SPECIAL NEEDS TRUST

November 4, 2020

John Doe was a laborer since age eighteen, but when he was thirty, he was severely injured and became paralyzed. John didn’t have health insurance at the time of his accident, and the hospital applied for Medicaid on his behalf after getting injured. He qualified for Medicaid, since he had no real assets and no longer had an income. His family applied for Social Security Disability since he had worked enough quarters to be insured. John’s personal injury lawyer has settled the case for $1,000,000, which will help him pay for everything he now needs, but it is far less than what is needed to pay for all his future medical care. The question now is what to do with the settlement?

For more information, read this excerpt from Synergy’s CEO, Jason D. Lazarus‘ book ‘The Art of Settlement’:

October 8, 2020

ABLE accounts, named for the Achieving a Better Life Experience Act, have been around since 2014 but remain underutilized across the country despite offering a way for people with disabilities and public benefits to save money without jeopardizing their public benefits eligibility. [1]  The reasons why are likely a combination of the limitations that apply to ABLE accounts and a lack of awareness, but for those who qualify and understand how to use them, ABLE accounts can make a world of difference.

Public Benefits

Before delving into the intricacies of ABLE accounts and how they can help your client, you should first understand the problem they were created to solve. Those with means-tested benefits, such as Supplemental Security Income (SSI), Medicaid, housing benefits, or Supplemental Nutrition Assistance Program (SNAP) benefits, must keep their income and resources below a certain threshold (usually around $2,000) or risk losing their benefits. [2]  This threshold varies by program and by state, so it is important to understand exactly which benefits a client has. There are many assets which are exempt (not counted), such as a home, vehicle, and household effects; but a personal injury recovery, while not taxable, is countable by nearly every public benefit program (the exception is assistance provided by the Department of Housing and Urban Development (HUD)). If you write a check to your client for their net recovery and they have one of the benefits above, they will have an obligation to report it to the agency which oversees their benefit and will likely lose the benefit until they spend the money or deposit the funds in a special needs trust or an ABLE account. [3]

The list above includes the common means-tested benefits, but this is not an exhaustive list. There are also entitlement benefits which are not means-tested; therefore, they are not affected by income or assets. Social Security Disability (SSDI) and Medicare are the most common, but some forms of Medicaid are not means-tested. Many clients do not fully understand which benefits they have, so the best practice is to get copies of their award letters. Sometimes you can make an educated guess based on the amount they receive—SSI pays a maximum of $783 in 2020, so if the client is receiving $1,200, then they do not have SSI. If they are receiving $700, it could be either SSI or SSDI. The only way to know for sure is to review the award letter.

ABLE Accounts

The Achieving a Better Life Experience Act is a federal law allowing individuals who are disabled to create a tax-advantaged savings account which is exempt from being a countable asset by the major public benefits programs. This allows them to save and invest or spend funds on “qualified disability expenses” (QDE). QDEs are broadly defined to include virtually anything used to support the health and wellness of the account holder.

The Bad News

ABLE accounts are only available to people whose onset of disability occurred prior to turning age 26. The client does not need to have been diagnosed before age 26, but they must be able to certify that their condition presented before that age. This limitation was likely imposed by Congress to limit the number of people who could take advantage of the tax savings. The fact that ABLE accounts have not been utilized as expected, coupled with the many reasons a person can become disabled at any age, has spurred several attempts to raise the age to 46 through the ABLE Age Adjustment Act, but as of the time of this post no changes have been made in that regard.

The other limitation, and the reason ABLE accounts are not the go-to solution for personal injury recoveries, is that only $15,000 can be contributed per calendar year and only one account can be created. An account holder who is working can contribute an additional $12,140 (more in some states) in earnings. This additional amount will grow tax-free but is not sheltered for public benefit purposes. The account balance can continue to grow year after year, up to a maximum set by the state (most are $270,000). If the person has SSI, the account balance must stay under $100,000 or the excess will be counted as income.

The Good News

There are many benefits to having an ABLE account. A big one is the tax advantage. The funds are invested (some offer different portfolio options to choose from) and grow tax-free. Distributions are also tax-free so long as the funds are used on QDEs.

How is this different from a Special Needs Trust?

The exemption from income and asset-counting rules is similar to a special needs trust (SNT) but with two big differences. One difference is that ABLE accounts have fewer restrictions. SNTs are meant to supplement, not replace, public benefit programs. For this reason, SNTs cannot disburse funds for things that are provided by other benefits. For example, if someone has SSI and their SNT disburses funds for food or shelter expenses, the individual’s SSI check will be reduced by up to a third. This is because SSI is meant to provide funds for food and shelter expenses (which includes rent), so the trust would be “replacing” that benefit by expending funds for that purpose. ABLE accounts, because they can be used on qualified disability expenses, can be used for food and shelter expenses. This is an area where SNTs and ABLE accounts can work together. A common workaround is to fund the SNT with the full amount of the net recovery and ask the trustee to disburse funds into the ABLE account each month so the beneficiary can pay for rent, groceries, and utilities. This allows the client to use their settlement recovery for all their needs and protect their benefits.

The other way in which an SNT is different from an ABLE account is that an SNT is a legal document, so it must be drafted by an attorney and distribution decisions will be made by a trustee. An SNT beneficiary cannot compel or have control over the distributions (this lack of control is why the trust is not a countable resource). ABLE accounts, in contrast, are controlled by the client or their representative and require no attorney assistance. All one needs to do is find an ABLE account provider which accepts people in their state.[4] Most have options to sign up online, which can be done in minutes. Further, all decisions about what gets paid are made by the account holder.

The funds can generally be accessed by paper check, electronic transfer, or by using a prepaid card which is linked to the account. The client could even transfer funds to their own personal bank account, but they need to be careful about doing this. If they keep the money into the next calendar month, it will become a countable asset. There are tax consequences for not following the rules, and there could be negative consequences to the client’s benefits (although this has yet to be reported). While there is much to be said for the independence of getting to decide how the money is spent, this should not be offered to clients who are likely to abuse or misunderstand it.

