Introduction
The receipt of personal injury proceeds by someone who is disabled can cause ineligibility for means based tested government benefit programs. Medicaid[1] and SSI[2] are two such programs. However, there are planning devices that can be utilized to preserve eligibility for those who have become disabled due to injury. A special needs trust can be created to hold the recovery and preserve public benefits eligibility since assets held within a special needs trust are not a countable resource for purposes of Medicaid or SSI eligibility. The creation of special needs trusts is authorized by the Federal law.[3] A trust commonly referred to as (d)(4)(A) special needs trust, named after the Federal code section that authorizes its creation, is for those under the age of sixty-five.[4] Another type of trust typically referred to as a (d)(4)(C) pooled special needs trust may be created for those of any age.[5] Pooled trusts are economical and are a great solution for personal injury settlements (not just small settlements). When deciding upon which type of trust to use, it is important to understand the differences between the trusts in terms of startup costs, ongoing costs, and management. The different types of trusts for those on needs-based benefits will be discussed in greater detail below.
Public Benefit Programs Overview
There are two primary public benefit programs that are available to those who become disabled. The first is the Medicaid program and the intertwined Supplemental Security Income benefit. The second is the Medicare program and the related Social Security Disability Income/Retirement benefit. Both programs can be adversely impacted by a disabled injury victim’s receipt of a personal injury recovery. Understanding the basics of these programs and their differences is imperative to protecting the disabled client’s eligibility for these benefits.
Medicare and Social Security Disability Income (hereinafter SSDI) benefits are an entitlement and are not income or asset sensitive. Clients who meet Social Security’s definition of disability and have paid in enough quarters can receive disability benefits without regard to their financial situation.[6] The SSDI benefits program is funded by the workforce’s contribution to FICA (social security) or self-employment taxes. Workers earn credits based on their work history and a worker must have enough credits to get SSDI benefits should they become disabled. Medicare is a federal health insurance program. Medicare entitlement commences at age sixty-five or two years after the date of disability under Social Security’s definition.[7] Medicare coverage is available again without regard to the injury victim’s financial situation. Accordingly, a special needs trust (“SNT”) is not necessary to protect eligibility for these benefits. However, the MSP may necessitate the use of a Medicare Set Aside.
Medicaid and Supplemental Security Income (hereinafter SSI) are income and asset sensitive public benefits that require planning to preserve. In many states, one dollar of SSI benefits automatically provides Medicaid coverage. This is very important, as it is imperative in most situations to preserve some level of SSI benefits if Medicaid coverage is needed in the future. SSI is a cash assistance program administered by the Social Security Administration. It provides financial assistance to needy aged, blind, or disabled individuals. To receive SSI, the individual must be aged (sixty-five or older), blind or disabled[8] and be a U.S. citizen. The recipient must also meet the financial eligibility requirements.[9] Medicaid provides basic health care coverage for those who cannot afford it. It is a state and federally funded program run differently in each state. Eligibility requirements and services available vary by state. Medicaid can be used to supplement Medicare coverage if the client has both programs. For example, Medicaid can pay for prescription drugs as well as Medicare co-payments or deductibles. Because Medicaid and SSI are income and asset sensitive, creation of a special needs trust may be necessary when a settlement is reached for someone receiving either or both of these public benefits.
Special Needs Trusts – the differences
A special needs trust is a trust that can be created pursuant to Federal law whose corpus or any assets held in the trust do not count as resources for purposes of qualifying for Medicaid or SSI. Thus a personal injury recovery can be placed into an SNT so that the victim can continue to qualify for SSI and Medicaid. Federal law authorizes and regulates the creation of an SNT. The 1396p[10] provisions in the United States Code govern the creation and requirements for such trusts. First and foremost, a client must be disabled in order to create an SNT.[11] There are three primary types of trusts that may be created to hold a personal injury recovery and one type used when it isn’t the injury victim’s own assets, each with its own unique requirements and restrictions. First is the (d)(4)(A)[12] special needs trust which can be established only for those who are disabled and are under age 65. This trust is established with the personal injury victim’s recovery and is established for the victim’s own benefit. Second is a (d)(4)(C)[13] trust typically called a pooled trust that may be established with the disabled victim’s funds without regard to age. The third is a trust that can be utilized if an elderly client has too much income from Social Security or a pension to qualify for some Medicaid based nursing home assistance programs. This trust is authorized by the federal law under (d)(4)(B)[14] and is commonly referred to as a Miller Trust. Lastly, there is a third party[15] SNT which is funded and established by someone other than the personal injury victim (i.e., parent, grandparent, donations, etc. . .) for the benefit of the personal injury victim. The victim still must meet the definition of disability but there is no required payback of Medicaid at death as there is with a (d)(4)(A) or (d)(4)(C).
