About the Author: Thomas D. Begley, Jr. has over 40 years of experience in Elder Law, Medicaid Planning, Special Needs Trusts, Disability Law and Personal Injury Consulting. He is a Fellow of the National Academy of Elder Law Attorneys and a past president and founding member of the Special Needs Alliance. For more information, please visit http://www.begley lawyer.com.
Frequently, in the settlement of a personal injury case, the plaintiff is receiving a large settlement. Often, the same plaintiff has significant financial and medical needs that can be met through public benefits. The purpose of a Special Needs Trust is to enable the disabled beneficiary to enjoy the proceeds of the personal injury settlement while at the same time maintaining important public benefits, such as SSI and Medicaid.
What is a Special Needs Trust and How Does it Operate?
A Special Needs Trust is a creature of statute. These trusts were authorized by Congress in 1993. Essentially, there are seven requirements:
- Assets of the Individual– The trust must consist of assets of the individual, such as a personal injury settlement is an asset of the individual.
- Under 65– The individual must be under age 65 at the time the trust is established and funded. A structure in place prior to the individual attaining age 65 can continue afterward.
- Disabled– The individual must be determined to be disabled by the Social Security Administration or the State Medicaid Agency.
- Sole Benefit Of– Distributions from the trust are limited to the sole benefit of the individual. This is often a problem as family members tend to view the trust as the family bank account. A strong trustee is essential.
- Established By- The trust must be established by a parent, grandparent, guardian, or a court. A Self-Settled Special Needs Trust cannot be established by the individual except in the case of a Pooled Trust.
- Payback– On the death of the beneficiary, or upon the termination of the trust during the beneficiary's lifetime, the assets in the trust must be used to repay Medicaid for all medical assistance paid to the beneficiary since birth.
- Irrevocable– The trust must be irrevocable.
A professional trustee should always be utilized. Family members often want to serve as trustee. The trustee must be familiar with SSI law, Medicaid law, tax law, have investment expertise, and be familiar with fiduciary standards. The trustee must also be able to say "no" to requests for inappropriate trust distributions. Many states require corporate trustees in all but the smallest of Special Needs Trusts. Most states require an individual trustee to be bonded, which is often difficult, if not impossible. Where an individual serves as a trustee, it is inevitably a question of when, not if, the trust will blow up in everyone's face. Family members can be appointed as Trust Protectors and given the right to remove and replace the corporate trustee with another trustee. This gives the family members comfort.
Essentially, the trustee makes distributions to third parties who provide goods and services, rather than to the trust beneficiary. A distribution to the trust beneficiary would reduce the SSI payment dollar-for-dollar. Payment to third party providers for goods and services are not considered income, unless they provide food or shelter, in which event the SSI payment is reduced by approximately one-third, but Medicaid continues.
If a structured settlement is paid to an individual plaintiff, that would cause a loss of means-tested public benefits. By having the same structure paid into a Self-Settled Special Needs Trust, benefits are preserved. Most states require that the beneficiary of the structure on death be the trust to ensure the Medicaid payback.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).