One of the biggest complaints about SNTs is the beneficiary’s lack of control. Since the trustee is charged with making disbursements according to the trust’s terms and the client’s best interest, there is room for disagreement between the trustee and the beneficiary. This can be very frustrating for a beneficiary, having just completed years of litigation, who has strong feelings about what they want and need. If the client is likely to butt heads with the trustee, one strategy is to front-load an ABLE account with $15,000 before funding the SNT. The client can use the SNT for most of their needs but will have the ABLE account to use for things the trustee might deny. Some trustees are open to further funding an ABLE account year after year without asking what the funds will be used for, while others apply the same standards as they would apply to any trust disbursement. This is still a grey area in the trust administration world, so it is up to the trustee to determine what happens to funds in the SNT once the deposit is made.

Instead of using an SNT, could I set up a structure to pay $15,000 per year into an ABLE account?

The answer, unfortunately, is unclear. There are no rules or regulations either allowing or prohibiting ABLE accounts from being funded this way. You could set up a structure to pay to the ABLE account, but the risk would be that either it would be prohibited by a later regulation or that the Social Security Administration or another benefit program would decide to make the contribution a countable resource. These scenarios do not seem likely, but they are possible.

Even if it was explicitly permissible, there are some risks that come with funding this way. One is that the $15,000 threshold could be changed, while the annuity would be virtually set in stone. If the maximum contribution went to $14,000 and a $15,000 check arrived, the ABLE provider would deny it, which would create a headache for the client and the life company. Further, if the client was going to save the money long-term, they would need to make sure they did not reach the maximum threshold. A more likely risk would be that the client might deposit their own money (maybe an unexpected gift, for example). Since the ABLE account cannot accept a penny more than $15,000, if a check that arrived would cause the account to exceed this amount, again, they would deny it.

All of that being said, using a structured settlement to fund an ABLE is still a viable planning option.  To have certainty, you would want to fund through a stand-alone or pooled special needs trust.  That way the trustee can move $15,000 annually into an ABLE account.  It also provides the necessary flexibility in case the maximum contribution goes up or down, the trustee would have the ability to contribute less or more with the balance of the structured settlement payment remaining in the SNT.

What happens to remaining funds when the client dies?

The answer to this question depends on the state. Initially, ABLE accounts were treated like SNTs in this regard: when the client died, Medicaid had a right to be reimbursed for services provided (not including those paid at settlement). A growing number of states have changed this and now disburse funds to the client’s estate. Medicaid Estate Recovery will still apply, but instead of money automatically going to Medicaid, statutory protections can be invoked which prevent estate recovery in certain circumstances.

Conclusion

ABLE accounts are still worthwhile for clients who qualify, and they can certainly be part of a well-rounded settlement plan. It is unfortunate that unless the recovery is very small, ABLE accounts cannot be the entire solution. There are some rules to follow and limitations to be mindful of, but the ability to save beyond the income and asset limits while having control over the money cannot be underestimated.

 

 

[1] https://www.cnbc.com/2019/08/24/theres-a-game-changing-way-for-the-disabled-to-save-but-few-use-it.html

[2] Linked here are the rules and exemptions for the major benefit programs: SSI, HUD, and SNAP. For Medicaid exemptions, see your local Medicaid eligibility manual, many of which can be found here.

[3] It is important to note that funds should be used to purchase services or exempt assets so as not to cause ineligibility in a different way. Any purchases need to be at fair market value, which means the money cannot be given away without triggering a transfer penalty.

[4] A list of ABLE account providers can be found here. One to make note of is STABLE, which is based in Ohio, but accepts account holders in every state.

April 9, 2020

By: Evelynn Passino

One of the many practice points rarely taught in law school: your client may lose public benefits as a result of a recovery, and you have a duty, as their attorney, to discuss benefit preservation with them. That does not mean you have a duty to actually preserve their eligibility–a competent adult can very well choose to not keep their benefits—but you must make sure they understand their options. Failing to discuss with your client how he or she can maintain their benefits may be grounds for malpractice. This article will provide relevant case law, an overview of the major government benefit programs, protection mechanisms, and best practices for ensuring that the attorney’s duty is met while protecting the client.

Case Law: Grillo & Glorioso

There are now many legal malpractice cases in which attorneys failed to properly advise their clients, but two cases which clearly illustrate this duty are Grillo v. Petiete et al., 96-145090-92 (96th Dist. Ct., Tarrant Cty., Texas) and French v. Glorioso, 94 S.W.3d 739 (Tex. App. 2002). Grillo involved a birth injury resulting in severe brain damage. The attorneys refused a structured settlement in favor of a lump sum of $2.5 million, which was then placed into a court registry. Because there was no structure, she was taxed on the interest earned. Not only did this result in substantially less money for Christina Grillo’s care, she lost Medicare and Medicaid eligibility because a special needs trust was not utilized, leaving her family with the burden of paying for care. Due to her serious medical needs, the funds were exhausted within a few years. The attorneys and guardian ad litem were ultimately liable in the malpractice cases for over $4 million in damages.

In Glorioso, the personal injury victim’s recovery was placed in her attorney’s trust account, where it remained for over a year. While she was not Medicaid-eligible at the time of her injury, she became eligible prior to the case being settled. The personal injury victim eventually lost Medicaid and subsequently filed suit against her attorney for failing to advise her that the funds needed to be in a special needs trust to protect her eligibility. The attorney was able to prove that he had advised her that she would need to establish an SNT to protect her benefits both at mediation and before, and that she had declined. Ultimately, he was not liable for malpractice.

