Special Needs Trusts & The Importance of Vetting Third-Party Providers

Medicaid planning can be complicated. So, in order to best serve their clients, elder law attorneys have to stay abreast of legislative and regulatory developments, keep an eye on rogue case workers, monitor developing case law, and work diligently to corral personal, financial, and medical information. Adding complication to this line of work, oftentimes elder law attorneys must rely on third parties to implement part of the Medicaid plan they designed.

In this piece, we will review a pending class action lawsuit involving a special needs trust (SNT) provider. This case highlights how, now more than ever, elder law attorneys should exercise caution when choosing third-party providers to implement aspects of their clients’ Medicaid plans. By carefully vetting third-party providers, elder law attorneys can help avoid complications for themselves and their clients.

Read More: 5 Things to Know About Special Needs Trusts

The class action case referenced above comes to us from the United States District Court for the Middle District of Florida. From the outset, we acknowledge that the facts contained in the complaint are allegations and have not been established by a factfinder.  However, the introduction section of the complaint sets the tone:

This tragic case involves a decade-long predatory scheme that began in 2009 and continued at least through 2020 to misappropriate over $100,000,000.00 of special needs trust assets belonging to the most vulnerable members of our society.

While this one sentence is enough to shake even the most seasoned practitioner, concern caused by the totality of circumstances surrounding this case could register on the Richter scale. A full recitation of the facts can be found in the class action complaint with further details available through a review of the bankruptcy filings (M.D. Fl. Case No. 8:24-bk-676-RCT), but a brief summary is useful here:

• Plaintiffs are a class of parents, legal guardians, and grantors of court-approved pooled special needs trusts established and administered by The Center for Special Needs Trust Administration (the “Center”).
• The Center operates as trustee and administrator of over 2,000 special needs trusts across the United States and is organized as a 501(c)(3).
• Defendants are a series of individuals and entities alleged to have misappropriated funds from the trust and/or otherwise engaged in civil wrongdoing through a series of poorly documented transactions. Defendants are alleged to have misappropriated $100,000,000.00 from funds for which the Center was trustee “in order to facilitate insider loans.”
• The facts alleged depict a tangled web of entities, beneficial ownership interests, loans made from trust funds, and placement of key individuals with such beneficial ownership interests in positions of control and influence related to the Center’s operations and finances.
• The Center filed for Bankruptcy on February 9, 2024. Many of the details relied upon in the class action complaint were revealed in the Center’s bankruptcy filing. The Center is not a party to the suit by virtue of its bankruptcy petition.
• In its bankruptcy petition, the Center claims to have first become aware of the missing $100,000,000.00 in or around April 2022, when the activity giving rise to the suit allegedly began in or around 2009.

Adding insult to injury, the Center “gave zero notice to the SNT beneficiaries of the existence” of the financial dealings between the Center and the Defendants until the bankruptcy case was filed, and ostensibly took “no reasonable action” to sue those involved with the alleged misappropriation of the trust assets despite the Center being the fund trustee.

The fact pattern set forth in the class action complaint has left many elder law attorneys irate, both individually and on behalf of their clients. And with good reason. Clients place an immense amount of trust in their attorney, particularly when that attorney was retained to create a plan for their care that accounts for their personal, financial, and medical wellbeing. A breach of trust can be, and often is, fatal to the attorney-client relationship.

The point of sharing this case is not to dissuade the use of pooled trusts but rather to highlight the importance of thoroughly vetting third parties. Just because a provider can offer a service to the client does not mean that they will perform that service well or that they are the correct provider for that particular client. Whether they be a banker, financial planner, insurance agent, or court-appointed trustee, taking the time to actively vet these third parties and communicate with the client about the vetting process can bolster the trust between attorney and client as it provides transparency and the opportunity for additional touch points.

What to Look for When Vetting a Third-Party Service Provider

When evaluating a third-party service provider, it is important to think not only as an attorney for the client but also as a business owner. Companies of all types outsource different components of their business operations, such as human resources, accounting, delivery, marketing, and more. Because each component supports the business, the business owner must evaluate not only whether the service provider can meet the business’s needs but also whether the provider can do so in a manner consistent with the owner’s expectations, including that the use of the provider does not harm the owner’s business itself or its customers.

As it applies to attorneys and law firms, vetting service providers comes with its own set of considerations, given the confidentiality obligations that attorneys carry coupled with the sensitive nature of the information that clients share with counsel. Attorneys should make sure their service providers understand these requirements. Additionally, to the extent the provider is exposed to or utilizes client information (e.g., practice-management software), attorneys must verify the provider is capable of protecting that information consistent with those obligations (and any other legal requirements).

Attorneys have many resources they can utilize when vetting third-party service providers. Many trade organizations have compilations of resources and listings for vendors and other third-party providers, such as investigators, financial services professionals, legal software providers, and expert witnesses. Additionally, if the third-party provider is a financial institution, attorneys can look to the major rating services such as A.M. Best, Moody’s, and the like for publicly available information. Consumer reports are also a good resource when it comes to vetting institutional providers.

Attorneys should also review a potential service provider’s online presence. This includes reading available news articles, checking the provider’s website to determine if it contains plainly incorrect or out-of-date information, and reviewing court dockets to see whether the provider is facing any disputes brought by similarly situated parties. These steps can help fill in gaps left open in reviewing other vetting material.

As a parting note, nothing in this piece is intended to suggest that any individual, attorney, or group that worked with the Center and/or any of the defendants in the case referenced above failed to do their due diligence or made a mistake. Appearances seemed to indicate that the Center was a large national provider with the capability and know-how to provide trustee and trust administration services. Moreover, the transactions and activities giving rise to these allegations were internal to the organization and not readily discoverable.

However, the point stands: exercise caution when selecting third-party service providers.