Draper v. Colvin, Part-3 – The POMS Two-Step Process of Parent-Established First Party Special Needs Trust.

November 30, 2015 - 3 minutes read

How to Establish a Valid SNT under the POMS in California.

Draper v. Colvin found the POMS in question, POMS SI 01120.203, controlling on how a parent should establish a first-party special needs trust with a child’s assets.  what the SSA regards as a valid special needs trust.

A Parent Establishing a First-Party Special Needs Trust for a Child is a Two-Step Process. 

1. The parents, acting as individuals, needed to establish an “empty” trust or a seed trust with their own assets as the trust’s initial “res”. {POMS SI 01120.203B(1)(f).}  [The “res” means the trust assets.]

2. Once the “empty” trust was formed or the seed trust was funded, then the parents, using power of attorney, would transfer the grantor’s money into the already-established trust.  {POMS SI 01120.203B(1)(g).}

Why Have a Parent Establish the Special Needs Trust in California?

One thing that sets a first-party special needs trust, established under 42 U.S.C. § 1396p(d)(4)(A) from say a pooled trust, 42 U.S.C. § 1396p(d)(4)(C), is that in establishing the former, Stephany Ann Draper herself could not establish the trust herself.  She could have however, established an account in a pooled trust completely on her own.  [The assumption is that since she executed a power of attorney, she had capacity.]  

Under 42 U.S.C. § 1396p(d)(4)(A), the special needs trust is established “for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court.”  In other words, Stephany Ann Draper could not establish her own (d)(4)(A) special needs trust.  

By contrast, a pooled special needs trust [42 U.S.C. § 1396p(d)(4)(C)] can be established “by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court.”  In other words, Stephany Ann Draper, the “such individual” could establish an account in a pooled special needs trust by herself.  

So, to avoid the time and additional costs of court establishment of a special needs trust, people opt for establishment of a 42 U.S.C. § 1396p(d)(4)(A), special needs trust by a parent.  Typically, establishment of the trust by a “legal guardian” is identical to establishment by a court, because the court will require the guardian to petition the court to establish the trust. See for example, Conservatorship of Kane, (2006) 137 Cal.App.4th 400, 40 Cal.Rptr.3d 378.  

Under standing how the POMS two-step process really works is the key to understanding the Draper case.  Future posts will discuss the underlying reasoning of this case and how the court appears to interpret the POMS.

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