by: Thomas D. Begley, Jr.

Essentially, there are four options with respect to the treatment of settlement funds obtained on behalf of a minor or incapacitated person.

  1. Deposit with Court.  In New Jersey, funds could be deposited in the Surrogate’s Court.  There are virtually no advantages to this option, but several disadvantages.  The disadvantages include:
  • Generally, each time money is to be withdrawn an application must be made to the Surrogate for approval by the Superior Court.  Courts frequently deny these applications.
  • Funds are invested in low yielding Certificates of Deposit.
  • At age 18, a minor can withdraw the funds and squander them as the minor sees fit.

In Pennsylvania, funds could be deposited with the Orphans’ Court.  The advantages and disadvantages are the same as for New Jersey.  However, under the Pennsylvania Rules of Civil Procedure[1], where there is a minor or incapacitated person, a corporate fiduciary must be used if the net settlement to the plaintiff is $25,000 or more.

  1. Special Needs Trust.  The funds could be deposited into a Self-Settled Special Needs Trust.  The funds in the trust are not counted in determining eligibility for means-tested public benefits such as SSI and Medicaid, and these important public benefits can be preserved.  The primary disadvantages are:
  • Medicaid Payback.  There is a payback provision to Medicaid on the death of the trust beneficiary.  While this may sound harsh, it is usually better than the alternative.  The alternative is to “pay as you go” for medical services in which payment is made at full list price rather than the deeply discounted arrangement paid by Medicaid.  “Pay as you go” means paying now rather than later.  If payment is deferred, those monies can be used for investments and for the basic needs of the trust beneficiary.  The beneficiary can take advantage of the time value of money.  If there is no money left in the trust on the death of the beneficiary, no payback is required.  If there is extra money left in the trust on the death of the beneficiary after payment to Medicaid, the excess funds can be left to the heirs of the trust beneficiary.  There is no payback requirement for SSI.
  • Sole Benefit Rule.  Under the rules of SSI and Medicaid, the funds in a Special Needs Trust are restricted for use of the sole benefit of the trust beneficiary.  This means that if other family members benefit from the trust in any way, they must pay a pro rata share.  For example, if the trust owns a home and it is occupied by three healthy people and the disabled trust beneficiary, the three healthy people must pay 75% of the expenses of operating and maintaining the home.

If a court is going to supervise the trust, which is always the case in Pennsylvania and sometimes the case in New Jersey, the court will insist on the funds being used for the sole benefit of the person with disabilities whether or not a Special Needs Trust is utilized.

  • Payment to Third Parties.  The Special Needs Trust cannot distribute money to the trust beneficiary.  Any such distribution would be considered income causing the beneficiary to lose SSI and Medicaid.  The practice is for the trustee to make direct payments to the third parties providing goods and services to the beneficiary.  For example, rather than give the trust beneficiary money to pay cell phone charges each month, the trustee pays the cell phone bill directly to the provider.
  1. Settlement Preservation Trust.  A Settlement Preservation Trust is somewhat more flexible than a Special Needs Trust.  The disadvantage is that if the trust beneficiary is receiving means-tested public benefits, the assets in the Settlement Preservation Trust would be considered countable resources and cause a loss of those benefits.  The advantage is that the administration of the trust may be somewhat more flexible.
  • Payback.  There is no Medicaid payback in cases involving a Settlement Preservation Trust.
  • Sole Benefit Of.   If there is court supervision, which is always the case in Pennsylvania if the beneficiary is a minor or incapacitated person and which is sometimes the case in New Jersey, then distributions must be made for the sole benefit of that minor or incapacitated person.  However, if there is no court supervision, trustees can be somewhat more flexible in benefiting other family members.
  • Payments to Third Party Providers.  Under a Settlement Preservation Trust, direct payment to third party providers is not required.  The trust could send the trust beneficiary or the parents or guardian of the trust beneficiary monies each month to be spent on behalf of the beneficiary in accordance with a budget previously agreed upon by the trustee and the family.
  1. Settlement Preservation Trust with Special Needs Provisions.  There are cases where a beneficiary may not be receiving means-tested public benefits at the time of settlement, but may be eligible for them in the future.  For example, as long as a child is under 18, he is normally not eligible for SSI and Medicaid, because the parents’ income is deemed to the child.  However, upon attaining age 18 the deeming stops and the child may be eligible for those benefits.  In other cases, the child has a medical condition such as heart failure and may be disabled, but at the time of settlement, may not be disabled in accordance with the definition of disability contained in the Social Security Act (SSA).  However, as time goes on, the child’s condition may decline and the child may meet the SSA disability standard and a Special Needs Trust may be required to obtain and maintain SSI and particularly Medicaid.  The solution in these situations is to establish a Settlement Preservation Trust, which has the advantages outlined above with a provision that the trustee has the right to transfer the funds in the Settlement Preservation Subtrust to a Special Needs Subtrust in the trustee’s discretion.  The advantage is much greater flexibility.  The disadvantages of the Special Needs Trust are deferred until it is determined that the Special Needs Trust is definitely going to be necessary.

[1] RCP Rules 2039 and 2064.