Public Benefit Programs

Government benefits are often compared to a tangled web or alphabet soup, and for good reason. There are a number of programs available, many interact or intersect, and most of them are known by similar acronyms. The first thing to understand is that government benefits generally fall into two types: means-tested (or needs-based) and entitlement. Means-tested benefits require the client to qualify financially, while entitlement benefits are not in any way related to income or assets.

Supplemental Security Income (SSI)

SSI is a means-tested benefit administered by the Social Security Administration, although some states add a supplement. In 2020, SSI is a monthly cash payment of up to $783 for an individual or $1,175 for a married couple. SSI is intended to provide basic support (food and shelter) for people with both financial and medical needs. In many states, receiving SSI automatically qualifies someone for Medicaid coverage in their state.

To qualify for SSI, the person must be a US citizen or non-citizen who meets certain requirements, have limited countable income and resources (less than $2,000 for an individual or $3,000 for a couple), and be one of the following: 65 or older, blind, or disabled. Assume any income or assets are countable unless the program provides an exemption. A person’s primary home and one vehicle are both considered exempt resources. The items in a person’s home are, generally, exempt resources, although there are exceptions for items held solely for their value. For example, a diamond ring that is worn from time to time is exempt, while a diamond or gold that is held as an investment is not.

The recovery from a lawsuit, unfortunately, is not an exempt resource. Any funds given to your client are going to count as income in the first month and as a resource in subsequent months. As illustrated in Glorioso, funds held in an attorney’s trust account can become a countable resource which underscores the necessity to plan early. SSI recipients are sometimes tempted to forego SSI; however, if they also have Medicaid, they must understand both can be lost as most states provide Medicaid coverage automatically with SSI. Preserving SSI eligibility may be important for this reason alone.

Social Security Disability Insurance (SSDI)

SSDI is also administered by the Social Security Administration but is an entitlement benefit. SSDI is a monthly payment that on average provides $1,258 per month. To qualify for SSDI, an individual must be disabled and have enough recent work credits (varies based on the age of the person). After 24 months of SSDI, an individual automatically qualifies for Medicare benefits. There are no financial qualifications for SSDI, so a settlement would have no impact on this benefit.

How to Tell the Difference between SSI & SSDI

The safest option is to request the award letter, but there are a few ways in which SSI and SSDI vary. First, SSI is means-tested while SSDI is not. Second, SSI is always going to be below $783 (unless your state supplements SSI) while SSDI is usually (but not always) over $1,000. Third, qualifying for SSI requires no recent work history while SSDI does. While this is not true 100% of the time, usually SSI is paired with Medicaid and SSDI is paired with Medicare.

Medicaid

Medicaid is health insurance funded by state and federal governments and administered by state agencies. For that reason, Medicaid programs vary across the board, both in terms of offerings and qualifications. Generally, Medicaid is means-tested, although there are some programs which are not. The qualifications are similar to SSI in that there are both financial and medical criteria, such as being pregnant, disabled, or 65 or older. Medicaid provides many benefits, but the one not covered by other government benefit programs is nursing home care. A client receiving this type of care through Medicaid typically cannot afford to lose it.

Like SSI, not all income and assets are countable but the rules are similar. Lawsuit recoveries are countable, meaning they will usually disqualify a person from Medicaid.  As stated above, in many states qualifying for SSI will result in qualification for Medicaid, but the reverse is also true: losing SSI will cause an interruption in Medicaid coverage. If Medicaid coverage is important to the client, then finding out if they have SSI and if their Medicaid is “tied to” their SSI is critical before distributing any part of their recovery to them.

Medicare

Medicare is a federal health insurance program administered by the Centers for Medicare & Medicaid Services (CMS) and is an entitlement benefit. To qualify for Medicare, an individual must be age 65 or older, have End Stage Renal Disease, or be disabled. There are no financial qualifications for Medicare, so it will not be impacted by funds received from a settlement.

There are 4 “parts” to Medicare. Part A covers inpatient care, such as hospital stays and limited skilled nursing care. Part B covers outpatient care, such as doctor’s visits, preventive care, home health care, and durable medical equipment. Parts A and B are what is known as “traditional Medicare.” Part D covers prescriptions. Part C combines parts A and B, and sometimes part D, and is administered by private companies called Medicare Advantage plans or Medicare HMOs. These companies receive funding from the federal government and operate like traditional insurance companies with networks, co-pays, and other out-of-pocket expenses. Most also offer additional coverage, such as dental coverage and gym memberships. Medicare supplements, also known as “Medigap” policies, are policies offered by private companies to fill in the gaps of what traditional Medicare does not pay for.

Medicare Set-Asides

If your client has Medicare or will have Medicare in the next few years, it may be prudent to consider establishing a Medicare Set-Aside (MSA) account. MSAs are not currently required by law but failing to properly advise your client may be grounds for a malpractice claim.

In a nutshell, CMS interprets the Medicare Secondary Payer Act to require that Medicare’s future interests be taken into account when a plaintiff receives compensation from a personal injury settlement. CMS’ preferred method to address this issue is the establishment of an MSA. The MSA is an account set up to pay for injury-related future medicals that are Medicare-covered. Once the MSA is funded, Medicare will continue to pay for non-injury related services, and when the funds in the MSA are exhausted, Medicare resumes coverage for injury related care.

How to Tell the Difference between Medicaid & Medicare

Medicare is a federal program while Medicaid is administered by states and varies from state to state. Medicare is an entitlement benefit; Medicaid is needs-based. While Medicare offers very limited coverage for nursing home stays, Medicaid often covers 100% of the cost. A person can qualify for Medicare after being on SSDI for 2 years. Medicaid qualification in many states is tied to SSI. Finally, set-asides only apply to Medicare. There is no such thing as a Medicaid set-aside.

