When to Use a First Party Special Needs Trust

• INTRODUCTION¹

You do your homework, help with negotiations, and spend hours working on the case to get the best result for your client. The settlement is finalized and everyone is ready to walk away from the case. Unfortunately, it does not always work that way. Too often, one of the parties to the lawsuit is on needs-based government benefits and no steps were taken to protect their eligibility for benefits after the receipt of the settlement. Money meant to care for the person for a lifetime is gone after a single hospitalization.

• IS FAILURE TO ADDRESS THESE ISSUES MALPRACTICE?

1. Legal malpractice claims against personal injury attorneys regarding advice and settlement and/or negotiation issues are on the rise due to a lack of consideration of one or more of these issues. Several legal malpractice cases have been brought for failure to advise clients of their ability to protect benefit eligibility.

2. For example, Christina Grillo settled a personal injury case in Texas for a lump sum upon the advice of her personal injury attorney. She later sued the attorney and guardian ad litem for malpractice. She alleged that the defendants: (i) failed to consult competent experts concerning a structured settlement and (ii) failed to plan to preserve her Social Security Income (SSI) and Medicaid eligibility. Ms. Grillo alleged that a structured settlement with a special needs trust would have protected her personal injury settlement from dissipation, provided tax benefits, and protected her SSI and Medicaid benefits. The case was settled by all defendants for a combined sum of $4.1 million. Grillo v. Petiete et al., 96-145090-92 (96th Dist. Ct., Tarrant Cty., Texas); and Grillo v. Henry Cause, 96-167943-96, (96th Dist. Ct., Tarrant Cty, Texas).

3. In Connecticut, a personal injury claim was settled for James A. Saunders III (Jamie) by his conservator. The conservator requested that the net settlement amount be placed in a special needs trust for Jamie to preserve his Medicaid eligibility. The State of Connecticut objected. The Supreme Court of Connecticut rejected the attorney general's argument that the conservator should spend down all of Jamie's assets and then re-apply for Medicaid assistance. The court ruled: "By contrast, with the creation of the trust, Jamie will retain his Medicaid eligibility and [the special needs trust] can provide for his supplemental needs from the trust assets, while Medicaid provides for his basic medical care. Therefore, not only is the latter course of action clearly the better one for Jamie, it may be fairly stated that by failing to follow it, the Probate Court, and [the conservator] potentially could have been deemed to be in dereliction of their duties to Jamie (italics added)." Dept. of Social Services v. Saunders, 724 A.2d 1093, 1105 (Conn. 1999). This duty requires the fiduciary of an estate and indirectly, the trial lawyer, to protect the disabled client's settlement.

4. Document Your File. Your file should document the fact that the special needs trust option (and the option to structure the settlement) was presented to the claimant. If the claimant chooses not to use a trust, a statement should be signed that they were advised about the trust, they understand that they will lose their benefits when the settlement proceeds become available, and they have chosen not to use a special needs trust. Also, remember that if the claimant, who is on need-based benefits, decides not to utilize a special needs trust, they have a legal obligation to notify Social Security and the local Medicaid office within ten days of receipt of the settlement funds. Failure to notify could result in an overpayment situation requiring repayment, or a fraud investigation in the future.

• PRESERVATION OF GOVERNMENT BENEFITS

Many persons with disabilities depend on government benefit programs for income and/or health care coverage. Some programs, such as Social Security Disability Insurance (SSDI) and Medicare, may be available regardless of the recipients income or property. Eligibility for these benefits is determined by prior work history, not by financial assets. In contrast, need-based programs, such as Supplemental Security Income (SSI) and Medicaid, have strict income and asset guidelines for eligibility. Medicaid provides coverage for medical expenses, including prescription drugs, in-home health care services, and payment for long-term nursing home care.

Receipt of assets or income from any source, such as a personal injury settlement or inheritance, can impact eligibility for these need-based programs. A chronically ill or severely disabled person may be otherwise uninsurable, and the assets received from the settlement may be insufficient to privately pay for the care provided by Medicaid. Federal and state laws now permit a disabled individual to preserve assets in a trust to pay for supplemental needs and care while maintaining eligibility for Medicaid and other government benefits.

Any case in which the plaintiff is disabled should be analyzed to determine if a special needs trust is appropriate. In cases where the disability is severe, the need for government benefits should be reviewed early in the case. The client may be eligible to receive various benefits which could make their lives more comfortable while the case is pending. This also may make the resolution of the case easier, as the clients will have a better understanding of the benefits available, the value of those benefits, and the methods of protecting their eligibility after the settlement. Moreover, by obtaining eligibility for Medicaid waiver programs which do not deem income and assets of the spouse or parents to the injured person, allocation of a portion of the settlement to the spouses loss of consortium claim or the parents loss of services claims will not affect the Medicaid eligibility of the injured family member.

