LIMITATIONS ON LITIGATION 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 2013, the maximum federal benefit rate is $710. In New Jersey, there is a state supplement of $31.25.
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 unless the funds are deposited in a special needs trust.
How Do These Trusts Work?
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 beneficiary’s lifetime. Many families of personal injury victims feel that the entire family has been affected by the personal injury and look at the money being received 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.Professional trustees, generally, try to limit distributions from the trust to 4% to 5% of trust assets so that the funds will be available over the beneficiary’s lifetime to meet all of the beneficiary’s needs.
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.
“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).
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.
Distributions to Providers
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” and the SSI payment may be reduced by up to $256.66.
Special Opportunities and Problems
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.
Under SSI rules, the person with disabilities is only entitled to one vehicle. The special needs trust can purchase one vehicle. Approval can usually only be obtained for the purchase of an average-priced vehicle.
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.
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.