Section 8 / The U.S. Department of Housing & Urban Development (HUD)

HUD provides several housing programs to assist low income families, the elderly, and people with disabilities. These programs are federally funded but administered at the state level through local housing authorities. The best-known of these programs is the Section 8 voucher program.

The local housing authority determines the amount of the voucher based on the above factors and the cost of rent in the local housing market. The voucher recipient then finds a suitable dwelling for that price (if the rent is higher than the voucher, the recipient pays the excess). The recipient will likely also pay 30-40% of monthly adjusted income.

Section 8 benefits are means-tested but not in the same way as programs like SSI and Medicaid. Those programs consider all income and assets while HUD only looks at the family’s income. This includes income produced by assets, or a percentage of assets deemed as income, but not the assets themselves.

Income generally includes what one would expect it to include: wages, income from a business, interest earned on investments, periodic annuities, etc. Of note are exclusions for lump sums (inheritances, insurance payments, and settlements for personal or property losses) and reimbursement of medical expenses. The lump sum category has an exception to the exclusion, however, for payments in lieu of earnings which includes workers’ compensation (meaning these payments are income).

Just because personal injury settlements are excluded income does not mean no planning or counseling is needed. Individuals who qualify for HUD benefits almost always have other needs-based benefits, so it is important to understand the whole package.

The Supplemental Nutrition Assistance Program (SNAP)

SNAP is a means-tested benefit funded by the federal government and administered by state agencies. Qualifications for SNAP vary by state but are generally based on the family’s income and resources. Non-citizens can qualify for SNAP if they have lived in the United States for 5 years, are receiving disability-related benefits, or are under 18. Like SSI and Medicaid, there are some resources that do not count towards the family’s asset limit, such as a home and vehicle (although there are restrictions on the value of vehicle and the purpose it is used for). Recipients access this benefit through an Electronic Benefit Transfer (EBT) card which functions like a debit card for use at grocery stores. Because this benefit is means-tested, it is impacted by personal injury settlements.

Veterans’ Benefits

Benefits provided by the Veterans Administration (VA) are funded by the federal government. Some are not means-tested, such as disability-connected VA compensation (disability connected), but VA pensions, which include Aid & Attendance and Housebound benefits, are means-tested. VA healthcare benefits can also be needs-based insofar as determining whether the veteran will pay a co-pay. Like other means-tested benefits, VA pensions are impacted by lawsuit recoveries. VA pensions apply an income test and a net worth test.

For the income test, they look at annual income, so they will take the award from the settlement and divide it by 12 to calculate the reduction in monthly benefits. The reduced rate will apply for 12 months. After 12 months, the veteran’s benefits will go back to normal, assuming no other changes.

For the asset test, there is a limit of $127,061 for both the veteran and spouse. Like other benefits, the money cannot be given away to reduce assets, but there are methods of reducing net worth to qualifying levels, such as spending money on medical services or home repairs (so long as it’s for fair market value).

Clients with No Benefits

Even if a client has no benefits presently, you may still need to discuss public benefit preservation strategies with them if there is a likelihood they will be on such benefits in the future. For example, if the client is going to have Medicare, they may want to establish a Medicare Set-Aside. If the client will need to qualify for Medicaid, they may want to consider placing funds in a settlement trust that can transfer assets to a Special Needs Trust.

Public Benefit Preservation Strategies

Once you have identified the client’s benefits, the next step is helping them decide which course of action to take to preserve them. There is one option available to nearly any kind of client: spend the money down to a level where they will qualify for the desired benefits. There are certain rules and timelines that must be followed to do this effectively, so it is critical to speak with an elder law or special needs law attorney who can properly advise you. One thing they cannot do is give the money away as that is considered a transfer for less than fair market value. A few other options are listed below that apply to more narrow circumstances.

Special Needs Trust (SNT)

If the client is disabled and wants to use their money in the future, they can establish an SNT. SNTs are authorized by federal law to shelter funds in the trust from being counted by most government benefit programs. The notable exception is VA benefits. There are two kinds of SNTs: standalone and pooled.

Standalone SNT

A standalone SNT (also known as a (d)(4)(a) trust) can be created and customized for an individual. Standalone SNTs can be expensive to draft, take weeks or months to set up, and a trustee must be appointed. Private banks or trust companies often fill the role of trustee and can be very costly.

Pooled SNT

A pooled trust (also known as a (d)(4)(c) trust) is an existing trust that a person can join. It gets its name because the funds contributed by the beneficiaries are pooled for investment purposes to obtain better returns; however, each sub-account is kept separate, so no beneficiary has access to another beneficiary’s money. By contrast with standalone trusts, pooled trusts are fast to join because the bulk of the drafting is already done. Fees also tend to be lower for two reasons: 1) according to federal law, the trustee must be a non-profit organization; 2) since the trustee is administering the same trust for many people (as opposed to the same number of people who all have different trusts), the trustee can work efficiently.

There are three things to keep in mind about these types of trusts. First, any SNT must include a provision to repay the state for Medicaid services provided since the inception of the trust when the beneficiary passes away. If there are funds remaining after payback, they may go to the designated death beneficiary; however, pooled trusts have the right to retain some or all the funds. These policies vary from trust to trust. Some pooled trusts retain nothing or a small percentage, so it makes sense to shop around. Second, SNTs are “sole benefit” trusts, meaning all funds expended must be for the benefit of the beneficiary only. A beneficiary would not be able to use funds in an SNT to buy gifts for a friend or loved one. Third, there are a number of rules to follow regarding distributions. For example, if someone has SSI, the trust cannot provide funds for food or shelter without causing a reduction the person’s SSI benefit. It is important to work with a trustee who is knowledgeable about the rules in your state and one well versed in working with personal injury settlements.

More generally, the client needs to understand that while the money is still theirs, they will have no control over it. They can make requests of the trustee, but ultimately every disbursement is the trustee’s decision. SNTs are always irrevocable, so they can’t be easily undone once they are created.

