By Jason D. Lazarus, J.D., LL.M., MSCC
Section 1: Introduction to Special Needs Trusts
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 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 provisions in the United States Code govern the creation and requirements for such trusts. First and foremost, a client must be disabled to create an SNT. 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) 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) 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) and is commonly referred to as a Miller Trust. Lastly, there is a third-party 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).
Section 2: Stand-Alone (d)(4)(A) versus Pooled (d)(4)(C) Special Needs Trusts
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. Second, the trust must maintain separate accounts for each Beneficiary, but the funds are pooled for purposes of investment and management. 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. 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.
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. The only caveat to the lack of an age restriction is that certain states may impose a transfer penalty for people who are over the age of sixty-five and fund a pooled trust causing a period of ineligibility. 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. 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 following chart illustrates the five primary differences between these two trusts:
|Stand-Alone Special Needs Trust||Pooled Special Needs Trust|
|Can only be created for those under the age of 65.||Can be created for someone of any age. Caveat though for a possible transfer penalty in some states.|
|Individually drafted for someone who is disabled. Provisions are unique and tailored to the trust beneficiary. A qualified elder law attorney who understands the unique needs of a personal injury victim should be consulted to assist with drafting the stand-alone special needs trust.||Not individually drafted. A disabled individual joins an established master trust, and his or her funds are pooled for investment purposes with those of other beneficiaries. Beneficiaries have their own sub-accounts where an accounting of their funds is maintained. A qualified elder law attorney who understands the unique needs of a personal injury victim should be consulted to assist with joining a pooled trust.|
|Trustee may be an individual but is typically a bank or trust company who may or may not handle investment of the trust assets. Investments may be personalized for the trust beneficiary’s circumstances.||Trustee is a non-profit entity who oversees distributions but often delegates investment functions to a third-party money manager using model portfolios.|
|All funds left in trust at death must be used to repay Medicaid for services provided to the trust beneficiary.||All funds left in trust at death may be retained by the non-profit instead of repaying Medicaid for services provided, allowing an injury victim to make a charitable donation to the non-profit and avoid repayment to Medicaid.|
|No startup costs except the legal fee to draft the trust, which can vary greatly. Most trustees charge an ongoing annual fee, typically a percentage of the trust assets. These fees vary from 1% to 3%, depending on how much money is in the trust. A stand-alone special needs trust will offer unlimited investment choices for the funds held in the trust. Typically, there are additional costs tied to investment management.||Typically have a one-time fee at inception, ranging from $500 to $2,000 (often much cheaper than the cost of establishing a stand-alone special needs trust). Most non-profit trustees charge an ongoing annual fee, typically a percentage of the trust assets. These fees vary from 1% to 3%. A pooled special needs trust will offer fewer investment choices—oftentimes, only one choice.|
Key Takeaway: Different methods for protecting needs-based benefit preservation must be explored for any disabled injury victim who is currently eligible. Special needs trusts allow injury victims to continue to access critical needs-based government benefits after settling their cases. Federal law authorizes and regulates the creation of special needs trusts. Two primary types of trusts may be created to hold a personal injury recovery, each with its own requirements and restrictions. First, is the (d)(4)(A) stand-alone special needs trust. A stand-alone special needs trusts can be established only for those who are disabled and under age sixty-five. This trust is established with the personal injury victim’s recovery, for the victim’s own benefit. It can be established by the victim, a parent, a grandparent, or a guardian, or by court order. Second, is the (d)(4)(C) pooled special need trust. A pooled trust can be established with a disabled injury victim’s funds, regardless of age. Like a stand-alone trust, this trust is established with the personal injury victim’s recovery, for the victim’s own benefit, and can be established by the victim, a parent, a grandparent, a guardian, or by court order.
Section 3: Limitations on Spending & Advantages/Disadvantages of Establishing an SNT
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.
Key Takeaway: There are important advantages and disadvantages to establishing a special needs trust for an injury victim. The advantages are that the injury victim can retain SSI/Medicaid eligibility; get professional trustee services; can avoid guardianship and annual reports; and the trust can pay for everything except “food & shelter”. The disadvantages are that there is no unrestricted use of funds by the injury victim; “Sole Benefit” rule applies; at death Medicaid must be paid back (except 3rd party); adds an extra layer of complexity; and the trust is irrevocable.
