Supplemental Needs Trusts: Advantages to Planning Ahead

Oftentimes an individual who has suffered a permanently disabling personal injury pursues a claim under which they receive a substantial settlement or judgment. Oftentimes this settlement or judgment involves an amount of money meant to compensate the injured person for the loss of quality of life they will suffer for the rest of his or her life. When an individual is planning to receive such a large settlement or judgment, it is important to think beyond the day one receives the funds, and to keep in mind the consequences of receiving such a large sum and how to take full advantage of the benefits available to the disabled person.

Why establish a special needs trust?

For every individual in this situation, it is advisable to consider establishing a supplemental needs trust to hold the funds. The primary objective in establishing such a trust is to protect the individual’s eligibility for Medicaid and Supplemental Security Income (SSI). When an individual receives a large settlement or judgment, the government will consider these monies to be assets that count against an individual’s qualification for government sponsored benefits like Medicaid and SSI. Having too many assets available will disqualify an individual from receiving these benefits. By establishing a proper trust to hold the funds, the individual can protect his or her eligibility for benefits while keeping the funds held in trust accessible at the discretion of the trustee.

The Medicaid Payback Trust, more commonly known as the (d)(4)(A) trust (so named for the statute allowing such a trust, IRC 1396p (d)(4)(A)) is the proper trust for individuals under the age of 65 who wish to protect their assets from disqualifying them from receiving government benefits. The design of such a trust is to allow the trustee, at his or her discretion, to use the trust funds to provide the beneficiary with supplemental support in addition to any government benefits they may receive in order to elevate their quality of life. At the beneficiary’s death, any funds remaining in the trust must be used to pay the government back for any benefits received during the beneficiary’s lifetime.

How the Special Needs Trust is Set Up

The structure of this supplemental needs trust involves a trustee, a beneficiary, and a remainderman. The trustee is an individual chosen to disburse the funds in the trust at his or her discretion. The trustee’s responsibilities are to serve as a fiduciary and to allow disbursement of funds from the trust that he or she deems necessary for the support of the beneficiary.

The beneficiary is the individual who is receiving the benefits of the trust. In a personal injury settlement or judgment the plaintiff would establish the trust and would be named as the beneficiary of the trust. In order to receive funds out of the trust, the beneficiary requests a disbursement of funds from the trustee naming the reasons why he or she wishes for the funds to be disbursed and how he or she plans to use them.

Finally, the remainderman under the Medicaid Payback Trust is the state. Upon the beneficiary’s death, the state must be paid back for the government benefits the beneficiary received during his or her lifetime. After the government has been paid back for these benefits and if any funds remain in the trust, the secondary remanderman named in the trust will receive these funds.

Giving to the Special Needs Beneficiary

It is important for family members and friends of the plaintiff/beneficiary to be aware of the trust when establishing their own estate plans. If a friend or family member wishes to give a gift or leave a bequest to the plaintiff/beneficiary in this type of situation, they run the risk of these assets again disqualifying the plaintiff/beneficiary from receiving government benefits.

In order to avoid this, the family members and friends should establish a new trust, a third party trust, with the plaintiff/beneficiary again named as beneficiary of this new trust. If these assets are correctly established in a third party trust, they will not be treated as countable assets for purposes of Medicaid or SSI qualification, and unlike the Medicaid Payback Trust, they will not have to be used to reimburse Medicaid upon the beneficiary’s death.

Rob Levine & Associates can answer all of your questions about special needs trusts, settling your personal injury claim, and eligibility for government benefits. Call us today: 800-LAW-1222.