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Special
Needs Trusts for Litigation Proceeds
The Problem
If an award from a personal injury case is paid to a plaintiff receiving
or otherwise eligible to receive Medicaid or Supplemental Security
Income (SSI), that person will lose those benefits. Loss of Medicaid,
for instance, would cause the award to be exhausted quickly to pay
for medical expenses that otherwise would have been paid by Medicaid.
The plaintiff then would have no other means of support to meet
his or her needs. As a result, a personal injury lawyer may be liable
for malpractice and may also be guilty of an ethics violation.
The Solution
In 1993 Congress authorized the establishment of Self-Settled Special
Needs Trusts for this situation. The award is placed in the trust
and the trustee uses the funds for the disabled plaintiff’s
special needs and the plaintiff’s public benefits, particularly
SSI and Medicaid, are protected. The trust can provide for expert
money management by a professional money manager, and appropriate
care for the disabled person utilizing care managers, if appropriate.
The life of the disabled person is enriched.
Is A Special Needs Trust Always
Appropriate?
A Special Needs Trust is not always
appropriate. The advantage of the Special Needs Trust is that the
funds in the trust can be used for the disabled person and public
benefits, particularly SSI and Medicaid can be preserved. However,
if a disabled person loses control of those funds, cash cannot be paid
directly to the beneficiary. The trustee must pay for goods and
services directly to third parties.
In many situations where the proceeds are relatively
small, other Medicaid planning techniques may be available to avoid
establishment of a trust. In other situations, if no means-tested
public benefits are being received or are likely to be received,
then a trust may be unnecessary.
Federal And State Law
Federal Law
Special Needs Trusts are authorized
at 42 U.S.C. 1396p(d)(4)(A).
The requirements are as follows:
• The trust must be funded with assets of the individual (the
award).
• The individual must be under 65 years of age at the time
the trust is funded.
• The individual must be disabled.
• The trust must be "for the sole benefit of" the
disabled beneficiary.
• Other persons benefitting from the trust must pay their
pro rata share of expenses (i.e., a home).
• The trust must be established by a parent, grandparent,
legal guardian or a court.
• State medical assistance on behalf of the individual must
be reimbursed to the state upon death, prior to any remainder beneficiary
receiving a share.
The Foster Care Independence Act of 1999 spells
out additional provisions pertaining to the establishment and administration
of these trusts.
If the plaintiff is receiving SSI, the Social Security
Administration must approve the trust.
New York State Law
Regulations pertaining to the drafting
and administration of Special Needs Trusts in New York also exist.
These regulations are extremely detailed. One of the most important
is that the Department of Social Services must be notified of the
creation and funding of the trust and must actually approve the
form of the trust.
Administration of a Special Needs
Trust
The administration of a Special Needs
Trust is governed by the Foster Care Independence Act of 1999,
the Program Operations Manual System of the Social Security Administration
(POMS), and the Amendments to the New York Medicaid Regulations.
Significant considerations in drafting Special Needs Trust include
the following:
• Distributions cannot be made to the person with disabilities.
• Distributions must be made directly to third parties for
the beneficiary's special needs.
• Distribution in-kind of food, clothing and shelter reduce
the SSI benefit belonging to the person with disabilities, but
do not eliminate it.
• Trust assets must be titled in the name of the trust.
• A bond is required if the assets of the trust equal or exceed
$1,000,000, unless waived by the court, or required by the court.
• Accountings
are required.
• The trustee must comply with the Prudent Investor Act, subject
to the purpose of the trust.
• Accurate records must be maintained.
• If the disabled person is receiving SSI, reports must be
made to the Social Security Administration.
• There are special rules pertaining to homes and motor vehicles.
