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Special Needs Trusts and Personal Injury Litigation: An Overview

By Mark Albertson, Senior Counsel, Albertson Law Group, P.S.

Ryan Henry was riding in the back of his mother’s car when it was hit by a commercial truck. The driver of the truck had fallen asleep at the wheel. Ryan’s mother was killed, and Ryan was severely injured, with brain trauma and kidney failure, which rendered Ryan permanently disabled, and with ongoing medical problems. Ryan was seven years old. Litigation resulted in a $1.6 million settlement for Ryan. Additionally, at seven years old, Ryan was the beneficiary of his mother’s estate of $500,000. Ryan’s impairments and health issues would most-likely last for his lifetime.

In a situation where there is a disabled child in personal injury litigation, issues very often present themselves which require the use of special needs trusts. In a non-disability case, a structured settlement may be sufficient, or, more often with minors, the establishment of a settlement trust under SPR 98.16W. But when there is a child who is disabled, either from the injury, or who was already disabled, if a standard settlement trust is used, the assets in the trust become a considered resource if the child applies for Supplemental Security Income (SSI) and Medicaid benefits. Sometimes the settlement is large enough that there is no need for SSI, as the child’s needs will be provided for from the settlement. But in many cases, even where there is a substantial settlement or judgment, the child is unable to be privately insured for his or her lifetime, and medical costs over that child’s lifetime can easily deplete any amounts received due to the injury. In this case, it may be wise to preserve the opportunity for the child to apply for SSI, as Medicaid will cover the child’s medical costs over their lifetime without the need to deplete the settlement or judgment.

How Supplemental Security Income Works

Supplemental Security Income (SSI) is a "needs-based" program designed to assist disabled people with food and shelter costs. When someone qualifies for SSI, they also receive Medicaid benefits, which provide medical coverage. In order to qualify for SSI, a person must be disabled within the definition set out by the Social Security Administration, and his or her income and resources must be below certain minimal amounts. When a person receives a personal injury settlement or judgment, or when they receive an inheritance, if that amount puts them over (essentially) $2,000 in resources, then they are disqualified from receiving SSI benefits until their resources go below that amount.

This year, SSI pays a maximum monthly stipend of $674 per month for housing and food costs. Generally speaking, the monthly stipend is not the valuable part of SSI. It is the Medicaid benefits, as very often the disabled person is unable to secure private health insurance, or their medical needs can cost extraordinary amounts over their lifetime. Often drugs alone cost in the thousands each month, and even a comfortable settlement can be depleted from ongoing health issues.

Special Needs Trusts Allow a Disabled Beneficiary to Qualify for SSI

Under 42 USC §1396p(d)(4), assets that are owned in what is known as a "special needs trust" or "supplemental needs trust" are not taken into consideration in that person’s qualification for SSI benefits. That means that even a substantial personal injury settlement or inheritance can be protected for the disabled person, and will not be subject to depletion due to ongoing health costs. The statute and the Social Security Administration require that the trust be a discretionary, non-support trust with an independent trustee. Additionally, the statute requires a provision to be contained in the trust to provide repayment to the state for medical costs paid during the lifetime of the beneficiary, prior to being paid to residuary beneficiaries after the disabled beneficiary dies. The trust is to be used for extra, supplemental needs of the beneficiary, above and beyond what SSI provides for. This has been interpreted to mean that distributions from the trust need to be for the benefit of the beneficiary, and not for food or shelter costs, although, very often, the penalty for using the funds for food or shelter are minimal. When a trust is established with the disabled person’s own money (such as money he or she is entitled to from a litigation settlement or inheritance), 42 U.S.C. §1396p(d)(4)(A) allows the establishment of such a trust. These are commonly known as "first person" or "d4A" trusts.

Who Can Establish the d4A Special Needs Trust

Under the statute, the parent(s), the grandparent(s), the disabled person’s guardian or the court may establish the d4A trust. In the context of litigation, very often the trust is established under SPR 98.16W as a qualified settlement trust and as a special needs trust. In this context, it is often the court that establishes the trust. Many judges prefer this method, as it allows court supervision of the trust in the same manner as a settlement trust, while at the same time preserving the beneficiary’s qualification for SSI. Within the inheritance context, very often the court prefers to have the parent or guardian establish the special needs trust, then orders the proceeds to be paid into the trust through probate.

The Special Needs Trust Can be Flexible in What it Contains

The d4A trust can contain a variety of assets, including cash, real property, securities and CD’s, and can also be the recipient of a structured annuity. Very often, the trust will purchase a house for the benefit of the beneficiary to provide for housing during the beneficiary’s lifetime, which can also provide for upkeep, insurance and homeowner dues, although this results in a 1/3 reduction in the monthly stipend to the beneficiary. The d4A trust can also contain provisions which allow the trustee, if it becomes impractical or imprudent to continue for the beneficiary to continue receiving SSI benefits, to turn the trust into a general support trust for the benefit of the disabled beneficiary.

Special Needs Trusts Often Make the Difference

Special needs trusts can often make the difference in provide for the beneficiary. In addition to the d4A trust, there are third party trusts which do no require payback to the state, and pooled trusts, which allow management of the assets in a pooled fashion for many beneficiaries. In both the litigation context and the inheritance context, special needs trusts are a critical component of a proper settlement plan.

Mark Albertson is an estate planning attorney who focuses on planning for families with special needs children. He is a charter member of the Academy of Special Needs Planners (ASNP) and is also a member of the National Association of Elder Law Attorneys (NAELA). He is senior counsel at Albertson Law Group, a five attorney estate planning firm with offices in Kent and Bellevue. Mark can be reached at mark@albertsonlaw.com. His website for special needs families is http://www.snkidslawyer.com.