When making a determination of whether a special needs trust is appropriate in a case, consider whether the disability meets the Social Security definition. You cannot use a special needs trust to protect low-income Medicaid eligibility for a non-disabled person. Also compare the anticipated costs of care with the expected net settlement proceeds. This analysis should be based on the person's life expectancy and lifetime care plan, the expected growth of the funds under different investment models or the proposed structure, and how long the funds will last both with or without Medicaid and other government benefits. Alternative payment sources or providers of services must also be determined. These include additional income sources, including Social Security Disability Insurance, private disability insurance, private health insurance and other government insurance programs. Even if private insurance is available, the limitations of this coverage must be reviewed carefully. The policy may have a lifetime cap, exclusions from coverage for pre-existing conditions, and/or a child's coverage under the policy may terminate at age 18 or 22.

Despite the Medicaid payback requirement upon the death of the beneficiary, the special needs trust often preserves more funds for other family members than would be available if the trust were not used. Medicaid generally pays for services and equipment at a much lower negotiated rate than the individual would pay privately.

• GOVERNMENT BENEFITS

1. Benefits Not Based On Financial Need

   Benefits not based on financial need include Social Security Disability Insurance (SSDI) and Medicare². Receipt of settlement funds will not affect eligibility for these benefits³. These benefits will be lost only if the person can return to work and is no longer disabled.

    

   SSDI. An individual is entitled to SSDI benefits if he or she is:

   under full retirement age;

   has at least 20 credits in the 40-quarter period ending with the quarter in which the individual became disabled (the 20/40 rule) and is fully insured (Social Security Handbook, http://www.ssa.gov/OP_Home/handbook/ssa-hbk.htm, §207. See §203 for the definition of fully insured [generally one quarter for each year after attaining the age of 21 up to a maximum of 40 quarters] and §208 for a special exception to the 20/40 rule for workers disabled before age 31); and

   is disabled (To be disabled within the meaning of the Social Security Act, the individual must have a severe, medically determinable physical or mental impairment which has or is expected to last for one year or to result in death. In addition, the impairment must make the individual unable to engage in "substantial gainful activity" 20 C.F.R. §404.1505 for SSDI, and 20 C.F.R. §416.905 for SSI);

   The person must file an application for benefits and establish a waiting period of five consecutive months beginning with a month in which the worker was both insured and disabled.

   Children who became disabled before age 22 and have remained continuously disabled may draw benefits on the record of a disabled, deceased, or retired parent as long as the child is disabled and unmarried. These benefits are often referred to as CDB (Childhood Disability Benefits) or DAC (Disabled Adult Child) benefits.

   Medicare. Medicare is a federal health insurance program. SSDI beneficiaries are entitled to Part A Medicare benefits after 24 months of qualified disability⁴. There are some exceptions for specific conditions, for example the waiting period is one month for a person disabled with ALS. There is no waiting period for a person with End Stage Kidney Disease (ESRD) on kidney dialysis who does home dialysis, there is a three month waiting period for patients receiving treatment at a dialysis center, and coverage may start up to two months before a patient receives a transplant if certain criteria are met.

   Medicare Part A covers inpatient hospital services, home health, and hospice benefits. It also pays for a very limited amount of Skilled Nursing Home care, but not custodial care. SSDI beneficiaries who are eligible for Part A benefits may enroll for Part B and D benefits but must pay a premium. Part B benefits cover physicians' charges, while Part D covers prescription drugs. There are significant deductibles and co-pays.

   Under current law, there are no resource or income limits for Medicare eligibility, however the new Part D has enhanced drug coverage for persons with low income and resources.

2. Benefits Based On Financial Need

   Need-based programs, such as Supplemental Security Income (SSI) and Medicaid, are often critical to the care of the disabled individual. Medicaid can be especially important if the individual is uninsurable, or if they need extensive home care. There are a number of other need-based benefits which are not addressed in this outline, but must be carefully considered when settling a case. These include the Bureau for Children with Medical Handicaps (BCMH), Section 8 housing, various utility assistance programs, Healthy Families and Healthy Start Medicaid for low-income families, and food stamps.

   Supplemental Security Income (SSI). SSI is a federal welfare program that provides a minimum level of income for some needy persons. To be eligible for SSI a person must be age 65 or older, blind, or disabled; a U.S. citizen (with limited exceptions); and not a resident of a public institution. The 2011 monthly federal benefit rate for unmarried persons is $674.00 and for a couple is $958.00.⁵

   In addition, the individual must meet the income and resource tests. Their income must be less than certain standards, and they may have no more than $2,000 of countable resources ($3,000 for a couple.)

