Special Needs Trusts and Personal Injury Settlements

A special needs trust (SNT), sometimes referred to as a supplemental needs trust, is a legal vehicle enabling assets to be held on behalf of someone with disabilities without affecting their eligibility for means-tested public benefits such as Medicaid or Supplemental Security Income. While assets held by the trust are not “countable” for the purpose of qualifying for such programs, there are strict regulations regarding disbursements. SNTs are meant to supplement the funds and services available through government programs.

Administering a special needs trust is considerably more complicated than managing most other trusts. The trustee is responsible for investing funds, making disbursements, paying taxes and maintaining detailed accounts. This requires an understanding of government programs, including strict regulations concerning the use of SNT assets, since improper use of funds can disqualify the beneficiary for important means-tested public benefits. In addition to handling these technical requirements, the trustee should have a deep appreciation for the beneficiary’s needs and desires so that the trust will make the best possible contribution to the individual’s quality of life.

A first party, or self-settled, SNT is created with assets belonging to an individual with disabilities, who becomes the “beneficiary.” Such funds typically consist of personal injury settlements or inheritance. The person must be under 65 at the time that the trust is established. Funds remaining in the trust at the beneficiary’s death must be used to reimburse Medicaid for services to that individual before they can be distributed to anyone else.

A third party special needs trust is created with assets provided by anyone other than the beneficiary, such as parents, other relatives or friends of the beneficiary. Such a trust can be created and funded during the life of the originator (“inter vivos”) or as part of a last will and testament (“testamentary”). Upon the beneficiary’s death, there is no requirement to use residual funds to reimburse Medicaid for services provided to the individual, and “remainder” beneficiaries may be named to receive those assets.

A pooled SNT is often a practical alternative for small estates or where it is difficult to identify a trustee. Sub-accounts belonging to many beneficiaries are managed as a single entity, usually by nonprofit corporations that call upon the experience of social workers, money managers and special needs attorneys. Since many financial institutions do not handle small SNTs, or charge fees that are not cost-effective for modest trusts, pooled trusts can give families access to highly skilled trustees. Funds remaining at the beneficiary’s death are typically divided between Medicaid and the nonprofit.

If the plaintiff will need means-tested public benefits such as Medicaid (including Medicaid waiver programs), Supplemental Security Income (SSI), the settlement should be held by a special needs trust in order to preserve their eligibility. Even a very large settlement can be quickly dissipated, given the high costs of care, and protecting assets in this manner can significantly contribute to the individual’s long-term financial security.

The first step is to assess the plaintiff’s short- and long-term financial requirements. There may be immediate needs –such as the purchase of a wheelchair-accessible van – requiring that a portion of the settlement funds be paid as a lump sum. Then analyze the return available through a structured approach. A broker will contact insurance companies to identify the most favorable payment schedule, which will be based on the plaintiff’s life expectancy and an associated “age rating,” determined through an evaluation of medical records. The internal rate of return should be compared with opportunities offered through other investments. The fact that structured settlement annuity payments are tax-free should also be considered in the analysis. If structured settlement annuity payments are utilized where a special needs trust is involved, the payee of the structured settlement annuity payments must be the special needs trust.

Medicare set-asides (MSAs) are funds that have been earmarked to pay for future medical care that Medicare would otherwise be expected to cover that are related to the individual’s injuries. Although there are currently no formal guidelines, many attorneys and settlement planners create such set-asides if:

• The plaintiff is currently on Medicare and the settlement is greater than $25,000, or
• The plaintiff is likely to begin Medicare coverage within 30 months and the settlement is greater than $250,000, AND
• The plaintiff is likely to require future treatment related to his or her injuries.

Because MSAs represent funds that are available to the plaintiff, they are considered “countable assets” by means-tested government programs. In order to protect the plaintiff’s eligibility for public benefits, a first party (self-settled) SNT must be established to include both the set-aside and the remainder of the settlement proceeds. The trust document must contain language sufficient to satisfy CMS (Centers for Medicare & Medicaid Services) that the MSA is being properly administered. This would include language prohibiting the payment of fees and expenses from the MSA amount, a requirement that the proceeds of the MSA be invested and provisions covering distributions to CMS.

The Impact of Personal Injury Settlements

While a personal injury settlement can provide much-needed financial relief, without proper planning, it can also jeopardize SSI and Medicaid eligibility. This is because these programs have strict income and asset limits, and a settlement can be considered income or assets, depending on how it is structured. Thus, for individuals with special needs who rely on these benefits, it is essential to establish a special needs trust to protect their eligibility.

Creating a Special Needs Trust with a Personal Injury Settlement

When setting up a special needs trust with a personal injury settlement, there are a few important steps to keep in mind:

1. Work with an attorney experienced in special needs planning to ensure that the trust is established correctly.

2. Ensure the settlement funds are structured correctly to avoid disqualification from government benefits.

3. Ensure that the settlement funds are held in the trust and not directly accessible to the beneficiary.

4. Follow all government regulations related to the trust’s administration and reporting.