Limitations on Special Needs Trusts
by: Thomas D. Begley, Jr.
Many clients who receive personal injury settlements are receiving important public benefits, such as SSI and Medicaid. SSI is an income stream that pays an individual monies intended to be used for food and shelter. For 2015, the maximum federal benefit rate is $733. In New Jersey, there is a state supplement of $31.25. In Pennsylvania, the supplement is $27.40. Medicaid pays for medical and pharmaceutical services for Medicaid recipients. It covers services that private insurance will not provide, including and most importantly home care. Both the SSI and Medicaid programs have an asset limit of $2,000. This means that if the individual receiving SSI and Medicaid receives a personal injury settlement, he or she will be ineligible for both SSI and Medicaid.
In 1993, Congress passed the Omnibus Budget Reconciliation Act of 1993 (OBRA ’93) in which Congress authorized the establishment of special needs trusts. Assets transferred to these trusts are not counted in determining asset eligibility for SSI or Medicaid.
HOW DO THESE TRUSTS WORK?
Special needs trusts have a certain amount of flexibility. These trusts can be used for almost anything that the individual with disabilities require, including items not covered by Social Security, Medicaid and other public benefits.
Generally, the purpose of special needs trusts is to provide financial support to the personal injury victim for the rest of his or her life. Monies must be expended solely for the benefit of the trust beneficiary in a judicious manner to ensure that ALL of the needs of the trust beneficiary are met over the lifetime.
Many parents try to live off their children’s trusts or to raise their standard of living by using the children’s trusts. Courts see this on a regular basis and are vigilant in stopping it. Trustees are required to try to meet the beneficiary’s needs and improve the quality of life while making sure that others are not “living off of the trust”. SSA and state Medicaid agencies are also aggressive in this regard.
WHO SUPERVISES THESE TRUSTS?
Court Supervision. For trusts involving a minor or incapacitated person, there is court supervision in both New Jersey and Pennsylvania. In addition, the New Jersey Bureau of Administrative Action and Recoveries supervises special needs trusts, and in Pennsylvania there is supervision from the Department of Public Welfare (DPW).
The primary purpose of supervision is to: (1) protect the minor or incapacitated beneficiary, and (2) to see that the “sole benefit of” rule, discussed below, is enforced. Many families of personal injury victims feel that the entire family has been affected by the personal injury. We recognize that this is true for families – everyone IS affected. However, some families look at the money being received through the personal injury settlement as a “family bank account.” Courts, on the other hand, are very strict in their views that the money belongs only to the minor or incapacitated person and should last for the lifetime of that individual. Trustees, mindful of the need to have the funds last, will limit routine and ongoing distributions to what is considered a “safe” rate of distribution even if the family feels that all of the beneficiary’s needs are not being met at the same time. As a rule of thumb, distributions are limited to between 4 and 5% of the value of the principal of the trust plus income earned by the trust. From these distributions trustee fees, money management fees and income taxes must be deducted. In New Jersey, payments from structured settlements are considered income. In Pennsylvania, they are considered principal. The trustees balance what is necessary, affordable, and reasonable under the circumstances. If distributions from a trust benefit persons other than the minor or incapacitated person, the other family members must pay their share. Courts are particularly concerned about families who act like lottery winners and want to immediately upgrade their standard of living well over and beyond what it had previously enjoyed and what is required for the benefit of the personal injury victim. Courts want to guarantee that the trust can afford these expenditures while still insuring that money will be left to meet all of the trust beneficiary’s needs for the remainder of that trust beneficiary’s lifetime.
In New Jersey there is little court supervision of special needs trusts after the trust has been established. If issues arise, the court does retain jurisdiction and the trustee, trust beneficiary, or family member can go back to court, if necessary.
In Pennsylvania, the Orphans Courts do retain active supervision of special needs trusts established for minor or incapacitated beneficiaries. The general rule is that trustees may make distributions complying with SSI and Medicaid rules from income, but may not make distributions from principal without prior court approval. In order to minimize the cost of frequent contact with the court, it is good practice to prepare a budget for anticipated expenses and have the budget approved by the court. Generally, budgets are submitted on three-year cycles. As long as the trustee stays within the budget, no further court approval is required. Occasionally, distributions are required for expenditures over and above budgeted items, such as a home or modified vehicle, and court approval is required for such distributions.
New Jersey State Medicaid Agency. The New Jersey Bureau of Administrative Action and Recoveries must be given 45 days advance written notice of any expenditure in excess of $5,000. The agency has a right to approve or reject such expenditures. While the agency occasionally rejects the expenditures, they seldom grant written approval. Very often, the 45 days simply expires and the trustee is then empowered to make the distribution. The problem here is that there is a delay in the expenditure. Families should try to anticipate those expenditures that will be required in excess of $5,000 and notify the trustee so that the trustee can make the requests early.