Section 4: Spousal & Parental Deeming in Cases with a Consortium Claim
Deeming is an important concept to understand for trial lawyers when working with their client to construct a plan post settlement to preserve needs-based government benefits. The following example will illustrate the point. Assume you have just resolved a catastrophic birth injury matter for a minor client and his parents. The minor receives SSI as a result of severe injuries from hypoxia at birth due to negligence. Upon resolving the case, the parents agree, and the court approves that all settlement proceeds for the minor child will go into a special needs trust. Mom and dad are given $200,000.00 for their consortium claim. The minor child is now ineligible for Medicaid and SSI as a result of “parental deeming” until he reaches age 18.
What is deeming? Deeming is when either a parent’s or spouse’s income and/or assets are counted towards the SSI/Medicaid recipient’s resources when applying for or receiving SSI. In my example, “parental deeming” is triggered as the child is under the age of 18 and is living in the same household as his parents. The theory behind deeming between a parent and minor child living at home is that it is the responsibility of the parent to care for a minor child. As part of deeming, a parent’s earned and unearned income as well as assets deem to a child. For a married couple, resources over $3,000 deem to the child. In my example of a $200,000 recovery for a consortium claim allocated to the parents, that well exceeds the asset cap of $3,000. Deeming of that recovery would cease once the minor reaches age 18 even if he is still residing at home; however, if the settlement occurred when the child was relatively young, say at 5 years of age, there would be 13 years of ineligibility due to the deeming from the consortium recovery (assuming it wasn’t spent down before the 13 years had passed).
Similarly, there is spousal deeming. If you represent a married couple where one is on SSI and there is a consortium claim, a similar issue could be created as with the example of a minor child parental deeming. This is so since if the combined assets of a couple exceed the $3,000.00 asset cap, then the SSI benefit will be lost by the injury victim that is disabled. In the event there is a consortium claim on behalf of the non-injured spouse and money is allocated to them, then the injury victim with SSI will lose their eligibility even if their settlement money goes into an SNT.
Given the complexities of deeming and some exceptions, it is important to consult an elder law attorney at settlement. If it is possible to avoid allocating monies to a parent or spouse in a deeming situation, that is advisable; however, often that simply doesn’t work given the dynamics of settlement. That is where an elder law attorney’s experience and expertise can help trial lawyers navigate these issues.
Key Takeaway: Deeming is a critical concept for trial lawyers to understand when planning to preserve their clients’ needs-based government benefits post-settlement. Deeming occurs when a parent’s or spouse’s income and assets are considered as part of the SSI/Medicaid recipient’s resources. Parental deeming can make a minor child ineligible for Medicaid and SSI until age 18 if the parents receive a settlement exceeding the $3,000 asset cap. Similarly, spousal deeming can affect a disabled spouse’s SSI eligibility if the non-injured spouse’s consortium claim results in combined assets exceeding the cap. The intricacies of deeming necessitate consultation with an elder law attorney to ensure proper allocation of funds and benefits preservation.
Section 5: Spend Down
In the right settlement situation, an alternative to establishing an SNT that is often overlooked is a spend-down plan on exempt assets. A “spend-down” plan involves promptly spending settlement money in excess of the applicable asset limit within the same calendar month of receipt to maintain eligibility for public benefits. The Social Security Administration (SSA) considers a lump sum of money as income only in the month received, so long as it is spent within that same calendar month (SI 01110.600); therefore, by the month-end of receipt, the injury victim must retain no more than the resource limit, usually $2,000 for an unmarried individual and $3,000 for a married couple.
A well-planned spend-down leverages SSA statutes and regulations that exempt certain assets from the “countable resources” category. The personal injury settlement proceeds can thus be used to acquire or pay off certain exempt assets permitted by statute, 42 U.S.C. § 1382b(a), potentially eliminating the need for an SNT. These exempt resources are detailed in the Program Operations Manual System (POMS) at SI 01110.210 and typically include:
- A primary residence of any value, 20 C.F.R. §§ 416.1210(a), 416.1212.
