By Guest Author, Evelynn Passino, J.D. – Executive Director of Pooled Trust Services
One of the many practice points rarely taught in law school: your client may lose public benefits as a result of a recovery, and you have a duty, as their attorney, to discuss benefit preservation with them. That does not mean you have a duty to actually preserve their eligibility–a competent adult can very well choose to not keep their benefits—but you must make sure they understand their options. Failing to discuss with your client how he or she can maintain their benefits may be grounds for malpractice. This article will provide relevant case law, an overview of the major government benefit programs, protection mechanisms, and best practices for ensuring that the attorney’s duty is met while protecting the client.
Case Law: Grillo & Glorioso
There are now many legal malpractice cases in which attorneys failed to properly advise their clients, but two cases which clearly illustrate this duty are Grillo v. Petiete et al., 96-145090-92 (96th Dist. Ct., Tarrant Cty., Texas) and French v. Glorioso, 94 S.W.3d 739 (Tex. App. 2002). Grillo involved a birth injury resulting in severe brain damage. The attorneys refused a structured settlement in favor of a lump sum of $2.5 million, which was then placed into a court registry. Because there was no structure, she was taxed on the interest earned. Not only did this result in substantially less money for Christina Grillo’s care, she lost Medicare and Medicaid eligibility because a special needs trust was not utilized, leaving her family with the burden of paying for care. Due to her serious medical needs, the funds were exhausted within a few years. The attorneys and guardian ad litem were ultimately liable in the malpractice cases for over $4 million in damages.
In Glorioso, the personal injury victim’s recovery was placed in her attorney’s trust account, where it remained for over a year. While she was not Medicaid-eligible at the time of her injury, she became eligible prior to the case being settled. The personal injury victim eventually lost Medicaid and subsequently filed suit against her attorney for failing to advise her that the funds needed to be in a special needs trust to protect her eligibility. The attorney was able to prove that he had advised her that she would need to establish an SNT to protect her benefits both at mediation and before, and that she had declined. Ultimately, he was not liable for malpractice.
Public Benefit Programs
Government benefits are often compared to a tangled web or alphabet soup, and for good reason. There are a number of programs available, many interact or intersect, and most of them are known by similar acronyms. The first thing to understand is that government benefits generally fall into two types: means-tested (or needs-based) and entitlement. Means-tested benefits require the client to qualify financially, while entitlement benefits are not in any way related to income or assets.
Supplemental Security Income (SSI)
SSI is a means-tested benefit administered by the Social Security Administration, although some states add a supplement. In 2020, SSI is a monthly cash payment of up to $783 for an individual or $1,175 for a married couple. SSI is intended to provide basic support (food and shelter) for people with both financial and medical needs. In many states, receiving SSI automatically qualifies someone for Medicaid coverage in their state.
To qualify for SSI, the person must be a US citizen or non-citizen who meets certain requirements, have limited countable income and resources (less than $2,000 for an individual or $3,000 for a couple), and be one of the following: 65 or older, blind, or disabled. Assume any income or assets are countable unless the program provides an exemption. A person’s primary home and one vehicle are both considered exempt resources. The items in a person’s home are, generally, exempt resources, although there are exceptions for items held solely for their value. For example, a diamond ring that is worn from time to time is exempt, while a diamond or gold that is held as an investment is not.
The recovery from a lawsuit, unfortunately, is not an exempt resource. Any funds given to your client are going to count as income in the first month and as a resource in subsequent months. As illustrated in Glorioso, funds held in an attorney’s trust account can become a countable resource which underscores the necessity to plan early. SSI recipients are sometimes tempted to forego SSI; however, if they also have Medicaid, they must understand both can be lost as most states provide Medicaid coverage automatically with SSI. Preserving SSI eligibility may be important for this reason alone.