   Income is anything received in cash, with the following exclusions: (1) The first $20 of most income received in a month; (2) The first $65 of earnings received in a month and one-half of earnings over $65. "Deemed" income is income of another attributed to the claimant. Deeming is an issue when the minor child lives with an ineligible parent. Deeming stops applying in the month following the child's 18th birthday.

   An unmarried individual can have no more than $2,000 of countable resources. A countable resource is property which is both owned by the individual, available to him or her, and not exempt. Generally, countable resources include cash, liquid assets, and any real or personal property that an individual owns (or has the right to liquidate) and could convert to cash to use for his or her support and maintenance. 20 C.F.R. §416.1202.

   Non-countable resources include:

   1. A home owned and occupied by the person with a disability, or if institutionalized, in many states, a home the person intends to return to.

   2. One automobile, if the vehicle is used for transportation for the individual or a member of the individual's household.

   3. Household goods and personal effects.

   4. Irrevocable funeral and burial arrangements. See POMS §SI 01130 for a list of non-countable resources.

    

   Transfers of resources for less than fair market value within 36 months of an application for SSI will result in the imposition of a period of ineligibility (up to 36 months), which is determined by dividing the uncompensated value of the amount transferred by the federal benefit rate, plus any state supplement benefit rate.

   Amounts owned on the first of the month are resources, while amounts received during the month are income. Income retained into the next calendar month is then considered a resource. Income and resources become countable only when they are available to the recipient (or could be available upon request.) An individual has a duty to report increases in income or resources within 10 days of receipt.

   Medicaid. Medicaid is a joint federal and state funded program to provide medical services to the aged, blind, and disabled who are financially needy. The federal government provides about 60% of the funding and delegates the administration of each state's plan to the state. Income and resource tests are generally identical to those used for SSI eligibility.

   Medicaid provides many services that are required or desperately needed by persons with disabilities or special needs.

   1. The federal Medicaid statute requires the state to pay for certain listed medical services. 42 U.S.C. §§1396a(a)(10)(A) and 1396a-(a)(10)(C), as well as 42 C.F.R. §§440.210, 440.220 and 440.230. These include: inpatient hospital services; outpatient hospital services; physician services; physical therapy; prescribed drugs; skilled and intermediate nursing services; home and community care for disabled individuals; community support living arrangement services; personal care services; case management services; and emergency and non-emergency medical transport.

   2. Generally, each state will have its own waiver programs which provide Medicaid services to individuals who live at home rather than in an institution. Waiver services include case management; homemaker services; home health aides; and personal care services. 42 C.F.R. §§441.300 et seq.

   3. State Medicaid Plans must provide for home health care for all persons entitled to nursing facility services.

    

   • TRUSTS TO PRESERVE BENEFITS

   1. Special Needs Trust or Medicaid Payback Trust. 42 U.S.C. §1396p(d)(4)(A); O.A.C. §5101:1-39-27.1, ORC 5111.151

      The special needs trust must meet the following three requirements in order to be an exempt resource for purposes of Medicaid eligibility. (i) The trust must be established by a parent, grandparent, legal guardian, or a court (the Center for Medicare and Medicaid Services, formerly HCFA, has stated that a court's "approval" of the establishment of the trust qualifies as "establishing" the trust.) (ii) The trust must be for the sole benefit of a beneficiary who is an individual under age 65 (trust remains valid after 65 but additional assets cannot be added except to structured annuity payments funded with an annuity prior to age 65), and the beneficiary must be disabled according to the Social Security definition (42 U.S.C. §1382c(3)). (iii) The trust must provide that upon the beneficiary's death, the state is reimbursed from the trust for all Medicaid benefits paid on behalf of the beneficiary.

      Funds entering and leaving the trust are generally treated according to SSI rules. Distributions directly to the beneficiary are unearned income, while expenditures for food and shelter are considered in-kind support and maintenance (ISM). Payments made for non-food or shelter expenses, which are paid directly to the providers of goods or services, have no impact on benefit eligibility.

   2. Pooled Trust. 42 U.S.C. §1396p(d)(4)(C); O.A.C. §5101:1-39-27.1

      The pooled trust is similar in most respects to the payback trust discussed in section V.A. above, with the following exceptions. The trust may be established by the disabled individual himself or herself, as well as by the parent, grandparent, legal guardian, or court; In some states, the trust may be established for a beneficiary over the age of 65 if the individual was disabled before the age of 65. In other states, a transfer of assets to a pooled trust by an individual 65 years of age or older will be considered a transfer without consideration and create a penalty period. The trust must be managed by a non-profit association, a separate account must be maintained for each beneficiary, with the individual accounts pooled for investment and management, and an option exists whereby funds which are retained by the trust at the death of the beneficiary are not subject to pay back to the state.

