Court Case Highlights Need For Special Needs Trust Funding

Last month, the Arkansas Supreme Court reversed the decision of a local Circuit Court which denied the request of a disabled party, James S. Corn, to establish a Special-Needs Trust on his behalf. James S. Corn, who is in his 50s, became disabled, suffering from memory loss. He receives both SSI and Medicaid.

His partner died leaving an inheritance to him in a third party special needs trust. However, she also left him as the beneficiary of her life insurance policies and bank accounts. These assets were worth approximately $260,000 which exceed the $2,000 asset cap for an individual who is receiving SSI and Medicaid. In order to cure this defect, Mr. Corn sought to establish a first party (self-settled) special needs trust in the Circuit Court.

The lower court denied Corn’s application, citing that it was against public policy to be able to shelter assets to maintain benefits that others have to pay through their tax dollars. The higher court reversed this decision citing the criteria needed to establish a self-settled special needs trust. Moreover, it held that States that participate in the Medicaid program must follow the federal regulations that come with the program. As special needs trusts are recognized by the federal regulations, Mr. Corn is allowed to establish a self-settled special needs trust on his behalf.

The decision is significant in that it reinforces the right for individuals to maintain their needs-based public benefits through the establishment of special needs trusts. However, the critical point that many commentators are missing is that the first party trust should have been unnecessary. Corn’s partner had set up a valid special needs trust in her estate plan. The problem, like with so many other situations that occur, is that attorneys and clients approach planning from a document approach, and fail to see the interrelationship between non-probate assets and trusts.

The solution in this matter should have been simple. When Corn’s partner set up her estate plan, she should have changed the beneficiaries on her life insurance policies and bank accounts so that those assets would pour into the third party trust automatically. Thus, it is imperative for clients and planners alike to recognize the need to position all assets – probate or otherwise – so that they flow in a manner consistent with the intention of the related wills and trusts.

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