Special Needs Trusts and Personal Injury Settlements
By Mary Alice Jackson
Special Needs Trusts or SNT’s (also known as supplemental care trusts) are trusts, created for disabled individuals, which are intended to supplement, but not replace, any public benefits to which the disabled individual may be entitled.
Goals: The goal of funding a supplemental needs trust is to provide a pool of funds from which the disabled individual can increase the quality of his or her life, while still remaining eligible for public assistance.
Caveat: The regulations regarding SNTs, SSI, Medicaid, federal housing, and other programs are creatures of federal and state statute and are subject to change. The protections provided by a SNT may change throughout the beneficiary’s lifetime and cannot be guaranteed.
Supplemental needs trusts which are established in accordance with regulations found under ‘1396p(d)(4)(a) were provided for under OBRA ’93 and created additional protections for disabled individuals, including protection from certain asset and transfer rules. A (d)(4)(a) trust must be established by a parent, grandparent, legal guardian or court, and must provide that after the death of the beneficiary, the state be repaid from the assets remaining in the trust up to the amount equal to the medical benefits paid on behalf of the beneficiary.
Usually, the public benefits which the recipients are trying to preserve are SSI (Supplemental Security Income) and Medicaid. In most states, persons eligible for SSI are automatically eligible for Medicaid. The Medicaid program pays for medical assistance that disabled individuals often need during their lifetimes. Sometimes, preservation of housing and additional benefits is also a consideration.
SNTs and personal injury settlements: Although attempts have been made in the past to characterize it differently, a supplemental needs trust established using proceeds from a personal injury action is now considered by most courts to be self-settled trust that is, a trust established by using funds belonging to the beneficiary, even if the trust is ordered by the court and the money never actually reaches the hands of the beneficiary.
Such a trust must be a “pay back” trust, meaning that it must provide that any remaining funds in the trust upon the beneficiary’s death must be reimbursed to the state to the extent of medical assistance provided. For SSI purposes, a residuary beneficiary (a specifically identifiable person or entity) must be named who would receive any excess monies available after the state has been repaid.
Establishing the trust: The trust must be created by either a parent, grandparent, legal guardian, or the court. In the case of a settlement, the court can create the trust, or can authorize its creation by the parent, grandparent, or guardian.
Nature of trust: A (d)(4)(a) trust is an irrevocable grantor trust. The trustee will be required to file an SS-4 to apply for an EIN.
Prior medical assistance payments: Prior to the funding of the trust, the proceeds will be subject to liens from existing state agencies who have provided medical assistance to the beneficiary. If the beneficiary is not yet a Medicaid recipient, these provisions do not apply.
Tax consequences: A reliable accountant or tax attorney should be consulted upon creation of the trust. Generally, tax will be owed and returns must be filed if the trust estate earns in excess of $600 per year. The transfer of settlement funds to the trust may not be a taxable event under Rule 1.468B. Under certain circumstances, the IRS has found that the funds remaining in the trust at the time of the beneficiary’s death may be part of the gross estate.
Distributions by trustee: Distributions by the trustee must be limited to payments for the supplemental needs of the beneficiary. In addition, the trustee must be careful not to make distributions directly to the beneficiary which would impact SSI or Medicaid asset or income regulations. Income must be restricted according to the rules of the program. For SSI, distributions cannot be made for food, clothing or shelter without impacting the monthly benefits. The trustee must keep apprised of SSI and Medicaid rules in order for the trust to work effectively for the beneficiary.