ABLE Accounts

If the client has less than $15,000 and they were disabled prior to age 26, they might consider placing the funds in an ABLE account as an alternative to establishing an SNT. These accounts, created by the Achieving a Better Life Experience Act, are available nationwide. Like an SNT, funds in an ABLE account are not “countable,” but unlike an SNT, the client has full control over the account. There is a bonus for those with SSI—they can use the funds for food and shelter purposes, which they cannot do with the funds in an SNT.

ABLE accounts and SNTs are increasingly used together, especially for those with SSI. The SNT can be funded with the full recovery, and the trustee can deposit up to $15,000 per year in the ABLE account, which the client can then use to pay their rent and buy groceries.

Do Nothing

Any competent adult can choose to take their recovery and lose their means-tested benefits. They need to be properly counseled before doing so, however. They might not be thinking about what their benefits really pay for or how much it would cost to buy private health insurance. Many benefit programs have waiting lists, so once a client is disqualified, it may be for good.  Clients must understand all the ramifications and all of their options available under the law to make a truly informed decision.

Best Practices

While the world of government benefits is complicated, there is some good news. You can keep yourself safe from a malpractice lawsuit and ensure your clients are protected if you remember to READ:

  • Review your client’s benefits at intake and throughout the case.
  • Enlist experts early-on to educate you and your client. Whether it’s a local attorney who practices in this area or a company like Synergy, work with people who know these programs inside and out.
  • Award letters—get them! Every government program sends the client a letter explaining what benefit they qualified for. This is the only way to know for sure what benefits your client does or does not have.
  • Document your file regarding your client’s decision and action steps taken to educate them. This is especially important if the client is choosing to forego any of their benefit programs. It is never a bad idea to have them sign something acknowledging that you counseled them on this matter and that they declined to take an action that would preserve their benefits.  One last tip, you might want to add a sentence to your closing statement informing clients that the receipt of a settlement could jeopardize eligibility for government assistance programs.

The Special Needs Trust (SNT) is designed to protect individuals with disabilities who are receiving money through a trust. The SNT is an effective tool because it places funds and other relevant assets in the control of a trustee to make it easier for an individual with special needs to save money while avoiding any possible breaches such as spending more than the active Supplemental Security Income/Social Security Disability (SSI/SSDI) resource limit of $2,000.

Few realize that breaching a trust can lead to a recipient losing their eligibility for federal and state benefits, so it is important to work with a settlement planner from Synergy Settlement Services who understands the nuances of SNTs. In this article, we will discuss the three types of trusts associated with SNTs: the First-Party Trust, the Third-Party Supplemental Trust, and the Pooled Trust.

First-Party Trust

This trust must be filed and completed by a parent, grandparent, or the court. It cannot be filed by the special needs beneficiary although this trust is funded by the assets of the beneficiary. As long as the beneficiary is living, the funds in the trust can be utilized for their benefit. Once the beneficiary passes away, the government is reimbursed for their Medicaid costs, often referred to as a payback provision.

Third-Party Supplemental Trust

Like the First-Party Trust, a Third-Party Supplemental Trust allows a disabled beneficiary to relinquish control of their trust to an entity who may be able to more suitably manage finances for long-term success. This is a common form of SNT because the trust is permitted to hold any type of asset from the donor including a house, stocks and bonds, or alternative types of investments. This type of trust also applies to beneficiaries of life insurance policies. Arguably the most important thing to understand about this trust is that since the SNT is never placed in the beneficiary’s name, the remaining funds will be passed on to family members or a preferred charity instead of the government if the beneficiary passes away.

Pooled Trust

When utilizing the Pooled Trust, all trust money is held and distributed by a non-profit 501c3. This can help avoid conflicts of interest and ensures that all money is issued according to necessity. Like the First-Party Trust, it also includes a payback provision. Is there not enough money for a stand-alone SNT for your client? This type of trust allows beneficiaries to combine their resources in a “pool.” This makes it easier for beneficiaries to invest their money wisely. Once again, if the beneficiary dies, the remaining money is passed on to another, non-government entity. Although a portion will often be given to the non-profit trust manager.

For more information about a pooled trust or to schedule a consultation, please submit our contact request form.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

Introduction

The receipt of personal injury proceeds by someone who is disabled can cause ineligibility for means based tested government benefit programs.  Medicaid[1] and SSI[2] are two such programs.  However, there are planning devices that can be utilized to preserve eligibility for those who have become disabled due to injury. A special needs trust can be created to hold the recovery and preserve public benefits eligibility since assets held within a special needs trust are not a countable resource for purposes of Medicaid or SSI eligibility.  The creation of special needs trusts is authorized by the Federal law.[3]  A trust commonly referred to as (d)(4)(A) special needs trust, named after the Federal code section that authorizes its creation, is for those under the age of sixty-five.[4]  Another type of trust typically referred to as a (d)(4)(C) pooled special needs trust may be created for those of any age.[5]  Pooled trusts are economical and are a great solution for personal injury settlements (not just small settlements).  When deciding upon which type of trust to use, it is important to understand the differences between the trusts in terms of startup costs, ongoing costs, and management.  The different types of trusts for those on needs-based benefits will be discussed in greater detail below.

Public Benefit Programs Overview

There are two primary public benefit programs that are available to those who become disabled.  The first is the Medicaid program and the intertwined Supplemental Security Income benefit.  The second is the Medicare program and the related Social Security Disability Income/Retirement benefit.  Both programs can be adversely impacted by a disabled injury victim’s receipt of a personal injury recovery.  Understanding the basics of these programs and their differences is imperative to protecting the disabled client’s eligibility for these benefits.

