Pick the Perfect Trust for Your Client

An individual who receives money from a personal injury settlement has a number of important considerations when it comes to how the funds will be distributed. For those on needs-based government benefits such as Medicaid (MediCal in California), Supplemental Security Income (SSI), food stamps, etc., the additional income could cause a loss of benefits eligibility.  This can be particularly troublesome for disabled individuals who rely on government benefits to meet their daily needs. Luckily, a special needs trust (SNT) can help preserve eligibility for government benefits while allowing the disabled individual to access their settlement proceeds. However, there are certain factors that must be considered when determining which type of SNT best fits your client’s situation.

Making the Right Decision

Before advising your client on the proper type of SNT, some essential questions need to be answered, including:

1. Does your client currently receive any needs-based government benefits (i.e. SSI, Medicaid/MediCal, food stamps, etc.)?
2. What age will your client be when establishing the trust?
3. What are your client’s monthly assets? Generally assets as little as $2,000 or $3,000 as a married couple are enough to disqualify an individual from needs-based benefits eligibility.
4. Do the assets going into the trust belong to the disabled individual or a parent/guardian? Will your client fund the trust with cash or a structured settlement annuity?

While some might believe that a settlement award should be enough to replace government benefits, in many cases—even in the case of million dollar settlements—that money may not be enough to care for the disabled individual’s lifetime medical needs or most importantly, the attendant care.

First Party Special Needs Trusts

A first party special needs trust (sometimes referred to as a “(d)(4)(a) trust”) is funded with assets belonging to the beneficiary (e.g. settlement funds). If the individual is under age 65, is currently receiving or may receive in the future needs-based benefits such as SSI and Medicaid, and is deemed disabled, this could be a good option.

Under current regulations, disabled individuals can’t set up their own first party SNTs, regardless of whether or not the individual has the mental capacity to do so. Instead, the trust must be established by the beneficiary’s parent, grandparent, guardian, or the court. Earlier this year, the “Special Needs Trust Fairness Act of 2015” (H.R. 670) was introduced in Congress.  Should the legislation pass, the disabled individual would be added to the list of individuals who can establish the trust.

First party SNTs also include a Medicaid payback provision, which requires that upon the death of the beneficiary, any remaining funds must be used to reimburse Medicaid for the amount of medical assistance provided to the beneficiary. If any funds remain after reimbursing Medicaid, those funds may be eligible for distribution to beneficiaries and/or heirs.

Pooled Trusts

For disabled individuals over the age of 65, who are deemed disabled and are receiving needs-based benefits, a pooled trust (sometimes referred to as a “(d)(4)(c) trust”) could be an option for preserving benefits.

The pooled trust is established and managed by a nonprofit organization, and the assets within are “pooled” for investment, with a sub-account managed by the nonprofit for each beneficiary. Unlike a first party SNT, the disabled individual can establish their own sub-account in a pooled trust.

The manner in which the remaining funds are handled after the beneficiary’s death depend on the terms of the trust. In some cases, the funds may remain in the pooled trust. In other cases, funds not retained by the pooled trust must be used to reimburse Medicaid.

Third Party Special Needs Trusts

A third trust option for disabled individuals is the third party special needs trust. Third party SNTs differ from first party SNTs in a number of ways, including how they are funded. Unlike first party SNTs, third party SNTs are funded with assets owned by parents or other relatives, not by the beneficiary. Much like the other types of SNTs, a third party SNT can allow the beneficiary to maintain eligibility for needs-based government benefits.

A third party SNT provides parents and guardians with a solution for ensuring that the disabled individual will have funds to cover medical needs once the parent or guardian passes away—or even during the parent or guardian’s lifetime.

When establishing the trust, the Grantor must stipulate how to handle any remaining funds in the trust upon the death of the disabled individual.

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If your client is disabled and will require future medical care, contact The Settlement Alliance-WEST at 800-354-2258 or info@tracikaas.com to discuss trust options. The Settlement Alliance-WEST has access to trust attorneys across the nation, and can help you determine the best strategy for your client based on their needs and jurisdiction.