Draper v. Colvin, Part-4 – What is a Dry Trust?

December 1, 2015 - 4 minutes read

An interesting issue concerning a “dry” special needs trust arose in the Draper case. The issue arose in part, because the POMS, POMS SI 01120.203, makes reference to both a “seed trust” and “dry trust” as options that can be used for a parent-established, child-funded first-party special needs trust.  This post will consider what a Dry Trust means.  

A Dry or Seed First-Party Special Needs Trust Under the POMS.

When establishing a first-party special needs trust by a parent, for a child, the POMS states: “In the case of a legally competent, disabled adult, a parent or grandparent may establish a “seed” trust using a nominal amount of his or her own money, or if State law allows, an empty or dry trust. After the seed trust is established, the legally competent disabled adult may transfer his or her own assets to the trust or another individual with legal authority (e.g., power of attorney) may transfer the individual’s assets into the trust.

The Draper court did not make a finding on the issue of dry trusts because, as footnote 12 to the trial court decision states: “In her reply brief Draper concedes that her trust was not a seed trust.”

A dry trust, as the term seems to be used, is simply a trust without assets. The assets in a trust are referred to by several terms, including “trust corpus,” the “res,” or trust assets.

In California, the term “dry trust refers to a trust wherein the trustees would have no actual responsibilities as such and no active duties to perform.” {In re Shaw’s Estate, (1926) 198 Cal. 352; Anderson v. Superior Court, (1983) 142 Cal.App.3d 112.} This however is not inconsistent with a trust without assets being described as a dry trust.  There is most likely nothing for the Trustee to do if there are no assets to manage. So a trust without assets may be a type of dry trust.

In The Draper Case, South Dakota Law Controls.

The law in South Dakota, concerning creation of a trust, seems to indicate that trust property is not required to establish a valid trust:

South Dakota Codified Laws 55-1-4. Creation of Express Trust–words or Acts of Trustor.

Subject to the provisions of § 43-10-4 concerning express trusts in relation to real property an express trust is created as to the trustor and beneficiary by any words or acts of the trustor indicating with reasonable certainty:

(1) An intention on the part of the trustor to create a trust; and

(2) The subject, purpose, and beneficiary thereof.

But, are cases that seem to hold the opposite, for example, this quote: “Strain argues that a trust corpus is essential to the creation of a trust. While this may be accepted, it has long been recognized in South Dakota that “[a]n express trust and constructive trust are not divisions of the same fundamental concept.” {Rosebud Sioux Tribe v. Strain, (1988) 432 N.W.2d 259.}

In California, “A trust is created only if there is trust property.” {California Probate Code § 15202.}

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