SPECIAL NEEDS AND SETTLEMENT PROTECTION TRUSTS: WHAT ARE THEY AND WHEN DO I NEED THEM? PART 2

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

            In the settlement of a personal injury case questions frequently arise as to the various types of trusts that may be utilized and whether or not a trust is necessary.  This is the second of a two-part series.

When to Use Each Type of Trust

SSSNT

An SSSNT is generally used when a plaintiff is receiving means-tested public benefits such as Supplemental Security Income (SSI), some Medicaid programs, SNAP (Food Stamps) and Federally Assisted Housing.

Most Medicaid programs have an asset limit.  These include SSI-linked Medicaid, Community Medicaid, and most Medicaid Waiver programs.  However, some Medicaid programs do not have asset limits.  These include Obamacare and CHIP.  It is important for the personal injury attorney and the attorney drafting the trust document to obtain a letter from Social Security clearly indicating the Social Security benefits that the client is receiving, and a copy of the client’s medical cards in order to make a determination as to whether an SSSNT is necessary.

 Self-Settled Special Needs Trust with MSA Provisions

If a plaintiff is receiving Medicare or is likely to receive Medicare within thirty months, CMS takes the position that a Medicare Set-Aside Arrangement (MSA) is required.  It should be noted that there are no regulations governing the third-party liability cases.  The question then arises as to whether the funds in the MSA are countable assets for public benefit purposes such as SSI, Medicaid, SNAP and Federally Assisted Housing.  An argument can be made that the use of the funds in the MSA is restricted and, therefore, the assets should not be countable.  However, not all states accept this interpretation, so the safer course of action would be to include an MSA subtrust in the SSSNT.  Normally the trustee would retain the services of an MSA custodian to administer the MSA subtrust.

Settlement Protection Trust

Settlement Protection Trusts (SPTs) are generally used where there are no means-tested public benefits involved. They are commonly used when the plaintiff is a minor or an adult lacking mental capacity.  Some adults with capacity choose to establish an SPT, if they want help with money management and/or want an outsider to impose some discipline to prevent the money being squandered.  These cases are rare, but they do occur.  In cases involving large recoveries, it may be possible for the plaintiff to give up means-tested public benefits.  Perhaps private medical insurance can be purchased by the trust to replace Medicaid, and perhaps the income from the trust can be used to replace SSI, SNAP and Federally Assisted Housing.  This usually makes sense when possible, because the SSSNT is very restrictive and contains the Medicaid payback.  SPTs are much more flexible and there is no Medicaid payback included in the document.

SPT with Special Needs Provisions

In many instances, at the time of the settlement of the personal injury case, particularly those involving minors, the plaintiff is not receiving public benefits but may be able to receive them in the future.  For example, if the plaintiff is under age 18 and the custodial parents are working, the Social Security Administration (SSA) deems the income and assets of the custodial parents to the child.  However, upon the child reaching age 18 deeming stops and the child may be eligible for SSI and SSI-linked Medicaid.  In those cases, it is convenient to draft an SPT with Special Need Provisions.  This trust contains to subtrusts.  One is the Settlement Protection Subtrust.  This is the subtrust that is initially funded.  If the plaintiff applies for public benefits in the future, the trustee simply transfers the money from the Settlement Protection Subtrust to the Special Needs Subtrust to make the plaintiff financially eligible for means-tested public benefits.

SPT with Special Needs and MSA Provisions

This situation is the same as the SPT with Special Needs Provisions, except that a third subtrust is added to manage the MSA.

Who Should Serve as Trustee

            There are seven reasons to select a corporate trustee.

• Target on Individual Trustee’s Back. Few people understand that a trustee has serious responsibilities in the administration of a trust.  If something goes wrong, such as the trust (1) makes improper distributions, (2) pays unnecessary taxes, (3) causes the beneficiary to lose public benefits, (4) is not in compliance with the instructions given by the grantor, or (5) the investment performance in the trust is poor, the trustee can be held personally responsible.  Since individual trustees lack expertise in these areas, they must understand that if they are appointed and accept the appointment, they have significant liability to repay money from their own pockets and are operating with a target on their back.
• Knowledge of the Law. A trustee must have a knowledge of income, gift, estate and generation-skipping taxes, including capital gains taxes.  Laws change frequently.  Tax laws and public benefits laws particularly change frequently.  Corporate trustees know when these laws change and adapt accordingly.  Family members are often unaware of the changes and fail to comply with the new requirements.
  • A trustee must have a knowledge of income, gift, estate and generation-skipping taxes, including capital gains taxes.
  • Trustees must make accountings to beneficiaries, courts and, possibly, public benefit agencies.Trustees must have expertise in preparing these accountings.
  • Changes in Law. Laws change frequently. Tax laws and public benefits laws particularly change frequently.  Corporate trustees know when these laws change and adapt accordingly.  Family members are often unaware of the changes and fail to comply with the new requirements.
• Investment Expertise. Good professional trustees have investment expertise, which is usually far superior to that of the proposed family member trustee.
• Avoidance of Family Friction. Are the client and his family as united as they first appear, or are they dysfunctional? At the time the money from the personal injury settlement becomes available, there is usually the appearance of harmony.  However, if the individual receives funds outright, it is very, very common for family members to impose on the personal injury victim for gifts and loans, which usually result in the personal injury settlement being squandered in a very short period of time. Besides family members, friends are also guilty of seeking funds either by gift or loan. Typically, loans to family members and friends are never repaid.
• Special Circumstances. Unfortunately, many beneficiaries of trusts suffer from drug or alcohol problems.  Professional trustees are much more apt to understand these problems and to be able to manage these situations.
• Spendthrift Plaintiffs. It is easier for a professional trustee to say no to unreasonable requests than it is for a family member to do so.
• Avoidance of Conflict of Interest. Frequently, the family member selected to be the trustee of the trust is also a remainder beneficiary.  The more the trustee distributes to the beneficiary, the less will remain to be distributed to the trustee on the beneficiary’s death.
• Knowledge of the Disability System. Professional trustees are able to navigate the disability system to the advantage of the trust beneficiary.

The trick is to overcome the plaintiff’s resistance to a professional trustee.  A Trust Protector, usually a family member, can be appointed in the trust document and given the power to remove and replace the trustee with another corporate trustee, if desired.  This gives the family a comfort level that they have some control over the administration of the trust.

Another reason individuals are reluctant to appoint a corporate trustee is fees.  Most corporate trustees charge between 1% and 2.5% of trust assets with a minimum fee.  Over long periods of time, most corporate trustees average approximately 7% as a return on investments.  Even after paying the trustee fees, the plaintiff is usually way ahead financially.