The growing need for third-party special needs trust reform.

Author:McCoy, Katherine B.

"The word 'autism' still conveys a fixed and dreadful meaning to most people--they visualize a child mute, rocking, screaming, inaccessible, cut off from human contact. And we almost always speak of autistic children, never of autistic adults, as if such children never grew up, or were somehow mysteriously spirited off the planet, out of society."

--Oliver Sacks *

CONTENTS INTRODUCTION I. SPECIAL NEEDS TRUSTS A. Definition B. Legislative History 1. Self-Settled Special Needs Trusts 2. Pooled Special Needs Trusts 3. Third-Party Special Needs Trusts II. THE PROBLEM OF MAINTAINING MEDICAID ELIGIBILITY A. Beneficiary Access B. Trustee Has Absolute Discretion 1. Trustee Power and Duties 2. Choice of Trustee C. Use of Funds D. Effects of the Uniform Trust Code III. POLICY A. Government Versus Family Interests B. Scientific Evidence of Rise in Diagnosis of Autism-Spectrum Disorders IV. SOLUTION CONCLUSION INTRODUCTION

On July 8, 2011, emergency room nurses at a hospital in Fort Lauderdale, Florida, found a ten-year-old boy named Benjamin wandering around by himself in the hospital. After trying and failing to find his parents, they called the police. Security footage showed a man in a minivan dropping the boy off at the hospital and leaving. The subsequent investigation revealed that the boy's mother had intentionally abandoned him. She said she was "overwhelmed." She had just lost her job and gotten divorced. Her house was being foreclosed on, and she had two other children to care for. Even though she had "tried everything [she] could" to raise her son, she simply "could not handle" his behavioral and medical issues. (1)

In any normal case, this woman's actions would be appalling. But here, even the police seemed to be on her side. They had no intention of prosecuting her or Benjamin's father. "They're not bad parents," the police department reported. "We're talking about parents who tried everything else and got desperate...." (2) Why were the police so seemingly unconcerned about this case of child abandonment? The answer is simple: because Benjamin is autistic. The police turned the boy over to Florida's Department of Children and Families so that he could be placed in a foster home with experience caring for children with special needs.

In April 2013, a couple from Ottawa, Canada, made the "painful decision" to leave their son Philippe at a social services agency because they "could no longer handle him." (3) They said that their decision was "an act of desperation fuelled by 10 years of frustration." (4) Nonetheless, they felt comfortable giving up their child. "I am so sure about what we're doing," (5) the father said. A camera crew accompanied the mother as she arrived at the agency's office to drop off her son. The agency fully supported the parents' decision. Philippe--who is also autistic--became one of 393 people with developmental disabilities waiting for a place in a group home in Ottawa. (6)

Parents of disabled children face insurmountable hurdles when attempting what should be simple tasks. They may feel powerless to make their children eat, go to sleep, or even stop hurting themselves. In certain situations, the children require constant care and frequent, expensive medical attention. Some parents are overwhelmed by the continuous work and stress, and some in society accept their decisions to give their children up. Others sincerely want to keep caring for their children but require government assistance to do so. In the United States, the very systems designed to help these parents, Social Security and Medicaid, instead present a whole set of new legal problems. This is especially true for parents who want to leave money for the care of their special needs child after they are gone. One of the difficulties they face is creating a trust for a disabled child without the trust's assets being considered "available" to the beneficiary and depriving him or her of Medicaid and Social Security benefits.

Part I of this Note explains the origins and use of special needs trusts and differentiates between the three types: self-settled, pooled, and third-party special needs trusts. Part II addresses the requirements placed on these trusts by government benefit programs, including lack of beneficiary access, absolute trustee discretion, and limited use of funds. Part II also describes the challenges these restrictions create for attorneys and the additional issues presented by the adoption of the Uniform Trust Code. Part III describes the often conflicting interests of government assistance programs and the families of disabled children, and suggests that recent rises in the diagnosis rate of autism spectrum disorders makes the resolution of this conflict even more pressing. Finally, Part IV discusses why some proposed solutions would not solve the issues faced by third-party special needs trusts. It suggests that the best resolution would involve redrafting Social Security and Medicaid regulations to carve out new exceptions for third-party special needs trusts.