Pennsylvania Department of Public Welfare. The Pennsylvania Department of Public Welfare (DPW) will not permit distributions by trustees from principal without prior approval from both DPW and the court.
Social Security Administration. Annual reports must be made to the Social Security Administration (SSA) for all expenditures made from a special needs trust. SSA closely monitors these distributions to be sure that they are being made solely for the benefit of the SSI recipient and not for other family members. They will provide sharp oversight to ensure that there is compliance with all SSI rules.
“Sole Benefit Of” Rule. The most difficult concept for families of persons with disabilities to understand is the sole benefit of rule. When Congress authorized special needs trusts to hold personal injury settlements for SSI/Medicaid recipients, Congress stated that the funds in the trust could only be used for their sole benefit. In both New Jersey and Pennsylvania, State Medicaid Agencies require that if any other family member benefits from a distribution from the trust, the other family member or members must pay a pro rata share (their share of the benefit). For example, if a special needs trust purchases a home occupied by the SSI/Medicaid recipient, two healthy parents, and one healthy siblings, then there would be a total of four people occupying the home. The parents and healthy sibling are responsible for their pro rata share, or 25% each, of all of the expenses in operating and maintaining the home. The special needs trust would limited to paying 25% of home operating and maintenance expenses, while the other three occupants must pay 75%. This is perhaps the most difficult rule by which to abide because often the beneficiary needs a home that is larger than the family members can afford on this pro-rata basis. This illustrates the need to request approval of a budget that meets the needs of the beneficiary that is also able to be sanctioned by the courts and public welfare agencies.
Payback. Upon the death of the Medicaid recipient, any funds remaining in the trust must be repaid to the State Medicaid Agency or Agencies that provided Medicaid benefits to the recipient during his or her lifetime. If there is insufficient money left in the trust to pay the lien, then any excess is forgiven. (It is noteworthy that, if there is a family-occupied home owned by the trust, the home is subject to being sold in order to pay off the financial obligation to the public welfare agency.) If there is excess money left in the trust over and above the Medicaid lien, then the Medicaid recipient can designate who shall receive the balance. If the Medicaid recipient is a minor or incapacitated person, the remaining balance is paid in accordance with the respective state intestacy statute. If the beneficiary is a minor, the trust can be drafted to give the minor the authority, upon attaining age 18, to execute a Will designating who shall receive any remaining balance. This is called the “limited power of appointment” and is noted in the trust agreement.
Distributions to Providers. To the maximum extent possible, distributions must be made to the third party who provides goods and services to the SSI/Medicaid beneficiary. Distributions cannot be made to the SSI/Medicaid recipient. Any distribution of cash to the SSI/Medicaid recipient would reduce the SSI payment dollar-for-dollar, and if the distribution exceeds the federal SSI benefit, then SSI would be lost and in those cases where Medicaid is linked to SSI, Medicaid would be lost as well.
In-kind Support and Maintenance. SSI is intended to provide recipients with monies for food and shelter. If anyone else, including a special needs trust, pays for food and/or shelter for the trust beneficiary, then this is called “in-kind support and maintenance” or “ISM”.
Any distribution from the trust that pays for food or shelter will reduce the beneficiary’s SSI payment by one-third or one-third plus $20. The benefit is reduced by the actual expenditure, or by one-third of the federal benefit rate ($244.33 per month), or, depending on living arrangements, by one-third of the maximum federal benefit rate plus $20 ($264.33 per month). Therefore, while it is alright for a special needs trust to pay for food or shelter, it must be understood that there will be a reduction in benefit. If the food or shelter distribution is only $200, there would be a $200 reduction in the SSI benefit, so nothing would be gained. If the food or shelter distribution were $1,000, then it may make sense to reduce the SSI payment by the maximum of $264.33 additional benefit obtained from the trust. As long as there is $1 of SSI benefit left, Medicaid will be retained. (In Pennsylvania, Medicaid can be retained without SSI benefits under the loophole, but this will expire after the recipient attains age 21.)
Deeming. Until a child is eighteen (18), the income and assets of a parent are deemed to the child. This means that SSI considers the parent’s income and resources to be the income and resources of the child. Unearned income of the parent reduces the child’s SSI benefit dollar-for-dollar. Generally, earned income of the parent reduces the child’s income by $1 for every $2 of earned income.
In New Jersey, the parent’s income and resources are also deemed for Medicaid eligibility purposes.
SPECIAL OPPORTUNITIES AND PROBLEMS
Home. A new home is a wonderful benefit to the personal injury victim and the family. However, over the years courts, SSA, state Medicaid agencies, and trustees have seen a number of problems that result from extravagant home purchases.
