“Structured Settlements & Special Needs Trusts”
By Crystal L. Welton, J.D., LL.M.
The use of a structured settlement as part of a personal injury settlement is a common practice. When settling a personal injury matter for a disabled individual, the personal injury attorney should determine whether the client is, or will become, eligible for resource-dependent public benefits, such as Medical Assistance and/or Supplemental Security Income, and consider the best way to protect the individual’s eligibility for those benefits. Special Needs Trusts, which were created by the Omnibus Budget Reconciliation Act of 1993, permit financial resources to remain available to a disabled individual who receives, or may receive, the benefits stated above. Further, the settlement proceeds of a disabled individual, including lump sum cash payments and annuities, can be used to fund a Special Needs Trust, allowing the individual to remain eligible for such benefits.
A Special Needs Trust (SNT) must include the following elements: the Trust must (1) be irrevocable; (2) exist for the sole benefit of the disabled person; (3) provide for payback to the Department of Public Welfare, upon the death of the beneficiary, for Medical Assistance provided during the existence of the SNT, but only to the extent of remaining funds in the Trust; (4) be created by a parent, grandparent, guardian, or court; (5) identify specific contingent beneficiaries who would take any remaining assets in the Trust upon the death of the beneficiary and upon payback to the Department of Public Welfare; (6) be fully discretionary and have as the Trust’s purpose to supplement, rather than supplant, the beneficiary’s special needs; and (7) be designed to provide for the special needs of the disabled individual.
When purchasing an annuity, it is important to keep in mind that the SNT should initially be funded with sufficient seed money. This is important in determining which corporate fiduciary can and will serve as Trustee of the SNT. Many corporate fiduciaries will not accept Trusts of smaller sizes and are very reluctant to accept a Trust that is only funded with an annuity. The fees charged by many corporate fiduciaries are percentages based upon the amount of principal in the Trust with a required annual minimum fee, which can be unreasonable if the Trust is not generating income and/or has a very minimal amount of principal. Further, the Trust should be funded with sufficient seed money to ensure that the Trustee has the ability to make initial distributions on behalf of the beneficiary. This is especially important if the disabled beneficiary is a minor or incapacitated person, because principal of the trust can only be used with court approval; accordingly, adequate funding is necessary to generate sufficient income to meet the special needs of the beneficiary.
When an annuity is part of a personal injury settlement for an individual who is, or may be, eligible for resource-dependent public benefits and a SNT is used, it is imperative that the following three terms be included in the structure to best protect the individual’s eligibility for those benefits: (1) the SNT must be named as the beneficiary of the annuity; (2) the death, contingent, or residual beneficiary of the annuity must also identify the SNT, pursuant to a policy of the Department of Public Welfare; and (3) a commutation clause should be included in the annuity provisions so that if the disabled beneficiary were to pass away prematurely, all remaining assets of the annuity would be paid into the SNT within a prompt specified time period to allow timely payment of death taxes and closure of the Trust.
Although some practitioners believe that SNTs are extremely limited in the services that can be provided to the disabled person, this is hardly the case. A SNT can be used to pay for virtually anything other than ordinary food and shelter expenses as those expenditures are considered “income” to the disabled beneficiary. While rental payments may not be made out of the Trust without jeopardizing public benefits, the monies may be used to purchase a home in the name of the Trust. Examples of the goods and services which may be purchased for the beneficiary include, but are not limited to, transportation (including the purchase of a modified vehicle), entertainment, travel, vacations, therapies, educational opportunities, paid caregivers, respite services, medical and dental care, nursing care, nutrition, socialization services, furniture, legal services, and modification to dwellings to permit accessibility.
SNTs are an important tool for individuals who are, or otherwise may become eligible for, resource-dependent public benefits. SNTs allow these individuals to receive these benefits and maintain some level of financial independence, and SNTs provide goods and services to the extent that necessary services or materials are not provided through Medical Assistance funds or other sources of benefits. Structured Settlements are a great source of funding for SNTs and, when done properly, allow the individual to benefit from both the settlement proceeds and public benefits.
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