Medicare and Social Security Disability Income (hereinafter SSDI) benefits are an entitlement and are not income or asset sensitive.  Clients who meet Social Security’s definition of disability and have paid in enough quarters can receive disability benefits without regard to their financial situation.[6]  The SSDI benefits program is funded by the workforce’s contribution to FICA (social security) or self-employment taxes.  Workers earn credits based on their work history and a worker must have enough credits to get SSDI benefits should they become disabled.  Medicare is a federal health insurance program.  Medicare entitlement commences at age sixty-five or two years after the date of disability under Social Security’s definition.[7]  Medicare coverage is available again without regard to the injury victim’s financial situation.  Accordingly, a special needs trust (“SNT”) is not necessary to protect eligibility for these benefits.  However, the MSP may necessitate the use of a Medicare Set Aside.

Medicaid and Supplemental Security Income (hereinafter SSI) are income and asset sensitive public benefits that require planning to preserve.  In many states, one dollar of SSI benefits automatically provides Medicaid coverage.  This is very important, as it is imperative in most situations to preserve some level of SSI benefits if Medicaid coverage is needed in the future.  SSI is a cash assistance program administered by the Social Security Administration.  It provides financial assistance to needy aged, blind, or disabled individuals.  To receive SSI, the individual must be aged (sixty-five or older), blind or disabled[8] and be a U.S. citizen.  The recipient must also meet the financial eligibility requirements.[9]  Medicaid provides basic health care coverage for those who cannot afford it.  It is a state and federally funded program run differently in each state.  Eligibility requirements and services available vary by state.  Medicaid can be used to supplement Medicare coverage if the client has both programs.  For example, Medicaid can pay for prescription drugs as well as Medicare co-payments or deductibles.  Because Medicaid and SSI are income and asset sensitive, creation of a special needs trust may be necessary when a settlement is reached for someone receiving either or both of these public benefits.

Special Needs Trusts – the differences

A special needs trust is a trust that can be created pursuant to Federal law whose corpus or any assets held in the trust do not count as resources for purposes of qualifying for Medicaid or SSI.  Thus a personal injury recovery can be placed into an SNT so that the victim can continue to qualify for SSI and Medicaid.  Federal law authorizes and regulates the creation of an SNT.  The 1396p[10] provisions in the United States Code govern the creation and requirements for such trusts.  First and foremost, a client must be disabled in order to create an SNT.[11]  There are three primary types of trusts that may be created to hold a personal injury recovery and one type used when it isn’t the injury victim’s own assets, each with its own unique requirements and restrictions.  First is the (d)(4)(A)[12] special needs trust which can be established only for those who are disabled and are under age 65.  This trust is established with the personal injury victim’s recovery and is established for the victim’s own benefit.  Second is a (d)(4)(C)[13] trust typically called a pooled trust that may be established with the disabled victim’s funds without regard to age.  The third is a trust that can be utilized if an elderly client has too much income from Social Security or a pension to qualify for some Medicaid based nursing home assistance programs.  This trust is authorized by the federal law under (d)(4)(B)[14] and is commonly referred to as a Miller Trust.  Lastly, there is a third party[15] SNT which is funded and established by someone other than the personal injury victim (i.e., parent, grandparent, donations, etc. . .) for the benefit of the personal injury victim.  The victim still must meet the definition of disability but there is no required payback of Medicaid at death as there is with a (d)(4)(A) or (d)(4)(C).

Since the pooled (d)(4)(C) trust and the (d)(4)(A) SNT are most commonly used with personal injury recoveries, I will focus on comparing these two types of trust.  There are several significant differences between a (d)(4)(C) pooled trust and a (d)(4)(A) special needs trust.  I will discuss these differences first starting with the (d)(4)(C) pooled trust.  As a starting point, a disabled injury victim joins an already established pooled trust as there is no individually crafted trust document.  There are four major requirements under Federal law necessary to establish a pooled trust.  First, the trust must be established and managed by a Non-Profit.[16]  Second, the trust must maintain separate accounts for each Beneficiary, but the funds are pooled for purposes of investment and management.[17]  Third, each trust account must be established solely for the benefit of an individual who is disabled as defined by law, and it may only be established by that individual, the individual’s parent, grandparent, legal guardian, or a Court.[18]  Fourth, any funds that remain in a Beneficiary’s account at that Beneficiary’s death must be retained by the Trust or used to reimburse the State Medicaid agency.[19]

As for the differences from a (d)(4)(A) special needs trust, there are four primary differences.  First, a (d)(4)(A) special needs trust can only be created for those under age 65.  However, a (d)(4)(C) pooled special needs trust has no such age restriction and can be created for someone of any age.  Second, a Pooled Special Needs trust is not an individually crafted trust like a (d)(4)(A) special needs trust.  Instead, a disabled individual joins a Pooled Trust and professional non-profit trustee pools the assets together for purposes of investment but each beneficiary of the trust has his or her own sub-account.  Third, a pooled trust is managed by a not for profit entity who acts as trustee overseeing distributions of the money.  The non-profit trustee may manage the money themselves or hire a separate money manager to oversee the investment of the trust assets.  Fourth, at death, the non-profit trustee may retain whatever assets are left in the trust instead of repaying Medicaid for services they have provided as is the case with a (d)(4)(A) special needs trust.[20]  By joining a pooled trust, a disabled aged injury victim can make a charitable donation to the non-profit who manages the pooled trust and avoid the repayment requirement found within the Federal law for (d)(4)(A) special needs trusts.  Other than the aforementioned differences, it operates as any other special needs trust does with the same restrictions on the use of the trust assets.