• DSS must be given advance notice of any distribution which
may "substantially deplete the assets of the trust",
as defined by DSS
Liens arising from the injury
Federal and state law require that payments made by Medicaid and/or
Medicare in connection with treatment of the injury which gave rise
to the lawsuit must be reimbursed to the state Medicaid agency or
widicare, respectively, before the remaining funds can be paid to
the Special Needs Trust or to the plaintiff directly. It is becoming
increasingly difficult to compromise these liens unless there is
an issue as to liability. If a worker's compensation claim is settled
for a lump sum, the Medicare Secondary Payer Act requires that a
sum sufficient to pay anticipated future medical bills be set aside
in a Medicare Set-Aside Arrangement.
Payback Provisions
Both federal and state law require that the trust document contain
a payback provision whereby the state Medicaid agency will be repaid
any funds expended on behalf of the disabled person during the term
of the trust. This payback is made upon the death of the disabled
person.
Additional monies remaining in the trust may be
distributed to the estate of the person with disabilities.
If all funds in the trust are expended for the disabled person
during his lifetime, the state is not entitled to a recovery.
If the beneficiary has other assets outside the trust, such as
a home, they may be subject to a separate lien; although there
are ways to minimize this risk.
Taxes, Structured Settlement
Annuities and Special Needs Trusts
Taxation of personal injury
award
Under current federal tax law, most
payments received as the result of a personal injury are not included
as gross income. Awards attributable to lost wages or punitive damages
are exceptions and are subject to taxation.
Structured Settlement
A structured settlement annuity is a payment of money for a personal
injury on a periodic payment basis over a period of time.
The time can be the life of the disabled person, a fixed term
of years, or a
combination of both. Structured settlements are regulated by both
federal and state law.
Taxation of Structured Settlement
Payments
Provided certain guidelines are met, the income received from the
structured settlement is tax-free to the disabled person. This
includes the interest component of each payment. However, unpaid
installments are included in the estate of the person with disabilities
for federal estate tax purposes.
Advantages and Disadvantages
of Structured Settlements
Budgeting: Studies have shown that the average personal
injury claimant spends the entire lump sum settlement within five
years. The structured settlement can guarantee that the monies last
a lifetime.
Taxes: If the beneficiary receives a lump
sum payment, the income earned by the lump sum is taxable to the
trust or the disabled beneficiary. The income component of the payment
under a structured
settlement is tax-free. However, to the extent monies are paid from
the lump sum for medical purposes, there is an offsetting medical
deduction.
Flexibility: Monies paid under a structured
settlement are not available to pay unexpected expenses based
on a change in circumstance. Designing a life
care plan and allocating a portion of the settlement to a lump
sum and a portion to a structure will often solve this problem.
Selection of the Trustee
Under federal law the funds in a Special Needs Trust are
not considered available to the disabled person for purposes of
determining eligibility trustee must have complete discretion as to
distributions. The disabled person must not have the right to compel
a distribution for support and maintenance or to revoke the trust.
The selection of a trustee is crucial for the successful
administration of the trust. Unless the trust is administered properly,
funds will be exhausted prematurely and/or the person with disabilities
may lose his/her public benefits. The ideal trustee should:
• Understand public
benefits law
• Understand the Prudent Investor Act and the Income and Principal
Accounting Act
• Understand federal and state tax law
• Keep accurate books and records
• Be bondable
• Live at least as long as the disabled person will live
• Have the best interest of the disabled person at heart
Attorneys at Davidow, Davidow, Siegel & Stern
are often willing to
serve as trustees of Special Needs Trusts. They are also willing
and
able to help locate corporate trustees to fill these roles. The
solution is often to have co-trustees, with a professional trustee
and a
family member serving.
Public Benefits Programs
Persons with disabilities usually receive either a combination
of Supplemental Security Income (SSI) and Medicaid or Social Security
Disability (SSD) and Medicare. SSI and SSD are both income assistance
programs. Both SSI and Medicaid are means-tested programs. SSD and Medicare are insurance programs.
These are not means-tested. They have no income or asset limits.
