POST-SETTLEMENT OPTIONS FOR MINOR OR INCAPACITATED PERSONS

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

            Essentially, there are four options with respect to the treatment of settlement funds obtained on behalf of a minor or incapacitated person.

• Deposit with Court. Funds could be deposited with the court. There are virtually no advantages to this option, but several disadvantages. The disadvantages include:
  • Generally, each time money is to be withdrawn, an application must be made to the court for approval. Courts frequently deny these applications if the beneficiary is a minor.
  • Funds are usually invested in low-yielding Certificates of Deposit.
  • At age 18, or the state age of majority, a minor can withdraw the funds and squander them as the minor sees fit.

In some states, such as Pennsylvania, where there is a minor or incapacitated person, the Rules of Civil Procedure⁴² require a corporate fiduciary if the net settlement to the plaintiff is $25,000 or more.

• Special Needs Trust. The funds could be deposited into a Self-Settled Special Needs Trust (SSSNT). The funds in the trust are not counted in determining eligibility for means-tested public benefits such as SSI and Medicaid, and these important public benefits can be preserved. The primary disadvantages are:
  • Medicaid Payback. There is a payback provision to Medicaid on the death of the trust beneficiary. While this may sound harsh, it is usually better than the alternative. The alternative is to “pay as you go” for medical services. Payment is made at full list price rather than the deeply discounted arrangement paid by Medicaid. “Pay as you go” means paying now rather than later. Payment is also made now rather than later. If payment is deferred, those monies can be used for investments and for the basic needs of the trust beneficiary. The beneficiary can take advantage of the time value of money. If there is no money left in the trust on the death of the beneficiary, no payback is required. If there is extra money left in the trust on the death of the beneficiary after payment to Medicaid, the excess funds can be left to the heirs of the trust beneficiary. There is no payback requirement for SSI.
  • Sole Benefit Rule. Under the rules of SSI, funds in an SSSNT are restricted for primary use of the trust beneficiary.  Under New Jersey Medicaid, the funds in an SSSNT are restricted for the sole benefit of the trust beneficiary.  This means that if other family members benefit from trust distributions for things like home improvements, they must pay a pro rata share. For example, if the trust owns a home and it is occupied by three healthy people and the disabled trust beneficiary, the three healthy people must pay 75 percent of the expenses of operating and maintaining the home.

If a court is going to supervise the trust, which is often the case in Pennsylvania and sometimes the case in New Jersey, the court will usually insist on the funds being used for the sole benefit of the person with disabilities whether or not an SNT is utilized.

• Payment to Third Parties. An SNT cannot distribute money to the trust beneficiary. Any such distribution would be considered income causing the beneficiary to lose SSI and Medicaid. The practice is for the trustee to make direct payments to the third parties providing goods and services to the beneficiary. For example, rather than give the trust beneficiary money to pay cell phone charges each month, the trustee pays the cell phone bill directly to the provider. Remember, that there can be a reduction in an SSI grant for distributions for shelter In-Kind Support and Maintenance (ISM).  Alternatively, the trustee will usually provide a credit card or debit card to the trust beneficiary or family member of the trust beneficiary.  Receipts must be furnished monthly to the trustee.

• Settlement Protection Trust. A Settlement Protection Trust (SPT) is somewhat more flexible than an SNT. The disadvantage is that if the trust beneficiary is receiving means-tested public benefits, the assets in the SPT would be considered countable resources and cause a loss of those benefits. Remember, however, Medicaid programs in most states do not count resources for children under the Child Health Insurance Program (CHIP). The advantage is that the administration of the trust may be somewhat more flexible.
  • Payback. There is no Medicaid payback in cases involving an SPT.
  • Sole Benefit Rule. Unless there is court supervision, which is often the case in Pennsylvania, if the beneficiary is a minor or incapacitated person and which is sometimes the case in New Jersey, then distributions must be made for the sole benefit of that minor or incapacitated person. However, if there is no court supervision, trustees can be somewhat more flexible in incidentally benefiting other family members. Trustees do need to make sure they do not breach their fiduciary duty to the primary beneficiary.
  • Payment to Third Party Providers. Under an SPT, direct payment to third-party providers is not required. The trust could send the trust beneficiary or the parents or guardian of the trust beneficiary monies each month to be spent on behalf of the beneficiary in accordance with a budget previously agreed upon by the trustee and the family.
• Settlement Protection Trust with Special Needs Provisions. There are cases where a beneficiary may not be receiving means-tested public benefits at the time of settlement but may be eligible for them in the future. For example, as long as a child is under 18, he is normally not eligible for SSI and Medicaid, because the parents’ income and assets are deemed to the child. However, upon attaining age 18, the deeming stops and the child may be eligible for those benefits. In other cases, the child has a medical condition such as a bad heart but may not be disabled at the time of settlement, in accordance with the definition of disability contained in the Social Security Act (SSA). However, as time goes on the child’s condition may decline and the child may meet the SSA disability standard and an SNT may be required to obtain and maintain SSI and particularly, Medicaid. The solution in these situations is to establish an SPT, which has the advantages outlined above with a provision that the trustee has the right to transfer the funds in the Settlement Protection Subtrust to a Special Needs Subtrust in the trustee’s discretion. The advantage is much greater flexibility. The disadvantages of the SNT are deferred until it is determined that the SNT is definitely going to be necessary. Many states have Katie Beckett Medicaid waiver programs where parental deeming does not apply.

42Pennsylvania RCP Rules 2039, 2064 and 2206.