust terminated. Because the state maintained that the trust ended, Colorado demanded repayment of its Medicaid benefits.

But wait — Parker was still very much alive. The federal law says that self-settled special needs trusts must repay Medicaid benefits on the death of the beneficiary, not their relocation to another state. Could Colorado adopt such a punitive (and, frankly, absurd) rule?

Colorado courts

The Colorado Medicaid agency asked a probate court in their state to terminate the special needs trust. Because the Colorado agency had insisted on it, the trust language provided for repayment of Medicaid expenditures on any termination. In other words, Parker would receive no benefits from his trust if he had the audacity to move to another state.

But federal law makes clear that a special needs trust beneficiary can move to another state. Such a move will not terminate Medicaid benefits. In fact, Parker and his father applied and qualified for Medicaid in South Carolina, and requested a Colorado court to allow trust modifications that would remove the Colorado-specific provisions.

Parker’s efforts were fruitless. The Colorado court terminated the trust, and ruled that there was no authority to modify its terms. And the Colorado Court of Appeals upheld the denial of authority to modify. Parker’s trust would have to pay back Colorado Medicaid because of his move to South Carolina.

Parker tries to make a federal case

In response, Parker filed a lawsuit in Colorado federal court. He argued that Colorado’s law on termination of special needs trusts violated his constitutional rights, and the federal Medicaid law. He asked the federal judge to stop Colorado (and its courts) from reaching into his special needs trust until his death, as spelled out in Medicaid law.

The Colorado federal court dismissed his lawsuit. First it ruled that federal courts have no jurisdiction over probate proceedings (including trust interpretation). The trust had been terminated anyway, so Parker had no standing to seek relief on behalf of his (now former) trust.

Parker had lost in the Colorado probate court and Court of Appeals. Then he lost at the federal trial level. Last week the Tenth Circuit Court of Appeals dealt him yet another blow when it upheld dismissal of his federal action (in a non-precedential decision).

The federal appellate court agreed with the federal district judge. Federal courts stay out of trust administration and other probate matters, even when the state arguably violates federal rights. The bottom line: Parker Wilson will lose most (perhaps all) of his self-settled special needs trust because he moved to South Carolina. Wilson v. Bimestefer, May 26, 2021.

Is there a deeper meaning?

Two quick observations about the unique provision in Colorado Medicaid law:

  1. No other state, so far as we know, tries to terminate self-settled special needs trusts just because a beneficiary moves. In a court properly applying federal law, we are confident that the state would lose. Even Arizona — known for its quirky and over-reaching law on special needs trusts — has never tried to extend this far.
  2. After Parker Wilson sued in federal court, Colorado changed its rules. A self-settled special needs trust no longer terminates just because the beneficiary moves out of state. So long as they qualify for Medicaid benefits in their new state, Colorado permits the trust to continue. Of course, that still violates federal law — but at least it’s easier to avoid legal fights.

While Arizona does not follow Colorado’s (former or current) rule on out-of-state moves, it does impose a number of limitations on self-settled special needs trusts. In most cases trustees and beneficiaries work around Arizona’s limitations rather than challenging them in court. But the idea that states can write silly, limiting, and even punitive rules to restrict the usefulness of special needs trusts did not arise in Colorado.

This is exactly why so many trustees and beneficiaries have to seek legal counsel. One of the supreme ironies: so far, at least, Arizona has not challenged the legal fees incurred by having to deal with the state’s over-bearing rules and arbitrary edicts.

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