Draper v. Colvin, Part-5 – Parent-Established First-Party Special Needs Trust – Analysis.

December 1, 2015 - 5 minutes read

Did Draper’s parents properly establish the Parent-Established First-Party Special Needs Trust for their daughter?  The appellate court commented that “[a]dmittedly, some evidence in the record supports Draper’s claim that her parents intended to act in their individual capacities [as opposed to acting as agents under a power of attorney].” {Draper v. Colvin, (2015) 779 F.3d 556, 564.} But the court rejects their arguments, showing how those facts did not result in a valid special needs trust, at least in this case.  

Two of The More Convincing Arguments Tending to Show that Draper’s Parent-Established Special Needs Trust is Valid.

Here are at least two of the arguments raised by Draper that seem at least facially convincing:

1. The “durable power of attorney did not grant her parents the ability to establish a trust.” Instead, it granted Draper’s parents the power “to fund, transfer assets to, and to instruct and advise the trustee of any trust wherein [Stephany Draper is] or may be the trustor or beneficiary…”

2. The “trust agreement does not reference the durable power of attorney agreement.”

Is Funding a Parent-Established First-Party Special Needs Trust Tantamount to Establishing?

The court found that language in the power of attorney, authorizing the parents to fund the trust, was language authorizing them to establish the trust for their daughter. Even the POMS, with its two-step seed money trust, on which the court relies, draws a distinction between establishing and funding. How could this be?

There seems to be at least one way to find that the power to fund is tantamount to the power to establish. But this could only occur in a state where dry trusts are prohibited. As pointed out in an earlier post, California is such a state.

The Implications of a Dry First-Party Special Needs Trust Established in California.

In that earlier post, it was pointed out that under California law, a “dry trust” is not a valid trust. In California then, a trust document, executed by the settlor would not be a valid trust, even though it had a settlor, trustee, beneficiary, and proper trust purpose until it was funded. Once assets are placed into the trust, it springs to life.

So, if the Drapers had executed a dry trust in California. Lacking assets, there is no actual trust. Then, pursuant to the power of attorney, they transfer their daughter’s assets into the trust. By doing so, the trust springs to life. One can clearly see that in this case, the parents agency power under the power of attorney was in fact the power to establish the trust, because the trust was only established upon funding the trust.

The Draper Court Must Have Found “Established” and “Funding” Occurred at the Same Time, Not in Two Steps, Violating the POMS Two-Step Rule.

The facts cited by both the trial court and appellate court seem to be based on this theory, without explicitly stating it:

The appellate court records the following: “the trust listed as its funding source only ‘the proceeds of the settlement of a liability claim,’ referring to the money Draper received in the personal-injury settlement . .. [t]he trust was funded with the $429,259.41 sum in a single deposit on the same day that her parents executed the trust agreement.” {Draper v. Colvin, (2015) 779 F.3d 556, 558.}

If the parents deposited the proceeds of the personal-injury settlement pursuant to the power of attorney, then arguably, the trust was in fact established by the parents as agents. This seems to be the case particularly since the court noted the concession that the trust established by the parents was not a dry trust (rendering a determination of South Dakota law, on the point of dry trusts, moot).

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