    1. Definition

      Trusts are legal instruments under which assets are held in the trust's name, managed by a trustee, and distributed for the benefit of a beneficiary. (7) The beneficiary does not own the trust assets, but has an equitable right to derive benefits from them. (8) Consequently, trusts are often used to shield assets from government scrutiny. (9) Special needs trusts are a subset of trusts designed to allow a disabled beneficiary to maintain eligibility for public benefits that cover basic needs, while also receiving resources from his or her family that provide a higher quality of life. (10) Special needs trusts must be established by a parent, grandparent, legal guardian, or court for the sole benefit of a disabled individual under the age of sixty-five. (11) Because many disabled individuals cannot work, they have limited resources and are usually dependent upon their families, the government, or a combination of the two. (12)

    2. Legislative History

      In the past, due to the strict income-limiting eligibility standards of government assistance programs, families of disabled individuals were often unable to provide support for them without making them ineligible for public benefits. Instead, they would have to choose between retaining eligibility for public assistance, knowing that their loved one would receive only the essentials, or losing government aid and attempting to provide for the disabled individual entirely on their own. Alternatively, they could make the risky choice to disinherit the person and leave the money with another family member in the hopes that he or she would use it for the disabled person's benefit. (13) Then, they discovered a third option: special needs trusts. Eventually, the creative use of these trusts to conceal money from Medicaid consideration became common practice. (14)

      Congress viewed these trusts as a form of Medicaid abuse and manipulation, (15) calling them "the single most offensive Medicaid estate planning vehicle." (16) ft attempted to limit the use of special needs trusts by promulgating a regulation that stated that all trust assets should be considered available to the beneficiary when determining Medicaid eligibility. (17) Under pressure from disability rights activists, Congress repealed the law, (18) but the problems with Medicaid manipulation by trusts persisted. State budgetary crises (19) and an unanticipated and overwhelming increase in the number of Medicaid applicants exacerbated the problem. (20)

      In 1993 Congress passed the Omnibus Budget Reconciliation Act ("OBRA '93"). (21) Under OBRA '93, Congress created a presumption of "availability" for trust funds; if someone received a personal injury or medical malpractice award and tried to protect that money by placing it in a special needs trust, the funds would be counted as "available" income for determining eligibility for government aid. (22) Although OBRA '93 effectively ended the ability of public benefits recipients to be trust beneficiaries, it appeased disability advocates by codifying two types of special needs trusts as exceptions to the rule: self-settled trusts and pooled trusts. (23) Through these special needs trusts, relatives of the disabled beneficiary could now supplement basic needs with simple comforts without risking the loss of government assistance. (24) Congress believed it had finally found a solution that could please everyone.

      1. Self-Settled Special Needs Trusts

        The first exception to the "available" trust funds presumption is self-settled trusts, also called (d)(4)(A) trusts because they are defined in 42 U.S.C. [section] 1396p(d)(4)(A). (25) Self-settled trusts must be funded with the assets of a disabled individual under the age of sixty-five. To be considered "disabled," the individual "must be unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months." (26) The trust must also be established by someone other than the disabled individual, such as a parent, grandparent, or legal guardian, for the sole benefit of the disabled individual. (27) Finally, it must contain a "payback" provision, stating that all funds left in the trust after the disabled beneficiary dies will be used to repay the state Medicaid agency for the assistance it provided. (28)

      2. Pooled Special Needs Trusts

        The second exception is the pooled, or (d)(4)(C), trust. (29) Pooled trusts are managed by nonprofit associations, which maintain separate accounts for each disabled beneficiary but pool the funds for investment purposes. (30) Unlike regular self-settled trusts, pooled trusts can be established by the disabled beneficiary him or herself, or by a parent, grandparent, or legal guardian. (31) Lastly...

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