THE TWO TRUSTS SOLUTION FOR SAVING THE HOUSE IN A BIRTH INJURY CASE

by Thomas D. Begley, Jr., Esquire, CELA

[Article originally published in The Barrister]  Many birth injury cases result in significant recoveries for the plaintiff(s).  As in most personal injury cases, the family usually has three wishes:  a house, a car and a trip to Disney World.  Frequently, the family is of modest means and the injured parties receiving means-tested public benefits such as SSI and Medicaid. In those cases, a Special Needs Trust is usually drafted to hold the settlement proceeds in order to enable the injured child to maintain those benefits.

Payback

One of the requirements under both federal and state law for a Self-Settled Special Needs Trust is that on the death of the beneficiary of the trust Medicaid be repaid for all medical assistance rendered to the trust beneficiary since birth.  As a result, upon the death of the child with disabilities, the home that was purchased with the proceeds of the settlement of the lawsuit must be sold to repay Medicaid, and the family living with the injured child is left homeless.  How can this result be avoided?

Two Trusts

Suppose at the time of settlement an allocation was made of the proceeds and paid into a First Party Special Needs Trust, and a portion was allocated to the parents to be paid into a Settlement Protection Trust for the benefit of the parents?  If necessary, the parents’ trust could be restricted to the purchase and maintenance of a home for the parents and the parents’ family.  If the parents had sufficient income, the trust could purchase the home and the parents could pay the expenses of maintaining the home.  The First Party Special Needs Trust for the benefit of the child could contribute a pro rata share of the maintenance costs. For example, if four people lived in the home, the Self-Settled Special Needs Trust could pay 25% of the cost of maintaining the home, such as real estate taxes, insurance, utilities and maintenance.  If the parents’ income combined with contributions from the First Party Special Needs Trust was not sufficient to pay all of the expenses of maintaining the home, then the trust would have to be funded with sufficient additional monies to pay the differential in maintaining the home.  A Structured Settlement could even be obtained for that purpose.  There is no payback required from a Settlement Protection Trust.  The Settlement Protection Trust could contain language establishing a Third Party Special Needs Trust for the benefit of the child with disabilities upon the death of the surviving parent.  There is no payback to Medicaid required from a Third Party Special Needs Trust.

If the child with disabilities died, the funds in the Self-Settled Special Needs Trust would go to repay Medicaid, but the funds allocated to the parents’ Settlement Protection Trust would not be subject to the Medicaid payback on the death of the child and the family could continue to occupy the home.  In fact, there would be no Medicaid payback even on the deaths of the parents.

If the parents predecease the child with disabilities, the home could be held in the Third Party Special Needs Trust established under the terms of the parents’ Settlement Protection Trust.  The Third Party Special Needs Trust would be for the benefit of the child with disabilities, and the trustee of that trust could be authorized to retain the home for the benefit of the child with disabilities, if that would be appropriate.  Otherwise, the trustee could be authorized to sell the home and deposit the proceeds of sale in the Third Party Special Needs Trust for the benefit of the child with disabilities.  Under this arrangement, the child is guaranteed a residence for so long as he or she is capable of living there, and the parents do not lose the residence upon the premature death of their child.

Allocation

The key to this strategy is the allocation to the parents.  If the injured party is a minor or an incapacitated person, the settlement must be approved by the court.  The court will want to see that the allocation between the parents and the child is reasonable.  The parents of a child with disabilities have a legal obligation to support the child. Parents are required to provide a normal amount of care for their children.  However, in the case of a child with disabilities, the parents will be providing an “extraordinary” level of care.  Parents are entitled to some form of compensation for that care.  A Pediatric Care Manager or a Life Care Planner can quantify the level of extraordinary care that is expected to be provided by the parents to the child.  This plan can be presented to the court as a basis for the allocation to the parent. In addition, parents are entitled to a loss of companionship by reason of the birth injury.  This is similar to the loss of consortium claim of a spouse that the courts frequently approve.  (See Thalman v. Owens Corning Fiberglass Corp., 290 N.J. Super 676.)