With a (d)(4)(A) special needs trust, a trustee needs to be selected, unlike the pooled trust where it is automatically a non-profit entity.  This provides some flexibility to the family or loved ones to have a hand in the selection of the trust company or bank acting as trustee.  However, it is important to have a trustee experienced in dealing with needs-based government benefit eligibility requirements so that improper distributions are not made.  Many banks and trust companies don’t want to administer special needs trusts under $1,000,000.00 in trust assets which can make it difficult to find the right trustee.  Most pooled special needs trusts will accept any size trust and the non-profit is experienced in dealing with those that are receiving disability-based public benefits.  With the (d)(4)(A), there are no startup costs except the legal fee to draft the trust which can vary greatly.  The (d)(4)(C) pooled trusts typically have a one-time fee at inception which can range from $500 to $2,000 which is typically much cheaper than the cost of establishing a (d)(4)(A) special needs trust.  Most trustees (pooled or (d)(4)(A)) will charge an ongoing annual fee which is typically a percentage of the trust assets.  These fees vary between 1-3% depending on how much money is in the trust.  A (d)(4)(A) will offer unlimited investment choices for the funds held in the trust while a (d)(4)(C) will have fewer investment choices.

The major limitation of all types of special needs trusts is that the assets held in trust can only be used for the sole benefit of the trust beneficiary.  So in the case of a disabled injury victim that funds a pooled special needs trust with their personal injury recovery, those funds can only be used for their benefit.  The disabled injury victim could not withdraw money and gift it to a charity or family.  The purpose of the special needs trust is to retain Medicaid eligibility and use trust funds to meet the supplemental, or “special” needs of the beneficiary.  These can be quite broad, however, and include things that improve health or comfort, non-Medicaid covered medical and dental expenses, trained medical assistance staff (24 hours or as needed), independent medical check-ups, medical equipment, supplies, programs of cognitive and visual training, respiratory care and rehabilitation (physical, occupational, speech, visual and cognitive), eyeglasses, transportation (including vehicle purchase), vehicle maintenance, insurance, essential dietary needs, and private nurses or other qualified caretakers.  Also included are non-medical items, such as electronic equipment, vacations, movies, trips, travel to visit relatives or friends and other monetary requirements to enhance the client’s self-esteem, comfort or situation.  The trust may generally pay for expenses that are not “food and shelter” which are part of the SSI disability benefit payment.  However, even these items could be paid for with trust assets but SSI payments could be reduced or eliminated.  This may not be problematic if the disabled injury victim qualifies for Medicaid without SSI eligibility.  However, many states grant automatic Medicaid eligibility with SSI so one has to be careful about eliminating the SSI benefit.

Conclusion

Each type of trust discussed above has advantages and disadvantages.  Some think of pooled trusts as only being appropriate for a smaller settlement which simply isn’t the case.  Some think of pooled trusts just for the elderly which isn’t the case either.  In the right case, the pooled trust is a great alternative option to a (d)(4)(A).  Just the same, in some cases a (d)(4)(A) may be the best option because of the flexibility in selecting a trustee and the customizable money management options.  In the end, though, a special needs trust be it pooled or a (d)(4)(A) must be considered because it will safeguard a disabled client’s recovery from dissipation and protect future eligibility for needs-based public benefits.  Just as importantly, the different types of trusts and their advantages, as well as disadvantages, should be closely considered before making a decision since special needs trusts are irrevocable along with bringing substantial restrictions on how the money may be used.  Creating a special needs trust for a disabled injury victim gives them the ability to enjoy the settlement proceeds while preserving critical health care coverage along with government cash assistance programs.

Synergy’s settlement consulting group is one of the premier plaintiffs focused on settlement planning firms offering services nationwide. Our settlement consulting firm assists injury victims and their attorneys in creating innovative settlement plans for personal injury and workers’ compensation case.  We specialize in evaluating cases where clients are eligible for public benefits and advising on special needs trusts, settlement trusts, Medicare set-asides, and financial planning options for the personal injury settlement. We can help injury clients plan for the uncertainties they face by maximizing the use of funds available to the client from both the settlement itself and government benefits.  Learn more about how we can help at https://synergysettlements.com/service/settlement-consulting/for-attorneys/

 

 

Watch our Third Thursday Webinar on the topic of Protecting Supplemental Security Income and Medicaid Eligibility for Injury Victims: Special Needs Trusts

 

 

 

[1]  Medicaid is a needs-based public benefit that provides basic health care coverage for those who are financially eligible.  The Medicaid program is federally and state-funded but administered on the state level.  Services and eligibility requirements vary from state to state.   The asset limit is $2,000 for single individuals and $3,000 for married couples for most Medicaid programs but the income limits vary by program and state.

[2] SSI or Supplemental Security Income, administered by the Social Security Administration, provides financial assistance to U.S. citizens who are sixty-five or older, blind or disabled.  The recipient must also meet the financial eligibility requirements.  42 U.S.C. § 1382.

[3] 42 U.S.C. § 1396p (d)(4).

[4] 42 U.S.C. § 1396p (d)(4)(A).

[5] 42 U.S.C. § 1396p (d)(4)(C).

[6] While most often we deal with someone who has a disability, Social Security Disability also provides death benefits.  Additionally, a child who became disabled before age 22 and has remained continuously disabled since age 18 may receive disability benefits based on the work history of a disabled, deceased or retired parent as long as the child is disabled and unmarried.

[7] SSDI beneficiaries receive Part A Medicare benefits which cover inpatient hospital services, home health, and hospice benefits.  Part B benefits cover physician’s charges and SSDI beneficiaries may obtain coverage by paying a monthly premium.  Part D provides coverage for most prescription drugs but it is a complicated system with a large co-pay called the donut hole.

[8] Disability is defined the same way as for Social Security Disability benefits which is that the disability must prevent any gainful activity (e.g. employment), last longer than 12 months, or be expected to result in death.  If someone receives disability benefits from Social Security they automatically qualify as being disabled for purposes of SSI eligibility.

[9] An individual can only receive up to $552.00 per month ($829.00 for couples) and no more than $2,000 in countable resources.

[10] 42 U.S.C. § 1396p.

