Court Avoids Deciding Fate of Unnecessary Special Needs Trust

MAY 13, 2013 VOLUME 20 NUMBER 19
We read an interesting appellate court case this week involving an Indiana special needs trust. The court’s resolution of the case was actually not all that interesting — it was dismissed on technical grounds. But the story was an interesting one, and involved a problem that we see from time to time. It also gives a chance to suggest some solutions to that problem (in addition to the one that the trial court judge actually implemented in the case).

Eileen Rogers (not her real name) owned a family farm in Indiana, and she had three adult children. One of them, daughter Jewel, was disabled: she had been diagnosed as suffering from bipolar disorder, and she received Social Security Disability payments. Because of her SSDI benefits Jewel was also covered by Medicare.

Ms. Rogers and her late husband had created a trust before his death. It provided that on the second spouse’s death the combined estate would be divided into three equal shares, with one to go to each child. In 2006 Ms. Rogers amended the trust to set up a special needs trust for Jewel’s one-third share. That special needs trust included a sort of a “poison pill” provision: if any government agency ever decided to treat the money as available to Jewel and thereby sought to  reduce her public benefits, her trust would terminate and be distributed to the other two children, as if Jewel had died.

In 2010 Ms. Rogers died. A dispute developed between her other two children (Jewel’s brother and sister) about what to do with the trust for her benefit. The basic problem: Jewel didn’t need a special needs trust to qualify for benefits. Astute readers will have seen this coming: Jewel’s Social Security Disability and Medicare benefits would not be affected by an outright inheritance, since they are not sensitive to assets or the income earned on those assets.

What should be done? Jewel’s brother thought that the trust should continue anyway, with him as trustee. Since the principal asset in Ms. Rogers’ estate was the family farm, that would allow the farm to stay largely intact and continue under his management. Jewel’s sister, however, agreed with Jewel herself: the farm should be divided, and Jewel’s one-third share should be distributed to her outright. The trust had been set up by mistake, they reasoned, and it should be terminated.

The local trial court agreed with the two sisters. He ruled that there was no reason to keep the trust and it should be dissolved. Jewel’s brother sought to intervene and to argue that the trust’s terms should be followed; the judge denied his request and maintained the dissolution of the trust.

Jewel’s brother appealed. Tragically, he died before the appeal was decided — but it was continued on his estate’s behalf by his wife. As noted earlier, the Indiana Court of Appeals dismissed the appeal based on technical grounds: the order denying Jewel’s brother’s request did not contain the language necessary to make it an appealable order. Raper v. Haber, May 6, 2013.

Even though the dispute over Ms. Roger’s trust does not establish any precedent, and wasn’t even decided on the merits of the trial court’s ruling, it does give us a chance to reflect on the problem of unnecessary special needs trusts. We see this issue from time to time: with all the public discussion about special needs trusts, parents and other family members often think they must establish such a trust for any person with any disability regardless of other circumstances. But, in fact, many people with disabilities receive all their benefits from Social Security Disability and Medicare, and such individuals will not usually be affected by inheritances they might receive outright.

The issue is actually more complicated than that. Some individuals receive both Social Security Disability AND Supplemental Security Income (SSI) payments, often because they are covered under their retired parents’ accounts. If they inherit money outright, they might lose the SSI portion of that income, and perhaps have their Medicaid benefits reduced or eliminated. But sometimes such individuals will receive an increase in their Social Security (not SSI) payments upon the death of their parents — and so it can often be difficult to determine in advance whether a special needs trust is really necessary.

Does that mean that no special needs trust should be considered for someone who is already receiving Social Security rather than SSI? Not necessarily. Sometimes a special needs trust (or at least an irrevocable trust) is appropriate for one or the other — or both — of two reasons:

  1. Even though the individual is not receiving SSI payments, he or she might be receiving Medicaid benefits — and sometimes without really even realizing it. Medicaid might, for instance, be paying for their Medicare Part D (prescription drug coverage) premiums and co-payments.
  2. Even though a “special needs” trust might not be necessary, a person with disabilities might be unable to reliably handle their own money. In such a case, an irrevocable trust — which might even look much like a special needs trust — might be appropriate.

Another issue comes to mind in reviewing the appellate court decision involving Ms. Rogers’ trust: might there have been other alternatives available? Of course, we do not know the details of her family situation, or her daughter Jewel’s level of ability and sophistication, so we are not really proposing alternate resolutions for her case. But in other circumstances, it might be possible to modify the unneeded special needs trust to make it more appropriate (rather than terminating it altogether). There are several ways such a thing might be accomplished, and solving problems like that are what good lawyers do best.

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