The creditor protected trust at the center of this case is a special needs trust. This kind of trust is created for a disabled or elderly person that’s intended to supplement, but not supplant, government assistance programs (such as Supplemental Security Income (SSI) and SSI-related Medicaid) by creating a fund to pay for care and services not otherwise provided by public programs.
While these trusts are designed to comply with the strict federal regulations governing eligibility for government disability benefits, they’re also subject to all of the state laws any other trust is subject to in Florida. That intersection of state and federal law is at the heart of this case.
Special needs trusts are subject to the Social Security Administration’s “sole benefit” rule under POMS SI 01120.201(F). The sole benefit rule has caused concern in cases involving claims for unpaid child support because of fears that a special needs trust beneficiary could lose his government benefits if his trust funds are used to pay his child support obligations (i.e., benefit a third party); that’s what the defendant argued in the Alexander v. Harris case.
This case involved a beneficiary of a special needs trust that hadn’t paid his child support in years. His trust was established pursuant to 42 U.S.C. § 1396p with funds from the settlement of a product liability action brought on the beneficiary’s behalf after he was catastrophically injured in a car accident as a minor.
The trust beneficiary owed $91,780 in unpaid child support, and his trust contained approximately $141,997 (plus monthly annuity payments of $3,035 for the rest of the beneficiary’s life). Special needs trusts are usually spendthrift/discretionary trusts for state law purposes, which means they’re shielded from most creditor attacks. But there are exceptions.
Spendthrift clause + discretionary distribution standard = creditor protected trust:
The reason most special needs trusts are impervious to most creditor attacks is a combination of two factors: these trusts usually contain a spendthrift clause that complies with F.S. 736.0502, and/or the trust qualifies as a “discretionary trust” under F.S. 736.0504. Most well-drafted trusts have both provisions — but they don’t have to. A creditor-protected spendthrift trust doesn’t have to be a discretionary trust, and vice versa. See Restatement (Second) of Trusts § 155, comment b.
But there are certain “exceptional” creditors who can pierce these protections. Over three decades ago, in Bacardi v. White, 463 So.2d 218 (Fla. 1985), the Florida Supreme Court held on public policy grounds that under certain circumstances a Florida spendthrift/discretionary trust isn’t shielded from child-support claims or an ex-spouse’s alimony claims. This rule was codified in sections 736.0503 and 736.0504 of the Florida Trust Code, as explained in Berlinger v. Casselberry, a controversial 2d DCA case I wrote about here.
Child support claim + creditor protected trust = win for child support claimant:
Now back to the Alexander case. Here, the 2d DCA held that the special needs trust was subject to garnishment for the same reasons the trust in the Berlinger case had been subject to garnishment: the unpaid debt fell within the state-law exception favoring certain creditors (such as unpaid child support claimants). The trust beneficiary in this case argued his trust funds should nonetheless remain protected because forcing his trust to satisfy his child support obligations would result in him losing his government disability benefits.
Did this argument work? Yes at trial, no on appeal. Why the loss on appeal? Because the argument failed on its own terms. According to the 2d DCA, there’s no “legal basis” for concluding you’re going to lose your disability benefits if your special needs trust pays your child support obligations.
The father argues that using the trust’s funds to satisfy his support obligations would jeopardize his eligibility for public assistance under federal law; however, he cannot identify any legal basis for this conclusion. We can find no federal law or regulation expressly addressing the garnishment of a special needs trust to satisfy a support obligation.
Once that boogeyman was disposed of, the end result was inevitable: child support claimant wins. Anyway, here’s how the 2d DCA made it’s federal disability-law point, which should be of special interest to those of you who spend much time drafting or administering special needs trusts.
To the extent that 42 U.S.C. § 1396p discusses support payments and eligibility, subsection (c)(2)(B)(iii) states that “[a]n individual shall not be ineligible for medical assistance by reason of paragraph (1) to the extent that … the assets … were transferred to … the individual’s child.” Furthermore, federal law gives great deference to state courts in family law proceedings, and the Supreme Court has explained that “[s]tate family and family-property law must do ‘major damage’ to ‘clear and substantial’ federal interests before the Supremacy Clause will demand that state law be overridden.” Hisquierdo v. Hisquierdo, 439 U.S. 572, 581, 99 S.Ct. 802, 59 L.Ed.2d 1 (1979) (quoting United States v. Yazell, 382 U.S. 341, 352, 86 S.Ct. 500, 15 L.Ed.2d 404 (1966)). In Rose v. Rose, 481 U.S. 619, 630, 107 S.Ct. 2029, 95 L.Ed.2d 599 (1987), the Supreme Court recognized that payment of child support is in the parent’s best interest, explaining that federal “benefits are not provided to support [the beneficiary] alone.” There is no indication in the federal statutes that Congress has expressed any intention to preempt state statutes, like section 736.0503, that permit garnishment of spendthrift trusts to satisfy the child support obligations of the beneficiary. Id. at 628, 107 S.Ct. 2029 (“Given the traditional authority of state courts over the issue of child support, their unparalleled familiarity with local economic factors affecting divorced parents and children, and their experience in applying state statutes … that do contain detailed support guidelines and established procedures for allocating resources following divorce, we conclude that Congress would surely have been more explicit had it intended the Administrator’s apportionment power to displace a state court’s power to enforce an order of child support.”).
Can you shop around for stronger creditor protection laws? YES
If you’re a planner with a client looking for better asset-protection than Florida law provides, you may want to consider moving your trust to one of the states vying for this kind of business, such as Nevada or South Dakota. That kind of planning was discussed at length in Bacardi on the Rocks, a Florida Bar Journal article reacting to the Berlinger case. And just recently, in a case written about in California Child Support Order Not Enforced Against South Dakota Trust In Cleopatra, the South Dakota Supreme Court refused to enforce a California child support judgment against a South Dakota Trust.
Putting planning issues aside, what does this case tell us about litigating these kinds of claims?
If you’re prosecuting a claim for unpaid child support, your focus should be on Florida state law and the special treatment afforded to these kinds of claims vis-à-vis otherwise creditor protected trusts. As for the state-law issues, this case and the Berlinger case tell you everything you need to know.
If you’re defending one of these cases, you need to play defense on two fronts: state trust law and federal disability law. As for the federal disability law issues, you have the 2d DCA’s analysis in this case in support of a no-forfeiture result. For another analytical approach that reaches the same conclusion you’ll want to read Thoughts on Supporting Healthy Dependents Using Funds From a Disabled Parent’s or Spouse’s Special Needs Trust, by Florida special needs trust guru David Lillesand. In David’s opinion the Social Security Administration is unlikely to contest this kind of trust distribution both as a matter of law and public policy. Here’s an excerpt:
There is no federal regulation or even an SSI POMS provision that addresses the use of d4A Special Needs Trust funds to pay items of support of the disabled person’s spouse or children. The published “rules” neither allow, nor disallow, such payments. Public policy and state non-support criminal statutes, however, would indicate that withholding support for spouses or children would violate the law. The Social Security Administration has indicated that payment of taxes, administration costs of the trust, and attorney’s fees do not violate the sole benefit rule. Because d4A Special Needs Trusts are self-settled trusts not safe from the claims of legitimate creditors, it would seem not only right, but proper, that trust funds be used to support the disabled person’s legal dependents.