If a beneficiary is receiving SSD and Medicare and
never expects to require any monies paid by Medicaid, or group housing,
vocational training, etc. and never expects to need Section 8 Housing
or any other means-tested public benefit programs, a Special Needs
Trust may not be appropriate. If they are receiving SSI and Medicaid,
a Special Needs Trust is required unless there can be another way
to achieving Medicaid spend down. Generally speaking the SSI/Medicaid
recipient can have very limited income and the following assets:
• $2,000 in liquid assets
• A residence occupied by the person with disabilities
• One automobile
• A prepaid funeral in an irrevocable funeral trust
If distributions of cash are made to an SSI beneficiary,
this will cause a dollar-for-dollar reduction in benefits. If the
SSI benefit is reduced to zero, the diabled person loses SSI and
Medicaid. If a Special Needs Trust pays directly for goods and services,
there is no reduction in SSI benefits unless the services are for
food, clothing and shelter in which event there is a reduction but
not a loss of benefits. As long as the SSI benefits are not completly
lost, Medicaid will be maintained. If the trustee of the Special
Needs Trust makes improper distributions, both SSI and Medicaid
can be lost.
Medicaid
Medicaid eligibility is usually met by qualifying for SSI. In New
York, a person receiving SSI is automatically entitled to Medicaid.
There are some exceptions to this general rule. Medicaid is often
the most important public benefit the person with disabilities receives,
because it pays the person's medical bills.
Medicaid provides:
• Medical services and treatments
• Presciptions
• Hospitalization (including nursing care)
• Psychiatric care and dental care
• "Medically necessary" durable medical equipment
• Long-term nursing home care
Community-based Services
New York has waiver programs under which
Medicaid will provide in-home services for persons with disabilities receiving
SSI and Medicaid so that they can avoid nursing home placement.
Persons with disabilities would always prefer to remain home and
this is a significant advantage.
Social Security Disability (SSD)
SSD is an entitlement program paid for through Social Security taxes.
Because it is an insurance program, it is not means-tested. Eligibility
is based on the work history and the amount of benefits is based
on prior earnings. To be eligible, the beneficiary may not be able
to engage in any substantial gainful activity, as defined in the
Social Security Act.
Medicare
Medicare is a federal medical insurance program for
people over 65 and people under 65 who are disabled for two or
more years.
Benefit Combinations
Some persons are eligible for SSI and SSD and Medicaid
and Medicare.
Frequently Asked Questions about Special
Needs Trusts
Should every disabled person have a Litigation
Special Needs Trust?
No. Some persons are not receiving public benefits that require
a Special Needs Trust and are not likely to receive such benefits
in the future. If the amount of the Special Needs Trust is small,
there may be other ways of accomplishing Medicaid and SSI eligibility
without the necessity of a Special Needs Trust. Davidow, Davidow,
Siegel & Stern can advise with respect to these options.
Must the Beneficiary always remain on benefits?
No. Special Needs Trusts can be terminated if the disabled person
regains independence. Medicaid must be repaid for monies they have
advanced from the inception of the trust. Any remaining assets in
the trust can be distributed to the formerly disabled person.
Can a disabled person serve as trustee?
No. The disabled person cannot have any power to direct trust disbursements.
This would make the funds in the trust available for public benefit
purposes.
Who can serve as trustee?
While anyone other than the disabled person can serve as trustee
it is desirable to have a professional who is familiar with the
administration of Special Needs Trusts fill this role. As a general
rule, family members do not have the expertise to manage these trusts
and often unintentionally abuse them and disqualify the beneficiaries
from their public benefits.
What can the trust pay for?
Distributions should be made for the special
needs of the person with disabilities, such as transportation,
education, telephone, medications and treatments not provided for
by Medicaid and other items designed to enhance the quality of
the life of the person with disabilities. However, if distributions
are made for food, clothing or shelter, there will be a reduction
in the SSI payment of the person with disabilities.
What happens if a Special Needs Trust does pay
for food, clothing and shelter?
Distributions in-kind of food, clothing and shelter reduce the
SSI benefit of the person with disabilities, but do not eliminate
it. Depending upon the actual living arrangements of the beneficiary,
the SSI payment can be reduced by a maximum of one-third of the
SSI benefit plus $20.
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