Lawyers can set up special needs trusts for the benefit of disabled and elderly persons. Assets in such a trust do not count against the beneficiary’s assets in qualifying for Medicaid.
A lawyer in Massachusetts organized a pooled-asset trust to combine the assets of more than 300 such trusts. He was the president, treasurer, executive director and day-to-day manager of the organization, and ran it out of his law office. He took a salary from the pooled-asset trust based on its growth in excess revenues, and that salary eventually reached $70,000.
The lawyer then sought a declaration from the federal district court in the District of Columbia that his organization qualified for 501(c)(3) tax-exempt status. This fall, the court denied the application, finding that the primary purpose of the organization was to operate a private commercial business, and that the salary paid to the lawyer amounted to prohibited private inurement.
What This Case Teaches:
Two things. First, in order for an organization to qualify as a 501(c)(3) charitable organization, it needs contributions or grants. In this case, the lawyer’s organization did not attempt to raise money through contributions or grants, but relied instead on a sliding scale of fees. This suggested to the court that the organization wasn’t trying to act as a charitable organization at all.
Second, an organization should have a salary-comparability study in hand to avoid disqualification for private inurement from alleged excessive salaries. This pooled-asset trust did not and consequently could not qualify as a tax-exempt organization. The $70,000 may or may not be a reasonable amount to pay a lawyer, but the organization had no study and also did not need a lawyer to run it.
Editor’s Note: SGR’s Kristen Lewis has written and lectured extensively on special-needs trusts, including pooled-asset trusts. See from the editor, “Special Needs Trusts,” *Probate & Property, May/June 2003, pp. 11-14, available [here](http://americanbar.org/newsletter/publications/gp_solo_magazine_home/gp_solo_magazine_index/specialneedstrust.html)+ and “Top 15 Tips For Estate Planners When Planning for Special Needs,” Probate & Property, March/April 2010, pp. 38-42, available [here](http://americanbar.org/content/dam/aba/publications/probate_property_magazine/v24/02/2010_aba_rpte_pp_v24_2_mar_apr_barr_davis_lewis.authcheckdam.pdf)+.*