Since the pooled (d)(4)(C) trust and the (d)(4)(A) SNT are most commonly used with personal injury recoveries, I will focus on comparing these two types of trust. There are several significant differences between a (d)(4)(C) pooled trust and a (d)(4)(A) special needs trust. I will discuss these differences first starting with the (d)(4)(C) pooled trust. As a starting point, a disabled injury victim joins an already established pooled trust as there is no individually crafted trust document. There are four major requirements under Federal law necessary to establish a pooled trust. First, the trust must be established and managed by a Non-Profit.[16] Second, the trust must maintain separate accounts for each Beneficiary, but the funds are pooled for purposes of investment and management.[17] Third, each trust account must be established solely for the benefit of an individual who is disabled as defined by law, and it may only be established by that individual, the individual’s parent, grandparent, legal guardian, or a Court.[18] Fourth, any funds that remain in a Beneficiary’s account at that Beneficiary’s death must be retained by the Trust or used to reimburse the State Medicaid agency.[19]
As for the differences from a (d)(4)(A) special needs trust, there are four primary differences. First, a (d)(4)(A) special needs trust can only be created for those under age 65. However, a (d)(4)(C) pooled special needs trust has no such age restriction and can be created for someone of any age. Second, a Pooled Special Needs trust is not an individually crafted trust like a (d)(4)(A) special needs trust. Instead, a disabled individual joins a Pooled Trust and professional non-profit trustee pools the assets together for purposes of investment but each beneficiary of the trust has his or her own sub-account. Third, a pooled trust is managed by a not for profit entity who acts as trustee overseeing distributions of the money. The non-profit trustee may manage the money themselves or hire a separate money manager to oversee the investment of the trust assets. Fourth, at death, the non-profit trustee may retain whatever assets are left in the trust instead of repaying Medicaid for services they have provided as is the case with a (d)(4)(A) special needs trust.[20] By joining a pooled trust, a disabled aged injury victim can make a charitable donation to the non-profit who manages the pooled trust and avoid the repayment requirement found within the Federal law for (d)(4)(A) special needs trusts. Other than the aforementioned differences, it operates as any other special needs trust does with the same restrictions on the use of the trust assets.
With a (d)(4)(A) special needs trust, a trustee needs to be selected, unlike the pooled trust where it is automatically a non-profit entity. This provides some flexibility to the family or loved ones to have a hand in the selection of the trust company or bank acting as trustee. However, it is important to have a trustee experienced in dealing with needs-based government benefit eligibility requirements so that improper distributions are not made. Many banks and trust companies don’t want to administer special needs trusts under $1,000,000.00 in trust assets which can make it difficult to find the right trustee. Most pooled special needs trusts will accept any size trust and the non-profit is experienced in dealing with those that are receiving disability-based public benefits. With the (d)(4)(A), there are no startup costs except the legal fee to draft the trust which can vary greatly. The (d)(4)(C) pooled trusts typically have a one-time fee at inception which can range from $500 to $2,000 which is typically much cheaper than the cost of establishing a (d)(4)(A) special needs trust. Most trustees (pooled or (d)(4)(A)) will charge an ongoing annual fee which is typically a percentage of the trust assets. These fees vary between 1-3% depending on how much money is in the trust. A (d)(4)(A) will offer unlimited investment choices for the funds held in the trust while a (d)(4)(C) will have fewer investment choices.
The major limitation of all types of special needs trusts is that the assets held in trust can only be used for the sole benefit of the trust beneficiary. So in the case of a disabled injury victim that funds a pooled special needs trust with their personal injury recovery, those funds can only be used for their benefit. The disabled injury victim could not withdraw money and gift it to a charity or family. The purpose of the special needs trust is to retain Medicaid eligibility and use trust funds to meet the supplemental, or “special” needs of the beneficiary. These can be quite broad, however, and include things that improve health or comfort, non-Medicaid covered medical and dental expenses, trained medical assistance staff (24 hours or as needed), independent medical check-ups, medical equipment, supplies, programs of cognitive and visual training, respiratory care and rehabilitation (physical, occupational, speech, visual and cognitive), eyeglasses, transportation (including vehicle purchase), vehicle maintenance, insurance, essential dietary needs, and private nurses or other qualified caretakers. Also included are non-medical items, such as electronic equipment, vacations, movies, trips, travel to visit relatives or friends and other monetary requirements to enhance the client’s self-esteem, comfort or situation. The trust may generally pay for expenses that are not “food and shelter” which are part of the SSI disability benefit payment. However, even these items could be paid for with trust assets but SSI payments could be reduced or eliminated. This may not be problematic if the disabled injury victim qualifies for Medicaid without SSI eligibility. However, many states grant automatic Medicaid eligibility with SSI so one has to be careful about eliminating the SSI benefit.
