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Special needs trusts 101: A look at the basics

By: dmc-admin//March 16, 2009//

Special needs trusts 101: A look at the basics

By: dmc-admin//March 16, 2009//

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Every personal injury attorney must learn the basics of special needs trusts, so that money a client receives from an award or settlement doesn’t jeopardize public benefits he or she receives for medical care.

A special needs trust allows a person with medical expenses to maintain public benefits by putting away money from a lawsuit settlement into the trust to supplement what public benefits do not cover, such as housing or attendant care.

This area can be a malpractice trap for personal injury attorneys.

“Some personal injury lawyers are either missing the boat altogether or they only have bits and pieces and don’t bring in an expert quickly enough,” said Mary Alice Jackson, an elder law attorney with Boyle & Jackson in Sarasota, Fla., who recently spoke at a Web seminar on the topic.

“It’s a very specialized area. In addition to federal [law], each state may add its own statutory requirements,” said Bradley J. Frigon of the Law Offices of Bradley J. Frigon in Englewood, Colo., who also spoke.

Jackson recommends lawyers involve an expert on special needs trusts early on to determine whether one is needed at all.

Types of Benefits

Before figuring out whether you should set up a SNT, you have to determine the status of various public benefits, such as disability income, Social Security benefits, Medicare, Medicaid, food stamps or Section 8 housing.

“Never, ever take your client’s word on which type of benefits they receive,” advised Jackson.

If a client uses the words “disability” or “money from the government” or “medical benefits check,” you must follow up in order to protect those benefits, she said.

Each type of benefit has its own technical eligibility requirements.

For example, Social Security Income (SSI) is a needs-based benefit for low income individuals, including those with disabilities.

An individual must be under a certain income level and have less than $2,000 worth of property in order to qualify.

“Once you put money into a SNT you can get under the $2,000 limit,” said Frigon. SSI pays $674 per month to a single individual.

In addition, in most states SSI creates automatic eligibility for Medicaid.

“For most people, SSI is their ticket to get Medicaid,” said Frigon.

For that reason, attorneys must be careful that SNT funds don’t offset all SSI benefits, because as long as an individual is receiving even a dollar in SSI, he or she will continue to qualify for Medicaid.

“If the trust gives cash to someone [who is receiving $674 per month] in SSI and you give them $675, that person will lose their Medicaid. It can really create huge disasters,” said Jackson.

Potential Reductions

SSI also has a “one-third” rule which automatically reduces benefits by one-third if anybody provides an SSI beneficiary with food or housing, she added.

Social Security Disability Income (SSDI), on the other hand, does not have an asset limit; payment depends on how long an individual worked and paid into the system.

However, SSDI does have a limit on how much an individual can earns (around $800-$900 per month), because the definition of “disability” is the inability to be substantially employed.

An individual becomes eligible for Medicare following a two-year waiting period after receiving SSDI.

Medicare is not based on income or assets. If Bill Gates became disabled and unable to work, he could receive SSDI and Medicare.

“They don’t care how much money you have in the bank,” said Frigon.

An individual who is on Medicare and would not require long-term care will not require a SNT, he added. But the catastrophically injured need Medicaid because Medicare does not pay for an individual to be in a long-term care facility.

First-Party SNTs

Although the two main types of special needs trusts are first-party and third-party SNTs, a lawsuit award will almost always involve a first-party SNT, said Frigon. A first-party special needs trust is established for a “disabled” individual’s benefit with his or her own funds under 42 U.S.C. §1396p(d)(4)(A) and any relevant state law.

Even if the beneficiary is incapacitated and the settlement is going through a conservatorship, the funds are considered the beneficiary’s for purposes of a SNT, said Frigon.

A third-party SNT, on the other hand, is never funded with the beneficiary’s money and is governed by state law, not federal.

The most significant element of a first-party SNT is the pay-back provision, said Patricia Sitchler, an elder law attorney with Schoenbaum Curphy & Scanlan in San Antonio, Texas.

This provision requires that any funds remaining in the trust upon the death of the beneficiary will be used to reimburse the state for benefits it paid out.

Another requirement of a first-party SNT is that the trust be created and funded before the beneficiary turns 65.

This is important because often lawsuit settlements are funded by a structured settlement annuity and payments may not conclude until after the person turns 65, said Frigon.

A first-party SNT must be for the sole benefit of the individual and can only be established by a parent, grandparent or legal guardian.

This means that the beneficiary himself is excluded from establishing the SNT, as is a spouse or child of the beneficiary.

However, many states have special procedures that allow a court to be asked to create a SNT where an individual is physically disabled but mentally capable of managing his affairs, or where there is no parent, grandparent or legal guardian.

A SNT that does not follow these special procedures will put a beneficiary at risk of losing his benefits, sometimes months down the road, Frigon said.

Pooled SNTs

For plaintiffs who receive a small settlement amount that cannot be managed by a traditional trustee or large institution, a “pooled” special interest trust is another type of first-party SNT.

“If you’re a member of a class action and get a $30,000 award, we talk about putting it into a pooled SNT,” said Frigon.

Associations or non-profit organizations for disabled people often manage pooled SNTs. Some states require a payback provision in a pooled SNT; other states waive it because the trusts are managed by nonprofits for the benefit of disabled people.


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