Special Needs Trust can’t be created by beneficiary’s agent under power of attorney

Federal law allows a person who receives or is applying for Medicaid or Supplemental Security Income (SSI), which are means-tested programs, to transfer their excess resources into a Special Needs Trust that was “established for the sole benefit of the disabled individual by a parent, grandparent, legal guardian or the disabled individual or a court.” 42 U.S.C. 1396p(d)(4)(A) https://www.law.cornell.edu/uscode/text/42/1396p New Jersey’s regulation tracks the federal language. N.J.A.C. 10:71-4.11(g)1. The transfer causes no penalty, and once the assets are in the Trust, they are no longer ‘countable” so that they wouldn’t be treated as excess resources. See also the SSI POMS  01120.203, which is the Social Security Administrations’  explanatory guidance.  https://secure.ssa.gov/poms.nsf/lnx/0501120203 These are first-party special needs trusts with third-party grantors.

What is contemplated here is a two-step process. In step one, someone who is not the disabled person creates the trust. In some cases, the disabled person’s parent or grandparent creates the Trust and signs it as grantor, seeding it with a minimal amount just to open the trust account. In other cases, the disabled person’s legal guardian,  or their agent under power of attorney or even the disabled person himself (see N.J.S.A. 3B:11-36 and 11-37) petitions the court to establish the trust. In that case, the Court is the “grantor” and signs an Order establishing the trust. Afterwards, in step two,  the disabled person transfers their excess assets into the trust. Now there may be an Agent under Power of Attorney or a legal Guardian acting who does this transfer transaction on behalf of the disabled person. However, the law distinguishes between these roles when it comes to step one and step two.

On March 5th, the 8th Circuit US court of Appeals sustained a decision  which held that the assets in a certain Special Needs Trust were countable because the party creating the trust had acted as Agent Under Power of Attorney for the disabled person for both step one   and step two. Draper v. Colvin, No. 13-2757 (March 3, 2015). The result was a termination of benefits. The Court held that the person who was acting as POA did not meet the law’s express criteria for who could be a third party grantor for such trusts.

The reasoning would apply to Special Needs trusts established in New Jersey as well. The lesson is that the Special Needs Trust requirements must be scrupulously followed, as the results could be catastrophic for the person who needs Medicaid or SSI.

For legal advice on establishing and administering Special Needs Trusts, and for Medicaid applications and planning, call 732-382-6070