A federal district court rules that the Social Security Administration’s Appeals Council did not have good cause to question an administrative law judge’s finding that a Supplemental Security Income (SSI) beneficiary had no vested interest in a trust that was distilled into a third-party special needs trust. W.N. Kleinert v. Commissioner of Social Security (N.D.Cal., No. 15-cv-06111 NC, July 8, 2016).

W.N. Kleinert has received SSI since 1978.  Mr. Kleinert’s mother, Alice Kleinert, established a trust for herself in 1998.  The trustees were required to distribute the trust to several beneficiaries, including Mr. Kleinert, following Ms. Kleinert’s death, but only after the payment of final expenses, funeral costs and taxes.  Ms. Kleinert died in 2011 and, before the expenses were paid, the trustee petitioned a California court to modify Ms. Kleinert’s trust to distribute Mr. Kleinert’s share to a third-party special needs trust. 

After the new special needs trust was funded, the Social Security Administration (SSA) informed Mr. Kleinert that the trust was a countable resource because it did not contain Medicaid payback language.  Mr. Kleinert appealed the SSA’s determination, and an administrative law judge (ALJ) ruled in his favor, finding that Mr. Kleinert’s share of his mother’s trust had not vested when the trust was modified.  Since the share was not vested, Mr. Kleinert’s new special needs trust was not required to contain the payback language.  The Appeals Council reversed the ALJ’s decision, finding that under California law, the inheritance vested as soon as Ms. Kleinert died.  Mr. Kleinert appealed, claiming that the Appeals Council lacked good cause to reopen the ALJ’s decision, since it was based on a reasonable difference between trust law and estate law.

The U.S. District Court for the Northern District of California reverses the Appeals Council.  The court finds that “California courts have held that legal title to a trust interest passes to the beneficiary only upon termination of the trust, the timing of which may or may not be upon the death of the settlor but must be determined by the trust language . . . Alice’s Trust directed the trustee to distribute the trust after the payment of certain death-related expenses, and there is no evidence in the record showing that these payments were completed.”

For the full text of this decision, click here.