Introduction:
When settling a personal injury case for a person with a
disability today, there is almost an automatic assumption
that the best approach is to establish a special needs
trust. That often is the best answer--particularly if it is
critically important to maintain public benefits eligibility
and especially where the settlement amount is substantial
but not necessarily enough to provide all the medical care
the recipient requires. A good special needs adviser will
review and discuss some of the alternatives to special needs
trusts--as with so many legal questions, there is no
one-size solution that can be made to fit all problems.
Some of the
approaches that might be appropriate in some circumstances
might be positively harmful or dangerous in others, so there
is a real need to seek professional--and
personalized--advice. Still, it is good to be familiar with
some of the options that might be proposed. Common
alternatives to special needs trusts for litigation
settlements will include:
Spend-Down: Although the whole
purpose of special needs planning for personal injury
settlements is usually to maintain eligibility for public
benefits, there are some circumstances in which the problems
associated with special needs trusts outweigh the benefits.
This can particularly be true with small settlements, when
it may be entirely appropriate to simply report the
settlement to the Social Security Administration and the
state Medicaid office, let the recipient lose current
benefits and spend the proceeds until eligibility can be
re-established.
In some cases
the spend-down cycle can be completed before eligibility is
actually suspended. Legitimate debts incurred by the
beneficiary before the settlement can usually be paid
without incurring any penalty, and money can be set aside
for funeral and burial arrangements. Clothing, furniture,
personal effects, even groceries and supplies can be
purchased without causing any further ineligibility.
Even larger
expenditures can be considered as part of a spend-down plan.
The beneficiary can own a home without affecting eligibility
for most benefits plans, and so the settlement proceeds can
be used to purchase, improve or renovate a home. Similarly,
since a single vehicle is exempt, the recipient can purchase
a new or replacement vehicle, or pay to have an existing
vehicle retrofitted for accessibility or convenience.
Obviously,
the particular needs of each plaintiff will vary even as the
size of the settlement and public benefits profile differ.
This approach should not be undertaken lightly, and almost
certainly will benefit from careful planning with an
experienced special needs attorney. The timing of the
spend-down is critically important, and should be planned
out in advance of receipt of the settlement proceeds.
Structured Settlement: Special
needs trusts and structured settlements often work
hand-in-hand, with a structure's payments directed to a
special needs trust to maintain future eligibility. In some
cases, however, the structured settlement option may even be
an alternative to establishing a special needs trust. If,
for example, the beneficiary is expected to recover and
probably even "graduate" from public benefits programs, it
may be advantageous to delay the start of settlement
payments until after the public benefits issue is no longer
important.
What happens
if you guess wrong, and it turns out that public benefits
are still required on the future date when a structured
settlement payment is received? Assuming the law stays the
same and the beneficiary has not reached age 65 in the
meantime, future payments can be transferred to the special
needs trust with only (in most cases) a single month of
ineligibility. Obviously, the structured settlement
alternative works better with younger recipients and
infrequent periodic payments. Typically, payments are
scheduled for after the beneficiary reaches majority and for
payments on an annual, or even three- or five-year, basis
rather than monthly.
Pooled Trusts: For smaller
settlement amounts it may make economic sense to look for a
"pooled" trust alternative. Although pooled trust are not
available in every state, there has been a recent surge in
popularity, and the growth of pooled trust options has been
remarkable. Your local Special Needs Alliance member will be
familiar with all of the pooled trust options operating in
your state.
The pooled
trust is really a type of special needs trust, but by
accumulating assets into a common pool the trustee can save
some administrative expenses and thereby reduce the costs to
the beneficiary. There is no dollar limit on the amount that
can be managed through a pooled trust, though most
beneficiaries tend to prefer individual accounts for larger
trust amounts.If there is a pooled trust operating in your
state, it may be the perfect low-maintenance alternative for
settlements of less than, say, $50,000.
Gifts: With recent changes in
Medicaid and Supplemental Security Income rules, making a
gift of any significant portion of the settlement proceeds
will usually not be a good choice. In fact, if the
beneficiary's disability is mental it may not even be
possible to make gifts in any amount. Still, there are a
small handful of circumstances when gifts may make sense as
part of a plan for dealing with eligibility after receipt of
a personal injury settlement or award.
Problems With Special Needs Trusts:
While considering the alternatives to special needs trusts,
it is important to review the reasons why you might wish to
avoid creating such a trust with your settlement proceeds.
Special needs trusts are great for some situations, but they
are not without their own difficulties:
-- Cost. A litigation special needs trust is more likely to
require a professional (bank, lawyer or private fiduciary)
trustee, and the administrative expenses can be
considerable. Especially with smaller trusts, the trustee's
fees may be the largest expense paid out of the trust each
year. That is not a particularly attractive result, and it
makes trustees as unhappy as beneficiaries when it does
happen.
-- Expenditure limitations. Depending on state law and the
particular program benefits the beneficiary receives, there
may be significant limits on the types of things the trust
can purchase. Of course, payments for food or shelter, or
cash distributions for any purpose, can create eligibility
problems. In addition, problems can arise with care payments
(especially to family members), with gifts (even though the
beneficiary might be adamant that he or she wants to make
gifts--even token gifts--to family and friends), or with any
number of other specific expenditures.
--Pay-back provision. Of course, a personal injury
litigation special needs trust must include a provision
repaying the state government for its Medicaid disbursements
upon the death of the beneficiary. While this may not
directly affect the beneficiary's quality of life, it is an
irritant and can make the special needs trust unattractive
to some beneficiaries.
Conclusion:
Special needs trusts are a wonderful tool for many personal
injury victims who receive settlements that might otherwise
affect their public benefits eligibility. Given the cost and
limitations imposed by a special needs trust, however, it is
important to consider the options before making a final
decision. A good special needs attorney will frankly and
completely discuss the alternatives to assist you with your
decision. Members of the Special Needs Alliance are familiar
with those options, and also with the nuances of local
practice and programs.
About the Author:
Robert B. Fleming is a Certified Elder Law Attorney in
Tucson, Arizona, whose practice focuses on special needs
planning, elder law and estate planning. Mr. Fleming is a
member of the Special Needs Alliance, a non-profit
organization dedicated to serving the legal planning needs
of people with disabilities and their families. Contact
information for a member in your state may be obtained by
calling toll-free (877) 572-8472, or by visiting
www.specialneedsalliance.com.