PERSONAL INJURY SETTLEMENTS AND SPECIAL NEEDS TRUSTS: SETTING CLIENT EXPECTATIONS
by: Begley Law Group
by Thomas D. Begley, Jr., Esquire, CELA
If a client receiving a personal injury settlement also receives certain public benefits such as SSI and many forms of Medicaid, a Special Needs Trust is required to preserve those benefits. Special Needs Trusts entail restrictions and a small minority of clients would rather give up their benefits than fund a Special Needs Trust. In those cases, counsel should be careful to obtain a writing from the client acknowledging that refusal to do the trust will result in the means-tested benefits not being received. This will prevent a subsequent malpractice claim against the attorney.
In order to be sure the client understands what a Special Needs Trust is and how it operated, it is important to have a counseling session with the client and the trustee prior to the trust being established and funded. That way, the client meets the trustee, the trustee gets to know the needs of the client, and administration of the trust is much smoother than it otherwise would be.
If the trust is large, the disabled beneficiary and family should determine how long the person with disabilities is likely to live and how many years the trust should last. Once this determination has been made, a proposed budget should be prepared showing the anticipated expenses for which distributions can be made. This exercise begins the process of managing the family’s expectations with respect to distributions.
In developing the budget certain factors must be taken into consideration:
- The size of the trust;
- Anticipated income from the trust;
- Beneficiary’s current and anticipated needs;
- Age and health of the beneficiary;
- Anticipated extraordinary expenses;
- Plan to meet unexpected infrequent needs;
- Public benefits the beneficiary is currently receiving; and
- Public benefits for which the beneficiary may be eligible or could become eligible and is not currently receiving.
At the end of the counseling session, the Special Needs attorney should prepare a memo to the family and the trustee listing the points agreed to at the counseling session. After the initial meeting, it is appropriate to hold an annual follow-up meeting with the person with a disability, the family, and the trustee.
The trustee should begin by identifying any immediate cash needs. The person with a disability may need a residence, a handicap van, a vacation, furniture, or funds to repay outstanding debt.
Then, by using the budget form, the trustee should determine each item of expenditure with a monthly estimate as to cost and determine whether the expenditure will be paid by the trust or by the beneficiary. Once the budget is established, the trustee can pay these expenses every month without further request from the beneficiary.
A credit card makes the administration of the trust easier for all concerned. Will the beneficiary be able to get a credit card? Disabled beneficiaries often have no credit or poor credit, so this may be difficult. An option in this situation is to obtain a secured credit card. The trust could make a deposit with the bank issuing the credit card and the credit card limit will be less than the amount of the deposit. If the borrower defaulted on the credit card payments, the bank would seize the money in the account. If the trust beneficiary cannot obtain a credit card, determine whether another family member can get one. If so, that family member should obtain a separate credit card to be used only for purchases of goods and services for the trust beneficiary. The trustee can then reimburse the family member monthly for appropriate purchases.
Involving the person with a disability in the preparation of the budget is extremely useful, if the person is an adult with capacity. If the trustee attempts to impose its will on the budget process, there will be resentment on the part of the person with a disability and administration of the trust will become contentious. Participation by the person with a disability will achieve “buy-in” and the process of administering the trust will be much less contentious. The trustee should provide appropriate guidance.
Most clients want to spend some money right away on a house, a vehicle, and a trip to Disney World. In addition, there may be outstanding debt that should be repaid.
- Many personal injury victims wants to buy a home with a portion of the settlement proceeds. Typically, trustees, courts and State Medicaid Agencies like to keep the expenditure for the home at about 20% to 25% of the liquid assets in the trust, exclusive of any payments from the Structured Settlement. There are exceptions, but this is a good rule of thumb. If the trust pays for the home, the home must be titled in the name of the trust. Other family members living in the home must contribute a pro rata share to maintain the home. Maintenance includes taxes, insurance, utilities, routine maintenance, etc. For example, if there are four people living in the home, one the disabled person and the other three family members, the three family members should contribute 75% of the costs. Unfortunately, New Jersey Medicaid has recently taken the position that a parent has a legal obligation to support the child until age 18, so the trust may not pay any portion of the expenses of maintaining the home until that time. In determining whether a home can be purchased and how much can be spent for the home, these factors must be taken into consideration. Caution must be taken until this issue is resolved.
- New Jersey Medicaid has become strict with respect to purchase of vehicles. Typically, unless the vehicle is handicap accessible, the agency imposes a limit of roughly $20,000 to $25,000 on the purchase. If the vehicle is a handicap accessible van, then $70,000 is a more realistic number. If the van is purchased by trust assets, it can still be titled in the disabled person’s name or a family member’s name, so long as the trust has a lien on the vehicle. No payments need be made because of the lien, but the lien is filed with the Division of Motor Vehicles and prevents the plaintiff or family members from selling the vehicle or borrowing against it.
- Many clients receiving a personal injury settlement have waited a long time since their last vacation. The trust may pay for all of the expenses for the disabled plaintiff. If the plaintiff is a minor or physically or mentally incapacitated so that he or she cannot travel alone, the trust can pay for an adult, typically a parent, to accompany the plaintiff. Social Security permits the trust to pay for two parents in many situations, but New Jersey Medicaid is likely to resist this arrangement absent strong evidence that two parents are absolutely necessary. The trust cannot pay for other family members to join on the trip.
- At the time of a personal injury settlement, a plaintiff often has outstanding debt. The debt cannot be paid from the trust, but must be paid from the personal injury settlement directly. Debt sometimes include monies borrowed from family and friends. This debt can be repaid, but New Jersey Medicaid will insist on very thorough documentation to ensure that the payments are not simply disguised gifts.