[11] To be considered disabled for purposes of creating an SNT, the SNT beneficiary must meet the definition of disability for SSDI found at 42 U.S.C. § 1382c.  42 U.S.C. § 1382(c)(a)(3) states that “[A]n individual shall be considered to be disabled for purposes of this title … if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or … last for a continuous period of not less than twelve months (or in the case of a child under the age of 18, if that individual has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or … last for a continuous period of not less than 12 months).”

[12] 42 U.S.C. § 1396p (d)(4)(A) provides that a trust’s assets are not countable if it is “[a] trust containing the assets of an individual under age 65 who is disabled (as defined in section 1382c (a)(3) of this title) and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter.”

[13]42 U.S.C. § 1396p (d)(4)(C) provides that a trust’s assets are not countable if it is “[a] trust containing the assets of an individual who is disabled (as defined in section 1382c (a)(3) of this title) that meets the following conditions:  (i) The trust is established and managed by a non-profit association. (ii) A separate account is maintained for each beneficiary of the trust, but, for purposes of investment and management of funds, the trust pools these accounts. (iii) Accounts in the trust are established solely for the benefit of individuals who are disabled (as defined in section 1382c (a)(3) of this title) by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court. (iv) To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this subchapter.”

[14] 42 U.S.C. § 1396p (d)(4)(B).

[15] Third-party special needs trusts are creatures of the common law.  Federal law does not provide requirements or regulations for these trusts.

[16] 42 U.S.C. § 1396p (d)(4)(C).

[17] Id.

[18] Id.

[19] Id.

[20] If the funds remaining in the trust at death are sufficient to repay Medicaid’s payback right in full, many pooled trusts will distribute some portion of the remaining monies to the trust beneficiary’s heirs.  However, each pooled trust will have a different policy and the amount retained at death can vary greatly.  It is very important to investigate how much is retained in this type of situation.  Some trusts will only retain $5,000 while others may retain $50,000.

Clients who receive needs based benefits such as Medicaid and SSI require special planning to protect eligibility for those public benefits. More and more frequently, a pooled special needs trust is being utilized to preserve eligibility given the ease with which one can be set up and the relatively low cost. A pooled special needs trust is established by a non-profit trustee pursuant to 42 U.S.C. 1396p (d)(4)(C). Under that provision of the United States Code, there are four requirements for creation of a pooled trust. First, it must be established by a non-profit who acts as trustee. Second, the trustee must maintain a separate account for each beneficiary but funds may be pooled for investment purposes (hence the name of pooled trust). Third, each sub-account must be established solely for someone disabled under the Social Security definition. Lastly, any funds that remain at death may either be retained by the non-profit for charitable purposes or used to reimburse the applicable state Medicaid agency or agencies.

Pooled trusts are different from “stand alone” SNTs under 42 U.S.C. 1396p (d)(4)(A) in three ways. First, the pooled trust can be established by the injury victim themselves whereas a stand-alone trust can only be established by a parent, grandparent, guardian or court order. This is a big advantage in the context of a personal injury settlement as many times there is no parent or grandparent to establish it. Therefore, a court order becomes necessary which involves an extra step. Second, there is no age restriction for use of the pooled trust whereas with a stand-alone SNT there is an age limitation of sixty five. If you are over sixty five, you can only create a pooled trust. With the pooled trust, the beneficiary joins an already established master trust so there is no need for a customized trust document like a stand-alone SNT or the expenses that come with it.

Synergy’s non-profit, The Foundation for Those With Special Needs, Inc. (FTWSN), created the Settlement Solutions National Pooled Trust (SSNPT). The SSNPT was created for the singular purpose of assisting injury victims remain eligible for needs based public assistance benefits. The founders of the Settlement Solutions National Pooled Trust saw a need for a pooled trust that understood the special needs of injury victims and catered to those needs. SSNPT’s mission is to treat every trust beneficiary with the dignity and respect they deserve. Moreover, the SSNPT has a superior solution to other pooled trusts available to personal injury victims. It offers many specialized benefits that aren’t available with other pooled trusts in the marketplace.

What Sets SSNPT Apart?

SNPT has one of the lowest fee structures nationally with a one-time fee at inception of $550.00 and a 1% annual fee. SSNPT’s retained funds policy is the friendliest policy to the plaintiff. The trust will distribute all monies at death to the heirs, less a small retained amount (10% or $10,000 whichever is less) and less the amount due to Medicaid pursuant to their payback rights. Lastly, from the funds retained by the non-profit in situations where the amount due to Medicaid exceeds the balance left in the trust, the Foundation gives back to the civil justice system through contributions to other non-profits and charities who protect the civil justice system as well as all of our civil rights.

Another unique option is a Medicare Set Aside (MSA) sub-trust for clients whom are dual eligible. An unfortunately often ignored issue is the fact that MSAs are an available resource for Medicaid beneficiaries. So if an MSA is established for someone that is dual eligible but it isn’t held inside an SNT then that client will lose Medicaid coverage. The pooled trust sub-account can be set up to hold the MSA thus making it non-countable for purposes of qualifying for Medicaid and/or SSI. The SSNPT provides a complete solution for those that are dual eligible with separate sub-accounts for the non-MSA and MSA funds. The MSA funds are administered using a professional MSA administrator which does charge an additional fee beyond the annual trustee fee charged by the trustee. All fees come from the non-MSA sub-account as Medicare regulations don’t allow the MSA to pay administration costs out of the funds set aside.

In summary, the SSNPT provides a cutting-edge solution to the settlement marketplace for those on needs based benefits and those that are dual eligible. It is a low cost trust which provides a tremendous amount of service to its beneficiaries. Since it caters to the personal injury marketplace, there is a national network of attorneys available to prepare the necessary legal documents for joining the trust and providing proper notices to the government agencies. This makes for a seamless solution for both trial counsel and injury victims.

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