- One vehicle of any value for transportation of the SSI recipient or a household member, 20 C.F.R. §§ 416.1210(c), 416.1218.
- Household goods and personal effects, irrespective of value, 20 C.F.R. §§ 416.1210(b), 416.1216.
- Any-valued burial plots, 20 C.F.R. §§ 416.1210(l), 416.1231(a).
- A dedicated account for burial expenses up to $1,500, 20 C.F.R. §§ 416.1210(l), 416.1231(b), though an unlimited amount is allowed in an irrevocable funeral service contract, POMS SI 01120.201.H.1.a.
- Life insurance policies with a cash surrender value under $1,500 and unlimited term insurance, 20 C.F.R. §§ 416.1210(h), 416.1230.
For example, as part of a comprehensive spend down plan, a recipient could use the settlement to pay off a mortgage, purchase a new home, repair an existing one, or buy long-needed household goods or appliances. They could also use the funds to clear credit card debts. The following is a non-exclusive list of potential ways to spend down:
- Paying off existing debts (note: loans from family members or friends need to be bona fide with an expectation of repayment).
- Purchasing or paying off a home or part of a mortgage.
- Paying only that calendar month’s rent.
- Making home repairs and modifications for disabilities.
- Purchasing home furnishings, electronics or appliances.
- Paying an attorney for estate or Medicaid planning.
- Paying off non-Medicaid/Medicare medical bills, educational expenses, entertainment/recreation expenses, and vacation travel.
- Pre-paying burial arrangements.
- Purchasing a vehicle.
- Buying personal products or services like clothing or hygiene products.
However, making purchases for someone else or giving away money should be avoided, as these are considered transfers for less than market value and could result in loss of public benefits (SI 01150.001, SI 01150.007).
Lastly, it is important to report spend-down to the local Social Security Administration (SSA) office and/or the state Medicaid office. As a trial lawyer, you can either directly advise your client on these issues or engage an elder law attorney to guide the client in tracking and reporting their spend-down, including dates, amounts, and items purchased. It’s crucial to remember that if the client is on SSI, the money they get and spend down is income in the calendar month they get the money, so it does interfere in that one month’s SSI payment. If spend-down exceeds one month, the interference with SSI (and Medicaid) will continue beyond that one month. If there is no SSI and only Medicaid, then as long as spend down occurs in the same calendar month there should be no interference with medical coverage.
Key Takeaway: A “spend-down” plan is a viable alternative to a Special Needs Trust (SNT), in the right settlement scenario. It involves the prompt expenditure of settlement funds that exceed the asset limit within the same month of receipt to retain public benefits eligibility. The plan leverages statutes and regulations that exempt certain assets from being countable resources, thus permitting the use of settlement proceeds to acquire, pay down, or improve exempt assets, potentially bypassing the need for an SNT; however, the spend-down must be strategically planned and promptly executed, taking into account eligible exemptions and avoiding non-permissible transactions. All transactions should be timely reported to the Social Security Administration and/or the state Medicaid office. While a spend-down may cause interference with benefits for the month in which the lump sum is received, especially for SSI recipients, if effectively managed, it provides a pathway to preserve government benefits while monetarily benefiting from the settlement.
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. When creating a plan that includes an SNT for a minor child or a spouse, understanding the impact of deeming and consortium claims is important. Spend-down is a viable alternative to establishing an SNT in some situations. Every case and client is different though and careful consideration of the advantages and disadvantages should be done with an elder law attorney.
 42 U.S.C. § 1396p.
 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. § 1382c(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).”
 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.”
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.”
 42 U.S.C. § 1396p(d)(4)(B).
 Third-party special needs trusts are creatures of the common law. Federal law does not provide requirements or regulations for these trusts.
 42 U.S.C. § 1396p(d)(4)(C).
 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.
Jason D. Lazarus is the managing partner and founder of the Special Needs Law Firm; a Florida law firm that provides legal services related to public benefit preservation, liens and Medicare Secondary Payer compliance. He is also the founder and Chief Executive Officer of Synergy Settlement Services, which offers healthcare lien resolution, Medicare secondary payer compliance services, public benefit preservation and complex settlement consulting.