FEATURES TO BE CONSIDERED IN PERSONAL INJURY RELATED TRUSTS

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

            There are a number of considerations when a personal injury trust is being utilized in connection with a personal injury recovery.  The types of trusts commonly used are:

• Special Needs Trust. A Special Needs Trust (SNT) is for an individual receiving, or who may be eligible to receive, means-tested public benefits such as SSI, Medicaid, Federally Assisted Housing, and SNAP (Food Stamps).
• Settlement Protection Trust. A Settlement Protection Trust (SPT) is used when there is a plaintiff who is a minor or incapacitated adult, or if the plaintiff wants help in investing the money and preventing him or her from squandering it.
• Settlement Protection Trust with Special Needs Provisions. In some instances, the Settlement Protection Trust with Special Needs Provisions (SPT with SNT) is utilized.  An example would be where the plaintiff is under age 18 and is not eligible for SSI and Medicaid because of parental deeming until the child attains age 18.  In those situations, the Settlement Protection Subtrust, which is fairly flexible, can be utilized until the child’s 18th birthday, at which time the funds will be transferred by the trustee into the Special Needs Subtrust.
• Settlement Protection Trust with Special Needs and Medicare-Set Aside Provisions. There are occasions where there may be a Settlement Protection Trust with Special Needs and Medicare Set-Aside (MSA) Provisions (SPT with SPT and MSA).  These would be cases where the plaintiff may be receiving public benefits in the future but needs an MSA.  Some Courts hold that the MSA is a countable resource precluding the plaintiff from receiving public benefits.  If the MSA is embedded in the Special Needs Trust, it is not a countable asset.
• Special Needs Trust with Medicare Set-Aside Provisions. Some trusts are simply Special Needs Trusts with MSA Provisions (SNT with MSA).

In designing these trusts, certain features should be considered.

• Who Should Serve as Trustee? A professional trustee should always be considered for a Personal Injury-Related Trust. The professional trustee has expertise in investment management, taxation, and navigating the system to support the injured party. Courts will usually not require any bond for a professional trustee.
• Trust Protector. A trust protector should be appointed whenever there is a corporate trustee. The trust protector should be given the authority to remove and replace the professional trustee in the event that the relationship proves to be unsatisfactory. Knowing that the trustee can be removed is comforting to the beneficiary.
• Each professional trustee publishes a Standard Schedule of Charges for the services of a trustee. It is usually a declining sliding scale based on the size of the trust assets under management. It should be noted that these trustee commissions are generally comparable to, and often less expensive than, those charged by any investment manager or even mutual funds. A good trustee will provide personal attention to the trust beneficiary.
• Limited Power of Appointment. The Personal Injury-Related Trust should give a beneficiary who has capacity a limited power of appointment. This means that the injured party can execute a will disposing of the assets in the trust upon death.  It may be better to give the injured party the limited power of appointment than to have the trust document determine who will receive the funds on the death of the beneficiary, because the injured party can exercise the appointment from time to time and change the disposition of assets as he or she sees fit. It should be noted that estate planning is crucial in the settlement of a personal injury case, particularly where Federal and State estate and inheritance taxes are involved.
• Revocable/Irrevocable. An SNT and an SNT with MSA must be irrevocable from inception.  An SPT could be revocable by the injured party, if the party has capacity, or it could be irrevocable. If one of the goals is to protect against squandering assets, it is advisable to make the trust irrevocable. However, once the Special Needs Subtrust is funded, the Special Needs Subtrust must be irrevocable.
• Grantor Trust. Any of the Personal Injury-Related Trusts can be a grantor trust, which means that, for income tax purposes, it is ignored. The income tax treatment of the income and deductions pertaining to the trust are the same as they would be if there was no trust. The grantor picks up the income and deductions on his or her personal tax returns.