      The pooled trust is appropriate in cases in which the assets are insufficient for a corporate fiduciary to handle, when there is no suitable individual to serve as trustee, when the beneficiary is competent to establish the trust, has no living parent or grandparent, and does not want to go through the court or when the beneficiary is 65 years of age or older in those states that do not impose a penalty.

   • ALTERNATIVES TO SPECIAL NEEDS TRUSTS FOR SMALL SETTLEMENTS AND FOR PLAINTIFFS 65 YEARS OF AGE OR OLDER

   Before implementing a special needs trust or pooled trust, you should consider whether the trust is necessary. A trust is not always necessary or the correct answer. The cost of creating and funding the trust must be considered. In addition, the trust will incur administration expenses, including trustee's fees, attorneys' fees, investment fees, and tax return preparation fees. These costs may be excessive in relation to the amount in question. The beneficiary may not need SSI or Medicaid after receiving the settlement proceeds if the funds available to the injured person exceed his or her monthly care needs.

   Alternatives to an SNT for smaller settlements include:

    

   • Purchasing exempt resources, such as motor vehicle or home.
   • Paying off debt, including mortgages and credit card debt.
   • Prepaying bills.
   • Giving up needs-based benefits.
   • Prepayment of room and board for a limited term or life.

    

   Other methods of preserving benefit eligibility include making larger allocations to consortium claims or other derivative claims, or using traditional Medicaid planning techniques, such as transfers of assets, purchase of exempt assets with the settlement proceeds, and using structured settlement payments within the eligibility limits with family members named as annuity beneficiaries. The availability of these techniques is dependent upon whether the plaintiff is competent.

   • THE ROLE OF THE SPECIAL NEEDS TRUST ATTORNEY

   By consulting with an attorney experienced in drafting special needs trusts and knowledgeable about benefit programs, the litigating attorney can avoid liability for failing to effectively protect benefit eligibility, or for failing to address issues involving Medicare and Medicaid liens. The attorney consulted should be available to do the following:

   • Determine which public benefits are in place or can be accessed for the injured person and family members;

   • Review the life care plan or obtain an independent assessment of actual future needs;

   • Analyze allocation issues where there are derivative claims;

   • Recommend and prepare 468b settlement funds when appropriate;

   • Work with the structured settlement agent to determine an appropriate structure to meet the plaintiffs needs and to analyze estate tax issues;

   • Help identify and resolve Medicaid and Medicare liens;

   • Prepare Medicare set-aside arrangements when necessary;

   • Attend mediation and court hearings;

   • Draft or review court filings in probate and/or trial court;

   • Review settlement agreements and releases;

   • Draft an appropriate trust and explain it to the beneficiary and the family;

   • Prepare other estate planning documents for competent beneficiaries when appropriate, including a will, power of attorney, and health care directives;

   • Find an appropriate trustee and trust advisors, arrange for the trustee to meet the beneficiary and family, negotiate trustee fees;

   • Instruct the trustee and advisors concerning their responsibilities and administration of the trust, including appropriate distributions from the trust;

   • Prepare funding instructions and obtain taxpayer identification number;

   • Give formal notice of the trust and funding to public benefit agencies;

   • Defend the trust in the context of eligibility reviews or when benefits are improperly terminated;

   • Provide representation or advice in connection with the purchase or construction of an accessible residence or purchase of an adapted vehicle;

   • Provide ongoing advice and representation to the family or the trustee in administration of the trust, including filing applications to expend, accountings, etc. for trusts under probate court supervision;

   • Incorporate subsequent settlements into the trust, by appropriate court order if necessary; and,

   • Upon the death of the beneficiary, advise the trustee concerning termination of the trust, repayment to the state, and final distribution.

   • For a list of attorneys who practice in this area in each state go to http://www.specialneedsalliance.com

   1 The written materials were adapted from a presentation made to the Ohio Academy of Trial Lawyers by Janet Lowder of Hickman & Lowder, 1370 Ontario Street, Suite 1620, Cleveland, Ohio 44113. www.hickman-lowder.com.

   2 Other benefits which are not based on financial need include special education services, and civil service and military survivors' benefits for disabled adult children.
   3 Except in a workers' compensation claim. You are still required to settle the Medicare Secondary Payor Claim.

   4 In a workers' compensation claim may be required to do a Medicare Set-Aside amount.
   5 Some States will pay a state Supplement to the Federal Benefit Rate.

   
   

   Call (720) 200-4025 now or email us to find out how our attorneys can help with your Special Needs Trusts issues.