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PARENTS ESTABLISHING A SELF-SETTLED SPECIAL NEEDS TRUST FOR A CHILD: WHAT CAN GO WRONG?

by Thomas D. Begley, Jr., CELA

In an important case arising in South Dakota, the parents of Stephany Draper established a Self-Settled Special Needs Trust into which Stephany’s personal injury settlement was to be deposited. Prior to that case, this had been a common procedure used all over the country. However, the Social Security Administration (SSA) contended that Stephany’s parents did not deposit any of their own money into the trust, but simply arranged for Stephany’s personal injury settlement funds to be deposited. Therefore, SSA held that since Stephany’s money was used to fund the trust, then Stephany was the person who established the trust and under federal law an individual is not permitted to establish a Self-Settled Special Needs Trust.

What is the solution to this dilemma? SSA is now taking the position that where a parent establishes a Self-Settled Special Needs Trust for a child, the parent must deposit some of the parent’s money into the trust. This could be a token amount (i.e., $10). The rationale is that the person who “first funds” the trust is the establishor. Some lawyers are simply attaching a $10 bill to the trust and sending a copy of the trust with a copy of the $10 bill to Social Security. Better practice would be for the parent to deposit $10 into a trust bank account before the personal injury settlement proceeds are deposited into the account. Copying a $10 bill does not mean that the $10 was used to actually fund the trust. The parent could take the $10 bill out of their wallet, photocopy it, send it to Social Security, and put the $10 bill back in their wallet. Depositing the money into a trust bank account is evidence that the $10 was actually deposited into the trust.

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