Protecting the Recovery – Preservation of Needs-Based Benefits

Medicaid and SSI are income and asset sensitive public benefits, which require planning to preserve.  In many states, one dollar of SSI benefits automatically provides Medicaid coverage.  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 a SNT so that the victim can continue to qualify for SSI and Medicaid.  Federal law authorizes and regulates the creation of a SNT.  The 1396p^[1] 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 a SNT.^[2]  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)^[3] special needs trust which can be established only for those who are disabled and are under age sixty-five.  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)^[4] 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)^[5] and is commonly referred to as a Miller Trust.  Lastly, there is a third party^[6] 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, it is useful to compare these two types of trusts.  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.^[7]  Second, the trust must maintain separate accounts for each Beneficiary, but the funds are pooled for purposes of investment and management.^[8]  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.^[9]  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.^[10]

In directly comparing a (d)(4)(C) to 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 sixty five.  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 a 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 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, which is a requirement with a (d)(4)(A) special needs trust.^[11]  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 only proper distributions are made.  Many banks and trust companies don’t want to administer special needs trusts with a corpus under $1,000,000.00, which can make it difficult to find the right trustee.  Most pooled special needs trusts will accept any sized trust and the non-profit is experienced in dealing with people 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.    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 such as 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), eye glasses, 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.

Each type of trust discussed above has advantages and disadvantages.  Some think of pooled trusts as only being appropriate for a smaller settlement which is not the case.  Some think of pooled trusts just for the elderly which is not the case either.  In the right case, the pooled trust is an excellent alternative 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 healthcare coverage along with government cash assistance programs.

In conclusion, the evaluation of different methods for protecting needs-based benefit preservation must be explored for any disabled client who is currently eligible.  Special needs trusts allow injury victims to continue to access critical needs-based government benefits after settling their case.  Every case and client is different though and careful consideration of the advantages and disadvantages should be done with an elder law attorney.

Needs Based Public Benefits Case Studies

To better understand how to apply the foregoing information, I will illustrate with a few case examples.  First, consider a settlement for John Doe who was injured at age thirty after having worked up until the accident.  Since John was a laborer since age eighteen and was still young, he didn’t have health insurance at the time of his accident.  As a result of being paralyzed, the hospital applied for Medicaid on his behalf after getting injured.  He qualified for Medicaid since he had no real assets and no longer had an income.  His family applied for Social Security Disability since he had worked enough quarters to be insured.  You have settled his case for $1,000,000 which will help him pay for everything he now needs, but it is far less than what is needed to pay for all his future medical care.  The question now is what to do with the settlement?  While SSDI isn’t income or asset sensitive, Medicaid is and most likely the program John has will have an asset cap of $2,000.  In this situation a stand-alone or pooled special needs trust would be advisable to keep the Medicaid intact.  SSDI alone wouldn’t necessitate a special needs trust.

Second, consider the case of Jane Doe who is sixty-eight.  She never worked outside of the home and was recently the victim of medical malpractice.  She has a private insurance policy that she can no longer pay for after becoming disabled from the stroke she suffered which wasn’t diagnosed in a timely manner.  She needs to be in an assisted living facility due to the stroke.  She qualified for both Medicaid and SSI after the stroke.  In addition, she gets a small amount of Social Security benefits as a result of her husband’s death.  You have settled her case for the policy limits of the doctor had who missed the diagnosis, which is $250,000.  This is completely inadequate to care for Jane.  How will she qualify for nursing home care paid for by Medicaid given the small settlement?  Can she keep her SSI intact?  Will the death benefits cause an income problem?  The solution to the first two questions is to create a pooled special needs trust.  As Jane is over sixty-five, she cannot create a stand-alone SNT so her only option is a pooled trust which will protect both her Medicaid and SSI eligibility.  The SS retirement likely isn’t a problem since she already has Medicaid/SSI, but if she does have an income problem a Miller Trust or Qualified Income Trust could be established to deal with the excess income.

[1] 42 U.S.C. § 1396p.

[2] 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).”

[3] 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.”

[4]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.”

[5] 42 U.S.C. § 1396p (d)(4)(B).

[6] Third party special needs trusts are creatures of the common law.  Federal law does not provide requirements or regulations for these trusts.

[7] 42 U.S.C. § 1396p (d)(4)(C).

[8] Id.

[9] Id.

[10] Id.

[11] 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.