Social Security Disability Insurance (SSDI)
SSDI is also administered by the Social Security Administration but is an entitlement benefit. SSDI is a monthly payment that on average provides $1,258 per month. To qualify for SSDI, an individual must be disabled and have enough recent work credits (varies based on the age of the person). After 24 months of SSDI, an individual automatically qualifies for Medicare benefits. There are no financial qualifications for SSDI, so a settlement would have no impact on this benefit.
How to Tell the Difference between SSI & SSDI
The safest option is to request the award letter, but there are a few ways in which SSI and SSDI vary. First, SSI is means-tested while SSDI is not. Second, SSI is always going to be below $783 (unless your state supplements SSI) while SSDI is usually (but not always) over $1,000. Third, qualifying for SSI requires no recent work history while SSDI does. While this is not true 100% of the time, usually SSI is paired with Medicaid and SSDI is paired with Medicare.
Medicaid is health insurance funded by state and federal governments and administered by state agencies. For that reason, Medicaid programs vary across the board, both in terms of offerings and qualifications. Generally, Medicaid is means-tested, although there are some programs which are not. The qualifications are similar to SSI in that there are both financial and medical criteria, such as being pregnant, disabled, or 65 or older. Medicaid provides many benefits, but the one not covered by other government benefit programs is nursing home care. A client receiving this type of care through Medicaid typically cannot afford to lose it.
Like SSI, not all income and assets are countable but the rules are similar. Lawsuit recoveries are countable, meaning they will usually disqualify a person from Medicaid. As stated above, in many states qualifying for SSI will result in qualification for Medicaid, but the reverse is also true: losing SSI will cause an interruption in Medicaid coverage. If Medicaid coverage is important to the client, then finding out if they have SSI and if their Medicaid is “tied to” their SSI is critical before distributing any part of their recovery to them.
Medicare is a federal health insurance program administered by the Centers for Medicare & Medicaid Services (CMS) and is an entitlement benefit. To qualify for Medicare, an individual must be age 65 or older, have End Stage Renal Disease, or be disabled. There are no financial qualifications for Medicare, so it will not be impacted by funds received from a settlement.
There are 4 “parts” to Medicare. Part A covers inpatient care, such as hospital stays and limited skilled nursing care. Part B covers outpatient care, such as doctor’s visits, preventive care, home health care, and durable medical equipment. Parts A and B are what is known as “traditional Medicare.” Part D covers prescriptions. Part C combines parts A and B, and sometimes part D, and is administered by private companies called Medicare Advantage plans or Medicare HMOs. These companies receive funding from the federal government and operate like traditional insurance companies with networks, co-pays, and other out-of-pocket expenses. Most also offer additional coverage, such as dental coverage and gym memberships. Medicare supplements, also known as “Medigap” policies, are policies offered by private companies to fill in the gaps of what traditional Medicare does not pay for.
If your client has Medicare or will have Medicare in the next few years, it may be prudent to consider establishing a Medicare Set-Aside (MSA) account. MSAs are not currently required by law but failing to properly advise your client may be grounds for a malpractice claim.
In a nutshell, CMS interprets the Medicare Secondary Payer Act to require that Medicare’s future interests be taken into account when a plaintiff receives compensation from a personal injury settlement. CMS’ preferred method to address this issue is the establishment of an MSA. The MSA is an account set up to pay for injury-related future medicals that are Medicare-covered. Once the MSA is funded, Medicare will continue to pay for non-injury related services, and when the funds in the MSA are exhausted, Medicare resumes coverage for injury related care.
How to Tell the Difference between Medicaid & Medicare
Medicare is a federal program while Medicaid is administered by states and varies from state to state. Medicare is an entitlement benefit; Medicaid is needs-based. While Medicare offers very limited coverage for nursing home stays, Medicaid often covers 100% of the cost. A person can qualify for Medicare after being on SSDI for 2 years. Medicaid qualification in many states is tied to SSI. Finally, set-asides only apply to Medicare. There is no such thing as a Medicaid set-aside.