Payback. The first problem is the Medicaid payback. Whenever possible, it is better to have monies allocated to someone other than the personal injury victim and have those people buy the home. This avoids the Medicaid payback that would occur if the trust were to own the home and upon the death of the trust beneficiary. Inclusion of real estate in the trust could render the home subject to payback and cause the family to have to move.
Cost of Home. If the trust is to purchase the home, a rule of thumb is that courts and trustees generally will not approve more than 10% to 15% of trust assets to be used for the purchase of the home. Operating expenses of the home must be considered as well as OTHER NEEDS of the personal injury victim for the rest of her lifetime. The trust should last the lifetime of the personal injury victim and cover ALL of the personal injury victim’s needs. If the trust purchases a home to be occupied by other family members, the other family members must be able to pay the pro rata share of these operating expenses. Also, to the extent that the trust pays shelter expenses, the personal injury victim’s SSI payment will be reduced.
Vehicle. Under SSI rules, the person with disabilities is only entitled to one vehicle. The special needs trust can purchase one vehicle. Because of the fact that courts want the trust to last for the beneficiary’s lifetime and State Medicaid Agencies want assets to remain in the trust to accomplish the payback, approval can usually only be obtained for the purchase of an average-priced vehicle. In 2015, this may be in the neighborhood of $30,000. If the individual is disabled and a handicap vehicle is required, then $60,000 – $75,000 might be a more appropriate number. Courts and State Medicaid Agencies are reluctant to approve the purchase of luxury vehicles. They must maintain sufficient monies to provide for the other needs of the trust beneficiary over her lifetime.
Parental Obligation of Support. Parents have an obligation to support their children. Distributions from the special needs trust or personal injury award cannot be used to satisfy that obligation of support. Each state has guidelines used in divorce cases on how to calculate that legal obligation of support. As a rule of thumb, those guidelines might be followed. Both courts and State Medicaid Agencies recognize that where a child with disabilities is involved, the parent’s actual obligation of support exceeds the normal obligation of support and both courts and State Medicaid Agencies will approve trust distributions for these extra support obligations.
Caregivers. Trustees have historically paid parents to provide care for their children that exceeds the normal obligation of support. The Social Security Administration has recently indicated that parents must be medically-trained if they are to be paid. Currently, SSA is reviewing this position. Hopefully, this will soon be modified so that medical training is not required. However, compensation must be reasonable. In determining the reasonableness of the care, it is good practice to obtain a Life Care Plan showing what care is necessary over and above the care provided by a parent for a child without disabilities. Many courts and State Medicaid agencies will not approve the payment to parents of amounts equal to what a third party provider would receive. As a rule of thumb, 80% might be appropriate.
Medical Expenses. Generally, courts and state Medicaid agencies will approval payment of medical costs only to the extent that they are not covered by Medicaid or, if applicable, other insurance coverage. Remember, the special needs trust should be the payor of last resort.
Vacation/Travel. Historically, a special need trust has paid for a family member to accompany a trust beneficiary with disabilities on a vacation, if the beneficiary is unable to travel alone. In May of 2012, SSA changed its position so that the trust could only pay for the travel expenditures of the another family member if that family member were medically-trained. This policy is under review and hopefully will soon change back to the original position. Regardless of the outcome of this, the special needs trust can only pay for the vacation and travel of the beneficiary and such caregiver or caregivers as are necessary to care for the beneficiary. It may not pay for the expenses of the entire family, even if that means that the beneficiary cannot take the trip as a result of this limitation.
Schooling. In most cases, a special needs trust can be used to pay for the education expenses of the beneficiary. However, this is somewhat at the discretion of the Orphans Court in Pennsylvania where a minor beneficiary is involved. Some judges will permit these expenditures for private schools where public schools are available, others will not. All judges will permit expenditures for post-secondary education.
Divorced or Separated Families. Where there are divorced or separated families, the administration of a special needs trust becomes more complex. Courts are very reluctant to authorize expenditures from trusts to provide items for the convenience of the parents. For example, it would be very unlikely that a court would ever approve the purchase of more than one handicap van. The same would be true of wheelchairs and other medical equipment. While there may be some inconvenience caused to the parents, the trust is for the benefit of the child, not the parents. Courts and trustees are likely to take a strict view in this regard.
Budget. It is good practice to carefully prepare a budget of trust expenditures. Courts and state Medicaid agencies will want to look at this budget to be sure that distributions are realistic and that the money will last for the lifetime of the beneficiary. Budgets should not contain expenditures for ISM, as discussed above, or for a parent’s normal legal obligation of support.