Conclusion
Each type of trust discussed above has advantages and disadvantages. Some think of pooled trusts as only being appropriate for a smaller settlement which simply isn’t the case. Some think of pooled trusts just for the elderly which isn’t the case either. In the right case, the pooled trust is a great alternative option to a (d)(4)(A). Just the same, in some cases a (d)(4)(A) may be the best option because of the flexibility in selecting a trustee and the customizable money management options. In the end, though, a special needs trust be it pooled or a (d)(4)(A) must be considered because it will safeguard a disabled client’s recovery from dissipation and protect future eligibility for needs-based public benefits. Just as importantly, the different types of trusts and their advantages, as well as disadvantages, should be closely considered before making a decision since special needs trusts are irrevocable along with bringing substantial restrictions on how the money may be used. Creating a special needs trust for a disabled injury victim gives them the ability to enjoy the settlement proceeds while preserving critical health care coverage along with government cash assistance programs.
Synergy’s settlement consulting group is one of the premier plaintiffs focused on settlement planning firms offering services nationwide. Our settlement consulting firm assists injury victims and their attorneys in creating innovative settlement plans for personal injury and workers’ compensation case. We specialize in evaluating cases where clients are eligible for public benefits and advising on special needs trusts, settlement trusts, Medicare set-asides, and financial planning options for the personal injury settlement. We can help injury clients plan for the uncertainties they face by maximizing the use of funds available to the client from both the settlement itself and government benefits.
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[1] Medicaid is a needs-based public benefit that provides basic health care coverage for those who are financially eligible. The Medicaid program is federally and state-funded but administered on the state level. Services and eligibility requirements vary from state to state. The asset limit is $2,000 for single individuals and $3,000 for married couples for most Medicaid programs but the income limits vary by program and state.
[2] SSI or Supplemental Security Income, administered by the Social Security Administration, provides financial assistance to U.S. citizens who are sixty-five or older, blind or disabled. The recipient must also meet the financial eligibility requirements. 42 U.S.C. § 1382.
[3] 42 U.S.C. § 1396p (d)(4).
[4] 42 U.S.C. § 1396p (d)(4)(A).
[5] 42 U.S.C. § 1396p (d)(4)(C).
[6] While most often we deal with someone who has a disability, Social Security Disability also provides death benefits. Additionally, a child who became disabled before age 22 and has remained continuously disabled since age 18 may receive disability benefits based on the work history of a disabled, deceased or retired parent as long as the child is disabled and unmarried.
[7] SSDI beneficiaries receive Part A Medicare benefits which cover inpatient hospital services, home health, and hospice benefits. Part B benefits cover physician’s charges and SSDI beneficiaries may obtain coverage by paying a monthly premium. Part D provides coverage for most prescription drugs but it is a complicated system with a large co-pay called the donut hole.
[8] Disability is defined the same way as for Social Security Disability benefits which is that the disability must prevent any gainful activity (e.g. employment), last longer than 12 months, or be expected to result in death. If someone receives disability benefits from Social Security they automatically qualify as being disabled for purposes of SSI eligibility.
[9] An individual can only receive up to $552.00 per month ($829.00 for couples) and no more than $2,000 in countable resources.
[10] 42 U.S.C. § 1396p.
[11] To be considered disabled for purposes of creating an SNT, the SNT beneficiary must meet the definition of disability for SSDI found at 42 U.S.C. § 1382c. 42 U.S.C. § 1382(c)(a)(3) states that “[A]n individual shall be considered to be disabled for purposes of this title … if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or … last for a continuous period of not less than twelve months (or in the case of a child under the age of 18, if that individual has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or … last for a continuous period of not less than 12 months).”
[12] 42 U.S.C. § 1396p (d)(4)(A) provides that a trust’s assets are not countable if it is “[a] trust containing the assets of an individual under age 65 who is disabled (as defined in section 1382c (a)(3) of this title) and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter.”
[13]42 U.S.C. § 1396p (d)(4)(C) provides that a trust’s assets are not countable if it is “[a] trust containing the assets of an individual who is disabled (as defined in section 1382c (a)(3) of this title) that meets the following conditions: (i) The trust is established and managed by a non-profit association. (ii) A separate account is maintained for each beneficiary of the trust, but, for purposes of investment and management of funds, the trust pools these accounts. (iii) Accounts in the trust are established solely for the benefit of individuals who are disabled (as defined in section 1382c (a)(3) of this title) by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court. (iv) To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this subchapter.”
[14] 42 U.S.C. § 1396p (d)(4)(B).
[15] Third-party special needs trusts are creatures of the common law. Federal law does not provide requirements or regulations for these trusts.
[16] 42 U.S.C. § 1396p (d)(4)(C).
[17] Id.
[18] Id.
[19] Id.
[20] If the funds remaining in the trust at death are sufficient to repay Medicaid’s payback right in full, many pooled trusts will distribute some portion of the remaining monies to the trust beneficiary’s heirs. However, each pooled trust will have a different policy and the amount retained at death can vary greatly. It is very important to investigate how much is retained in this type of situation. Some trusts will only retain $5,000 while others may retain $50,000.