Section 8 / The U.S. Department of Housing & Urban Development (HUD)
HUD provides several housing programs to assist low income families, the elderly, and people with disabilities. These programs are federally funded but administered at the state level through local housing authorities. The best-known of these programs is the Section 8 voucher program.
The local housing authority determines the amount of the voucher based on the above factors and the cost of rent in the local housing market. The voucher recipient then finds a suitable dwelling for that price (if the rent is higher than the voucher, the recipient pays the excess). The recipient will likely also pay 30-40% of monthly adjusted income.
Section 8 benefits are means-tested but not in the same way as programs like SSI and Medicaid. Those programs consider all income and assets while HUD only looks at the family’s income. This includes income produced by assets, or a percentage of assets deemed as income, but not the assets themselves.
Income generally includes what one would expect it to include: wages, income from a business, interest earned on investments, periodic annuities, etc. Of note are exclusions for lump sums (inheritances, insurance payments, and settlements for personal or property losses) and reimbursement of medical expenses. The lump sum category has an exception to the exclusion, however, for payments in lieu of earnings which includes workers’ compensation (meaning these payments are income).
Just because personal injury settlements are excluded income does not mean no planning or counseling is needed. Individuals who qualify for HUD benefits almost always have other needs-based benefits, so it is important to understand the whole package.
The Supplemental Nutrition Assistance Program (SNAP)
SNAP is a means-tested benefit funded by the federal government and administered by state agencies. Qualifications for SNAP vary by state but are generally based on the family’s income and resources. Non-citizens can qualify for SNAP if they have lived in the United States for 5 years, are receiving disability-related benefits, or are under 18. Like SSI and Medicaid, there are some resources that do not count towards the family’s asset limit, such as a home and vehicle (although there are restrictions on the value of vehicle and the purpose it is used for). Recipients access this benefit through an Electronic Benefit Transfer (EBT) card which functions like a debit card for use at grocery stores. Because this benefit is means-tested, it is impacted by personal injury settlements.
Benefits provided by the Veterans Administration (VA) are funded by the federal government. Some are not means-tested, such as disability-connected VA compensation (disability connected), but VA pensions, which include Aid & Attendance and Housebound benefits, are means-tested. VA healthcare benefits can also be needs-based insofar as determining whether the veteran will pay a co-pay. Like other means-tested benefits, VA pensions are impacted by lawsuit recoveries. VA pensions apply an income test and a net worth test.
For the income test, they look at annual income, so they will take the award from the settlement and divide it by 12 to calculate the reduction in monthly benefits. The reduced rate will apply for 12 months. After 12 months, the veteran’s benefits will go back to normal, assuming no other changes.
For the asset test, there is a limit of $127,061 for both the veteran and spouse. Like other benefits, the money cannot be given away to reduce assets, but there are methods of reducing net worth to qualifying levels, such as spending money on medical services or home repairs (so long as it’s for fair market value).
Clients with No Benefits
Even if a client has no benefits presently, you may still need to discuss public benefit preservation strategies with them if there is a likelihood they will be on such benefits in the future. For example, if the client is going to have Medicare, they may want to establish a Medicare Set-Aside. If the client will need to qualify for Medicaid, they may want to consider placing funds in a settlement trust that can transfer assets to a Special Needs Trust.
Public Benefit Preservation Strategies
Once you have identified the client’s benefits, the next step is helping them decide which course of action to take to preserve them. There is one option available to nearly any kind of client: spend the money down to a level where they will qualify for the desired benefits. There are certain rules and timelines that must be followed to do this effectively, so it is critical to speak with an elder law or special needs law attorney who can properly advise you. One thing they cannot do is give the money away as that is considered a transfer for less than fair market value. A few other options are listed below that apply to more narrow circumstances.
Special Needs Trust (SNT)
If the client is disabled and wants to use their money in the future, they can establish an SNT. SNTs are authorized by federal law to shelter funds in the trust from being counted by most government benefit programs. The notable exception is VA benefits. There are two kinds of SNTs: standalone and pooled.
