WHAT IS A SPECIAL NEEDS TRUST? WHEN IS IT NEEDED IN A PERSONAL INJURY CASE AND HOW DOES IT OPERATE?
by: Thomas D. Begley, Jr.
Frequently, in the settlement of a personal injury case the plaintiff is receiving a large settlement. Often, the same plaintiff has significant financial and medical needs that can be met through public benefits. The purpose of a Special Needs Trust is to enable the disabled beneficiary to enjoy the proceeds of the personal injury settlement while at the same time maintaining important public benefits, such as SSI and Medicaid. Some public benefits are means-tested, which means that there are income and asset limits. Other public benefits are not means-tested, which means that the injured plaintiff can have money.
What public benefits are means-tested?
- SSI – SSI is an income stream. In 2013, the income will be $710 per month. In addition, some states provide a supplement. There is an asset limit of $2,000 for an individual and $3,000 for a married couple. Unearned income reduces the benefit dollar-for-dollar. Earned income reduces the benefit by one dollar for every two dollars earned after $85 per month. Until a child is 18, the income and assets of a parent are deemed to the child.
- Medicaid – Medicaid provides broad medical coverage for recipients. Medicaid covers not only acute care, but also chronic care. It should be noted that most private insurance covers acute care with limited, if any, coverage for chronic care. The income and asset limits tend to be the same as for SSI. In many states, if an individual receives SSI, they automatically receive Medicaid.
- Medicaid Waiver – Most states have Medicaid Waiver programs that provide coverage similar to basic Medicaid. Many states have an income cap. In 2013 the income cap is $2,130 per month. Most Medicaid Waivers have an asset limit, but they vary significantly from state-to-state and from program-to-program.
- SNAP (Food Stamps) – SNAP provides an Electronic Benefit Transfer (EBT) card to pay for food. The amount depends on household income. There is an assets limit of $2,000 or $3,000 if elderly. Income varies with the size of the household. All household members’ income is counted.
- Federally-Assisted Housing – This is also sometimes known as Section 8. This program provides subsidized rent. The rent is capped at 30% of family adjusted income. There is no asset text. Income must be at or below the Regional Maximum. This varies from region to region.
- Group Homes – Many states have group homes for disabled persons. Generally, Medicaid pays for these group homes. The income and asset tests tend to be the same as general Medicaid.
- CHIP – The Children’s Health Insurance Program (CHIP) provide medical assistance to low and middle-class individuals. The recipient need not be disabled. Only three states have an asset test. There is an income limit that varies from 90% of the federal poverty limit to 350%.
If an individual is receiving means-tested public benefits, a Special Needs Trust is required.
Public Benefits That Are Not Means-Tested
Certain public benefits are not means-tested. These include:
- SSDI – SSDI is a cash benefit. The amount depends on the amount paid into the Social Security system. There are no income or asset tests.
- Medicare – Medicare provides medical coverage for hospital, out-patient, and prescription drugs. Generally, Medicare is limited to acute care. There are premiums, deductibles, copays, and maximums per spell of illness. There are no income or asset tests.
If a person is receiving public benefits that are not means-tested, no special needs trust is required.
What is a Special Needs Trust and How Does it Operate?
A Special Needs Trust is a creature of statute. These trusts were authorized by Congress in 1993. Essentially, there are seven requirements:
- Assets of the Individual – The trust must consist of assets of the individual. The personal injury settlement is an asset of the individual.
- Under 65 – The individual must be under age 65 at the time the trust is established and funded. A structure in place prior to the individual attaining age 65 can continue afterward.
- Disabled – The individual must be determined to be disabled by the Social Security Administration or the State Medicaid Agency.
- Sole Benefit Of – Distributions from the trust are limited to the sole benefit of the individual. This is often a problem as family members tend to view the trust as the family bank account. A strong trustee is essential.
- Established By – The trust must be established by a parent, grandparent, guardian, or a court. A Self-Settled Special Needs Trust cannot be established by the individual except in the case of a Pooled Trust.
- Payback – On the death of the beneficiary, or upon the termination of the trust during the beneficiary’s lifetime, the assets in the trust must be used to repay Medicaid for all medical assistance paid to the beneficiary since birth.
- Irrevocable – The trust must be irrevocable.
A professional trustee should always be utilized. Family members often want to serve as trustee. The trustee must be familiar with SSI law, Medicaid law, tax law, have investment expertise, and be familiar with fiduciary standards. The trustee must also be able to say “no” to requests for inappropriate trust distributions. Many states require corporate trustees in all but the smallest of Special Needs Trusts. Most states require an individual trustee to be bonded, which is often difficult if not impossible. Where an individual serves as trustee it is inevitably a question of when, not if, the trust will blow up in everyone’s face. Family members can be appointed as Trust Protectors and given the right to remove and replace the corporate trustee with another corporate trustee. This gives the family members comfort.
Essentially, the trustee makes distributions to third parties who provide goods and services, rather than to the trust beneficiary. A distribution to the trust beneficiary would reduce the SSI payment dollar-for-dollar. Payment to third party providers for good and services are not considered income, unless they provide food or shelter, in which event the SSI payment is reduced by approximately one-third, but Medicaid continues.
If a structured settlement is paid to an individual plaintiff, that would cause a loss of means-tested public benefits. By having the same structure paid into a Self-Settled Special Needs Trust, benefits are preserved. Most states require that the beneficiary of the structure on death be the trust to ensure the Medicaid payback.
 42 U.S.C. §1396p(d)(4)(A).