Special Needs Trusts In Personal Injury Cases — Addressing Some Common Misconceptions

 

As practitioners have become acutely aware of the value of Special Needs Trusts in injury cases, some misinformation has spread about the legal community which sometimes discourage the proper use of Special Needs Trust planning.  A few of these misconceptions and the accurate response to them follow.

 

1. “My client has already signed a release to resolve the case, and therefore it is too late to create a Special Needs Trust.“

 

The signing of a release authorizing the resolution of a case does not preclude the creation of a Special Needs Trust on behalf of the disabled plaintiff, and will not affect the validity of a Trust when created.  However, as discussed below, the personal injury attorney should be careful in managing the receipt and distribution of settlement monies in a manner which does not jeopardize public benefits (most typically Medical Assistance and Supplemental Security Income) of the disabled plaintiff.

 

2. “Once the settlement monies are in the personal injury attorney’s escrow account, it is too late to create a Special Needs Trust.“

 

The receipt of monies by the personal injury attorney does not, in and of itself, disqualify a disabled beneficiary from receiving the benefits of a Special Needs Trust.  Unless the personal injury attorney holds the monies in escrow for an inordinate length of time (more than about 2-3 months) the relevant public agencies (the Department of Human Services for Medical Assistance, and the Social Security Administration for SSI) will not impute receipt of the proceeds to the disabled plaintiff, but rather generally focus on actual receipt of the funds by the disabled individual as the trigger point for recalculating eligibility for public benefits.  However, if the personal injury attorney holds the settlement monies for more than a few months, the risk increases that the relevant public agencies could find that the disabled individual has constructively received the settlement proceeds.  It is therefore important to promptly create a Special Needs Trust to receive the recovery to maintain public benefits.

 

3. “Once the personal injury recovery has been distributed to the client, it is too late to create a Special Needs Trust, especially if the client has been disqualified for public benefits.“

 

Even where the client has received the personal injury proceeds and has been disqualified for public benefits, a Special Needs Trust can nonetheless be created to receive the monies and allow the client to become reeligible for benefits.  Once again, however, speed is critical, as the longer the client waits to create the Special Needs Trust, the longer the period of ineligibility will last.  However, unlike transfers to other types of Trusts, there is no “look-back” period which would create future ineligibility where the monies are properly placed into a Special Needs Trust.  Where a Special Needs Trust is used to receive settlement proceeds on behalf of a disabled plaintiff, reeligibility for Medical Assistance and SSI is immediate, although bureaucratic processing of the application can take several months.  Consequently, it is always highly preferable to create a Special Needs Trust prior to distributing settlement proceeds to a disabled client.

 

4. “A structured settlement cannot be used in conjunction with a Special Needs Trust.“

 

To the contrary, structured settlements are often used in resolving personal injury claims on behalf of individuals who receive public benefits.  However, it is essential the structured settlement identify the Special Needs Trust as the recipient of each future payment (not the individual disabled plaintiff), and that the Trust is identified as the death beneficiary of any guaranteed payments.

 

When a structured settlement is used to fund a Special Needs Trust, it is important for several reasons that some significant portion of the settlement initially fund the Special Needs Trust.  First, death taxes will likely be due at the death of the beneficiary on the remaining value of the structured settlement. The Special Needs Trust will need sufficient liquid assets to pay the death taxes and administrative costs within nine months after the date of death.

 

Second, many of the best corporate fiduciaries are unwilling to handle a Special Needs Trust unless the Trust is funded at the outset with a substantial lump sum.

 

Third, if the disabled beneficiary has significant current needs, adequate resources must be available to meet the immediate special needs of the beneficiary.

 

5. “Where a settlement is small (less than $50,000.00), the client should not use a Special Needs Trust or other planning technique, but should simply allow himself (herself) to become disqualified until the settlement  money is gone.“

 

This perspective is virtually always incorrect.  First, it may be possible to undertake an immediate (i.e., within the month of receipt of the settlement monies) “spend-down” whereby the disabled beneficiary expends all of the settlement monies for goods or services at fair market value (it is never advisable to give the money away).  If the disabled beneficiary can spend all of the settlement monies for fair market value during the calendar month of receipt of the settlement, there is generally no disqualification for public benefits. For example, if the disabled beneficiary can spend the settlement proceeds on the purchase of a home, car, furniture, electronic equipment, clothing, prepaid funeral expense, prepaid taxes, utility bills, or other purchases for fair market value, no disqualification is exacted for SSI or Medical Assistance.  Moreover, for valid, documented debts, these agencies will generally permit repayment of these debts which validly existed prior to the receipt of the settlement monies without penalty.

 

If a rapid “spend-down” is not feasible due to the circumstances of the disabled plaintiff, a Special Needs Trust still can be used, as some drafters of such Trusts (the author included) will create Trusts at reduced fees for smaller settlements; we have even created Special Needs Trusts for a small fee in unique circumstances for settlements under $10,000.00 where no acceptable alternative existed.

 

Finally, “Pooled” Trusts exist which accept smaller settlements; the disadvantages to such Pooled Trusts are (1) the mandatory use of “one-size-fits-all” Master Trust Agreements required by these organizations and (2) the inability to identify a contingent beneficiary for any residual funds remaining after the death of the beneficiary, as Pooled Trusts must retain any proceeds for the benefit of other disabled beneficiaries.

 

We almost never recommend that individuals allow themselves to be disqualified for Medical Assistance or SSI and reapply in the future.  The requalification process can be burdensome and time-consuming.  It is simply never necessary to disqualify disabled individuals for the significant public benefits of Medical Assistance and SSI.