TYPICAL PROBLEMS WITH SPECIAL NEEDS AND SETTLEMENT PROTECTION TRUSTS IN PERSONAL INJURY RECOVERIES

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

            Money in a Special Needs Trust (SNT) must be expended solely for the benefit of the trust beneficiary in a judicious manner to ensure that all of the needs of the trust beneficiary are met over a lifetime. Money in an Settlement Protection Trust (SPT) for a minor or incapacitated person belongs to the beneficiary and trust monies must be used primarily for that individual’s benefit. The problem is many parents try to live off their children’s trust or to raise their standard of living using their children’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 where an SNT is involved. 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 principal of the trust plus income earned by the trust. Trustees’ fees, money management fees, and income taxes must be deducted from these distributions.

States vary in their interpretation as to whether to treat payments from a structured settlement as income or principal. In New Jersey, those payments are considered income; in Pennsylvania, they are considered principal. Trustees must balance what is necessary, affordable, and reasonable under the circumstances.  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, and meet the beneficiary’s other living expenses. 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 20 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 should be able 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 usually will 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?” Where 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 person with disabilities, 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 same is true of a handicap van. Courts and State Medicaid Agencies are willing to approve purchase of a handicap van with appropriate equipment but are reluctant to approve unnecessary luxury features.
• Parents as Caregivers. Parents often want to or are forced to quit their jobs and have the trust pay them as a caregiver.  Trustees, SSA, and most State Medicaid Agencies have no objection to this, so long as compensation is reasonable. However, many families want excessive compensation—often in excess of $100,000-$150,000 per year. Parents have an obligation to support their children, however, and distributions from SNTs and SPTs cannot be used to satisfy that obligation of support. Each state has guidelines on how to calculate the legal obligation of support. In general, these guidelines should be followed. 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.
• Divorced or Separated Families. Where there are divorced or separated families, the administration of a trust 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. Parents are expected to share the van. The same would be true of wheelchairs and other medical equipment. While there may be some inconvenience caused to the parents, the trust is for the benefit of the child and not the parents. 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.