A standalone SNT (also known as a (d)(4)(a) trust) can be created and customized for an individual. Standalone SNTs can be expensive to draft, take weeks or months to set up, and a trustee must be appointed. Private banks or trust companies often fill the role of trustee and can be very costly.
A pooled trust (also known as a (d)(4)(c) trust) is an existing trust that a person can join. It gets its name because the funds contributed by the beneficiaries are pooled for investment purposes to obtain better returns; however, each sub-account is kept separate, so no beneficiary has access to another beneficiary’s money. By contrast with standalone trusts, pooled trusts are fast to join because the bulk of the drafting is already done. Fees also tend to be lower for two reasons: 1) according to federal law, the trustee must be a non-profit organization; 2) since the trustee is administering the same trust for many people (as opposed to the same number of people who all have different trusts), the trustee can work efficiently.
There are three things to keep in mind about these types of trusts. First, any SNT must include a provision to repay the state for Medicaid services provided since the inception of the trust when the beneficiary passes away. If there are funds remaining after payback, they may go to the designated death beneficiary; however, pooled trusts have the right to retain some or all the funds. These policies vary from trust to trust. Some pooled trusts retain nothing or a small percentage, so it makes sense to shop around. Second, SNTs are “sole benefit” trusts, meaning all funds expended must be for the benefit of the beneficiary only. A beneficiary would not be able to use funds in an SNT to buy gifts for a friend or loved one. Third, there are a number of rules to follow regarding distributions. For example, if someone has SSI, the trust cannot provide funds for food or shelter without causing a reduction the person’s SSI benefit. It is important to work with a trustee who is knowledgeable about the rules in your state and one well versed in working with personal injury settlements.
More generally, the client needs to understand that while the money is still theirs, they will have no control over it. They can make requests of the trustee, but ultimately every disbursement is the trustee’s decision. SNTs are always irrevocable, so they can’t be easily undone once they are created.
If the client has less than $15,000 and they were disabled prior to age 26, they might consider placing the funds in an ABLE account as an alternative to establishing an SNT. These accounts, created by the Achieving a Better Life Experience Act, are available nationwide. Like an SNT, funds in an ABLE account are not “countable,” but unlike an SNT, the client has full control over the account. There is a bonus for those with SSI—they can use the funds for food and shelter purposes, which they cannot do with the funds in an SNT.
ABLE accounts and SNTs are increasingly used together, especially for those with SSI. The SNT can be funded with the full recovery, and the trustee can deposit up to $15,000 per year in the ABLE account, which the client can then use to pay their rent and buy groceries.
Any competent adult can choose to take their recovery and lose their means-tested benefits. They need to be properly counseled before doing so, however. They might not be thinking about what their benefits really pay for or how much it would cost to buy private health insurance. Many benefit programs have waiting lists, so once a client is disqualified, it may be for good. Clients must understand all the ramifications and all of their options available under the law to make a truly informed decision.
While the world of government benefits is complicated, there is some good news. You can keep yourself safe from a malpractice lawsuit and ensure your clients are protected if you remember to READ:
- Review your client’s benefits at intake and throughout the case.
- Enlist experts early-on to educate you and your client. Whether it’s a local attorney who practices in this area or a company like Synergy, work with people who know these programs inside and out.
- Award letters—get them! Every government program sends the client a letter explaining what benefit they qualified for. This is the only way to know for sure what benefits your client does or does not have.
- Document your file regarding your client’s decision and action steps taken to educate them. This is especially important if the client is choosing to forego any of their benefit programs. It is never a bad idea to have them sign something acknowledging that you counseled them on this matter and that they declined to take an action that would preserve their benefits. One last tip, you might want to add a sentence to your closing statement informing clients that the receipt of a settlement could jeopardize eligibility for government assistance programs.
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 a founding Principal and Chief Executive Officer of Synergy Settlement Services, which offers healthcare lien resolution, Medicare secondary payer compliance services, pooled trust services, settlement asset management services and structured settlements.