SPECIAL NEEDS TRUSTS FOR PERSONAL INJURY AWARDS
For persons entitled to large personal injury awards, settlements or proceeds from other legal claims, payment made directly to the claimant can be problematic when the claimant is already receiving certain needs-based public benefits such as Supplemental Security Income (SSI) or Medicaid. Where a person is already receiving these public benefits prior to the claim, or where he or she may become eligible for such public benefits as a result of their personal injury or other claim, outright payment of any substantial amount of money generally puts them over these programs’ financial eligibility limits. As a result of being ineligible for these programs, the person’s personal injury award or settlement may be quickly diminished by the high cost of the person’s ongoing health care and other needs.
Fortunately, federal law provides practitioners with a means to preserve the person’s personal injury award, while at the same time keeping the person eligible for public benefits programs. The way to accomplish this “best of both worlds” scenario is by placing the personal injury proceeds in a properly created and carefully drafted special needs trust.
Normally, programs like Medicaid and SSI are unavailable to persons with anything more than modest assets. For example, in Rhode Island, a person with more than $4,000 in “countable” assets is excluded from receipt of Medicaid funds. By law, certain assets are deemed “non-countable” or “exempt” from that tally, such as a person’s primary residence and an automobile. However, even a small bank account eclipsing this $4,000 threshold would cause the person to be ineligible for Medicaid benefits, even if it is held by virtually any type of trust other than a special needs trust.
The special needs trust exception to the rule is contained in 42 U.S.C 1396(p)(d)(4)(a) and is codified by the Rhode Island Department of Health and Human Services Regulation 0356.50.20. This type of “exempt” special needs trust is commonly referred to as a D4A Special Needs Trust (referring to the statute authorizing it), or a First Party Special Needs Trust. These two terms are interchangeable.
Properly Created and Carefully Drafted
D4A or First Party Special Needs Trusts serve to hold assets that already belong to the disabled individual, such as personal bank accounts or personal injury awards. A second kind of special needs trust, referred to as a Third Party Trust, serves to hold assets contributed to or for the benefit of the disabled individual by his or her parents, relatives, or other “third party” sources.
The distinction between First Party and Third Party Special Needs Trusts is an important one. The federal statute mentioned above, as well as Rhode Island’s regulatory version of it, mandates that a First Party Special Needs Trust must meet the following requirements:
- It may only be established for a disabled person 65 years of age or younger;
- It may only be established by a parent, grandparent, legal guardian or court order*;
- It must name the state as a remainder beneficiary upon the disabled beneficiary’s death, up to the amount of funds expended by the state on behalf of the disabled beneficiary.
Thus, in order to protect a disabled person’s personal injury award, the trust that receives the proceeds must meet these conditions. Many times, the second requirement proves the biggest obstacle to successful special needs trust planning.
It is often the case that the disabled person no longer has a living parent or grandparent, meaning a court order authorizing the trust, or a guardianship must be obtained. Neither is a small task. Depending on the disabled person’s circumstances, one or the other of these options might be preferred. For example, if the disabled person is already in need of a guardianship irrespective of his or her need for a trust, it would make sense to seek the establishment of the trust through the guardianship. On the other hand, where no guardianship is needed, a Superior Court petition probably makes more sense.
Involving Special Needs Planning Attorney in the Litigation
Perhaps the easiest and most efficient means to create the First Party Trust is to collaborate with a qualified special needs planning attorney during the actual litigation phase. While the civil action remains open, Plaintiff’s attorney can petition the court for the creation and funding of the First Party Special Needs Trust, which can then receive the settlement proceeds or award directly. This advance work avoids the subsequent need to re-initiate court action to fund the trust. More importantly, the court sanctioned process avoids the result that the disabled person will be deemed the holder of the award which result would put the person over their allowable resource limit and his or her benefits would be lost.
Avoid Commingling of Personal Injury Award Proceeds and Third Party Funds
Because funds held by a First Party Trust are subject to state payback upon the beneficiary’s death, it is important not to fund the First Party Trust with assets that would not otherwise be subject to the payback to the state. When parents or other relatives desire to leave the disabled person an inheritance, or to make a gift to the disabled person, the First Party Trust should not be named as the beneficiary of the inheritance.
For inheritance and other such third party funds, a Third Party Trust would be the appropriate beneficiary. Upon the disabled beneficiary’s death, the Third Party Trust may pay the remaining trust funds to private, non-state beneficiaries, since Third Party Trusts are not subject to the same, stricter standards set forth in the Federal and State Medicaid regulations.
*As of February 2015, the Special Needs Trust Fairness Act (H.R. 670), has been reintroduced in Congress. If passed, it would allow disabled individuals to create their own First Party trusts, if they are competent to do so.