Special Needs Trusts: Basics Every PI Lawyer Should Know

By Michele P. Fuller

Just when you think your work is done and the case is resolved, they drag you back in. Something in the back of your mind tells you your client may have to do a trust or something for their benefit. Litigators do not need to become probate or special needs lawyers in addition to what they already do, but they do need to know some basics about the effect their clients settlement may have on their eligibility for governmental benefits. Trial lawyers have been held liable for failing to recognize and advise their clients of the effect the settlement may have on their eligibility.

Whether a client is receiving funds directly as a result of her own cause of action or as a claimant under a wrongful death cause of action, the first question to be answered is whether the person receiving the funds receives means-tested benefits. Unfortunately, when a client is asked what type of benefits he receives, the answer frequently is "disability." The client, or his representative, may not know the type of benefits the client receives or be able to find a determination letter. As a practice tip, the client or their legal representative can call 800-772-1213 and request a benefits statement. Not all disability benefits are means-tested, so determining whether the client has benefits that need protection is a necessary first step. Early involvement with a special needs planning attorney will help the client become comfortable with the planning that will need to take place to preserve benefits, a process that may seem complex and overwhelming. Further, a consultation with the client regarding her benefits and the effect of receiving settlement proceeds limits the liability of the trial lawyer after the case is resolved and sets client expectations regarding the handling of funds.

What is a means-tested benefit? Means-tested benefits typically have an income and asset limit that must be met in order to become and remain eligible. An example that is probably familiar to you is the Medicaid assistance limit of $2,000 in countable assets. In addition to Medicaid, the most common federal means-tested programs are Supplemental Security Income (SSI), Section 8 housing, Veterans' benefits, and Medicaid waiver services. Most of these are federal programs that are administered differently in each state. In addition, the client may also receive state and local benefits that are also means-tested. Best practice is to affiliate with a local special needs planning attorney, as they will be familiar with various types of benefits, quirks of the locality where the client resides, and can determine if a settlement or structured settlement payments will compromise the client's continued eligibility.

After you have determined that your client in fact does receive a variety of governmental benefits and that an outright distribution of proceeds or payments will affect his eligibility, a (d)(4)(A) special needs trust may be appropriate. A (d)(4)(A) special needs trust is appropriate when the following criteria have been met:

• The client receives means-tested benefits;
• The client is under age 65; and
• The amount received justifies the costs involved.

A (d)(4)(A) special needs trust refers to 42 USC § 1396(p)(d)(4)(A), which codified one of the exceptions to the general premise that all trusts are countable assets with regard to means-tested governmental programs. By placing funds and/or structured settlement payments into a special needs trust, the assets are held for the sole benefit of the beneficiary while preserving her continued eligibility for assistance. Only a parent, grandparent, guardian or court can create this type of trust. Notice that the beneficiary cannot create the trust herself, and often court authority approving the creation of the trust is necessary. Some courts actively maintain supervision of the trust and require the filing of bonds and annual accounts, which can be very costly. Trusts with modest assets or those that are over-structured can be exhausted from these fees, and nothing angers a client more. Counsel should consider the continued costs of administration when deciding whether this type of special needs trust is the most appropriate. Local counsel should also be consulted as to the common court practice where the trust will be administered. However, if a parent or other lay person is to act as trustee, supervision may be advisable. Given the current economy and job market, a loss of financial security within the family may make dipping into trust assets too great a temptation to resist.

A (d)(4)(A) special needs trust must be irrevocable, executed by a proper party as indicated above, provide for the sole benefit of the beneficiary, and must contain a pay-back provision upon the death of the beneficiary. Upon the beneficiary's death every state in which the beneficiary received benefits must be paid back its proportional share of the assets remaining in the trust. The trustee is responsible for obtaining the lien information, which should be reviewed carefully for accuracy. Having the person who is in charge of the beneficiary's health care review the lien statement is also advisable. If a structured settlement broker is working with the client, the immediate and future structure payments should be made payable to the trustee of the trust. The beneficiary of the structure must be the trust and a commutation rider should be considered in order to pay the future lien and any estate taxes upon death. The amount to be structured, if any, should be carefully taken into consideration.