TYPICAL PROBLEMS WITH SPECIAL NEEDS AND SETTLEMENT PROTECTION TRUSTS

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

            Frequently the proceeds of personal injury recoveries are placed in a Special Needs Trust (SNT) when the plaintiff is receiving means-tested public benefits or a Settlement Protection Trust (SPT) when the plaintiff is a minor, an incapacitated person or wants help in investing and managing money over long periods of time.  It is important at the outset to establish expectations as to what a trust can and cannot do.  Frequently when then plaintiff is a minor, parents try to live off of the child’s trust or raise their standard of living by using the child’s trust.  Many families of personal injury victims feel that the entire family has been affected by the personal injury. Some families look at the money being received through a personal injury settlement as a “family bank account.” Courts see this on a regular basis and are vigilant in stopping it. The Social Security Administration (SSA) and State Medicaid Agencies also are aggressive in this regard. Courts are very strict in their views that the money belongs to the minor or incapacitated person and should last for the lifetime of that individual whenever possible. Trustees, mindful of the need to have the funds last, will limit routine and ongoing distributions to what is considered a “safe” rate of distribution, even if the family feels that all of the beneficiary’s needs are not being met at the same time. As a rule of thumb, distributions are limited to between 4 and 5 percent of the value of the trust.

Major problems typically encountered with these types of trusts include the following:

• Many families look at the personal injury settlement and want to use all or a major portion of it to buy a home for the family. In some cases, the family does not own a home. In other cases, they want to upgrade significantly from their current residence. If any portion of the settlement is to be used to purchase a home, it is best to try to allocate a portion of the settlement to other family members, such as parents, and have the parents use that money to purchase a home. Otherwise, the home will be subject to a Medicaid payback, if it is owned by an SNT. While an SNT or an SPT can purchase a home legally, the problem that many family members do not take into account is whether the trust can afford to maintain the home. Many families of personal injury victims are unsophisticated, have never owned a home, and have no idea of the expenses attendant to home ownership, including taxes, insurance, and higher utility bills.

If the trust is to purchase the home, courts and trustees generally will not approve more than 10 to 15 percent of trust assets to be used for this purpose. Operating expenses of the home must be considered as well as the personal injury victim’s other needs for the rest of his or her lifetime. If the trust purchases a home to be occupied by other family members, the other family members are often expected to pay a pro rata share of these operating expenses and are often unable or unwilling to do so. Some trustees will refuse to serve, if the trust owns a home.

• Modifications to the Home. In many instances the family owns a home, but it is no longer suitable because of the injuries sustained by the personal injury victim. Modifications can be made to the existing home to accommodate the individual with disabilities. These modifications often include installation of handicap ramps, altering the bathrooms to make them handicap accessible, installation of chair lifts or elevators, or adding an addition to the first floor for sleeping accommodations for the family member with disabilities. Courts often readily approve these modifications. Some families want to go further and install swimming pools, cabanas, and other amenities. In some cases, these are perfectly justified; in others, they are really more for the benefit of other family members and must be carefully scrutinized. The question then becomes, “can trust money be used to modify a home not owned by the trust?” If the trust does not own a home and an SNT is involved, many State Medicaid Agencies require that the homeowner grant the trust a lien on the value of the home before and after improvements.
• Either an SNT or an SPT can purchase a vehicle. Most trustees do not want to own the vehicle, but are willing to expend money to purchase the vehicle to be titled in the name of the beneficiaries of the trust, if appropriate, or in the name of another family member. The trustee then takes back a lien on the vehicle. Many family members want to purchase luxury vehicles that are unnecessary. Good trustees will resist this effort and agree only to purchase an average-priced vehicle. The amount that can be spent for the vehicle will depend, to a certain extent, on the size of the trust.
• Parents as Caregivers. Parents often want to or are forced to quit their jobs and have the trust pay them as a caregiver. SSA and most State Medicaid Agencies have no objection to this, so long as compensation is reasonable. Some states require medical certification of the caregiver. Parents have an obligation to support their children and distributions from SNTs and SPTs cannot be used to satisfy that obligation of support. Both courts and State Medicaid Agencies recognize that where a child with disabilities is involved, the parents’ 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. However, SSA has said an SNT “cannot pay mom to be mom.” Parents can be paid only for the extraordinary care that they provide. New Jersey has a program called “PPP” where Medicaid will pay the parents of a Special Needs Trust beneficiary to care for children.
• Divorced or Separated Families. Where there are divorced or separated families, the administration of an SNT becomes more complex. Courts are very reluctant to authorize expenditures from trusts to provide items for the convenience of the parents. For example, it would be very unlikely that a court will approve the purchase of more than one handicap van, one wheelchair and other medical equipment. Parents are expected to share the van, wheelchair and other medical equipment. The obligation of the courts and the trustees is to provide for all of the beneficiary’s needs over the beneficiary’s lifetime. Duplication of equipment is viewed as wasteful.