Plaintiffs’ Attorneys Need to Know about Special Needs Trusts; Brian Rubin Explains

Personal injury lawsuits all seek to recover damages for injured plaintiffs. If the injured plaintiff is a person who may someday be the beneficiary of a government program that involves a means test, the plaintiff’s attorney will need to protect the plaintiff’s future eligibility for such a program by using a special needs trust. Special needs attorney Brian Rubin explains how means testing works and why plaintiffs’ attorneys need to plan for their clients’ futures.

government benefit programs, including Medicaid and Supplemental Security Income, limit eligibility for the program to individuals whose assets do not exceed $2,000. In order to preserve future eligibility for a plaintiff with special needs, the plaintiff’s attorney will need to place the settlement proceeds in a special needs trust. These trusts have been around since about 1993. The point of the trust is to make the proceeds of a settlement available to a special needs person without disqualifying the person for governmental benefit programs in the future. There are all kinds of benefits, such as Medicaid payments for skilled nursing care or in-home services.

The federal law permitting special needs trusts was passed in the early 1990s, Rubin says. He uses the example of a child who receives several hundred thousand dollars in settlement of a medical malpractice case. When the child turns eighteen, he or she might be eligible for some important government benefits, but not if the settlement is all in a guardianship account or an account in the child’s own name. If the money is in a special needs trust, the person with special needs will be entitled to the benefits, and the proceeds of the lawsuit will be available as a reserve fund.

Rubin points out that the governmental benefits can be substantial. In the case of a child with Down syndrome whose parents are looking for residential services, “in today’s dollars . . . the state, with Medicaid, would be paying anywhere from $60,000 . . . to a couple of hundred thousand dollars a year” to provide those services for the child. If the child has lawsuit settlement proceeds in the bank, those assets would have to be exhausted before there would be eligibility for any governmental benefits.

Rubin says that most plaintiffs’ lawyers are now aware of both the means test programs and special needs trusts. However, some years ago, there were some lawsuits for legal malpractice filed against lawyers who failed to shield the proceeds of a settlement using a special needs trust. The important thing, Rubin says, is for a lawyer to do the right thing for a client. That will probably also protect the lawyer from a future legal malpractice lawsuit.

Speaking for special needs attorneys, Rubin says that their goals are twofold. They seek to assist plaintiffs’ lawyers in establishing special needs trusts that are properly written so that they will be approved by federal and state governments. In addition, a special needs attorney will work with plaintiffs’ attorneys and clients to determine how much of a settlement should be sheltered and how much should be spent. The special needs attorney can help a plaintiff’s attorney understand what benefits will (or won’t) be available to a plaintiff in the future. The special needs attorney can also help to quantify what a person with special needs will require in the future and when those needs will occur.

Rubin explains that in some situations, parents will be looking to use some of the proceeds of a settlement for the common good of the family, such as to purchase a new vehicle or a new residence. Purchases like these cannot be made from a special needs trust. Such trusts must be sole benefit trusts, meaning that only the beneficiary will be allowed to benefit from trust expenditures. “If another family member may benefit, that expenditure will basically disqualify that trust.” A special needs attorney can work with the plaintiff’s attorney to carve out a portion of a settlement as a partial settlement to the parents to permit, for example the purchase of a special van, “so that it’s not going to be a problem later on.”

Also, the special needs attorney can help with Medicare set-aside trusts in cases where such instruments may be needed. Third party liability cases may bring this issue into a case.

Brian N. Rubin is the founding member of Rubin Law, A Professional Corporation in Buffalo Grove, Illinois. He is also the father of a son with special needs. His practice is dedicated to serving the legal and future planning needs of his fellow families of children and adults with intellectual disabilities, developmental disabilities, and/or mental illness. He is a Fellow of the American College of Trust and Estate Counsel (ACTEC), and is the President Elect of the Special Needs Alliance, the national, non-profit, association of experienced special needs planning attorneys (membership is by invitation only).

The Interplay Between Litigation Trusts and Structured Settlements

There are five types of trusts commonly used in settling personal injury litigation:

• Self-settled special needs trust

  • Used when the individual will need means-tested public benefits such as Medicaid and Supplemental Security Income (SSI).

  • Funded with assets of the beneficiary, who is the person receiving the settlement.

  • Individual must be under 65.

  • Trust must be for the sole benefit of the plaintiff with disabilities.

  • Must be established by the plaintiff, their parent, grandparent, guardian or the court.

  • Requires a Medicaid payback.

• Self-settled special needs trust with Medicare set-aside (MSA) provisions

  • MSA funds are intended to cover potential future medical expenses related to the injury that Medicare would otherwise be required to pay for.

  • Conservative approach is to include the MSA within the special needs trust to ensure there is no disagreement about whether or not MSA-held funds will affect eligibility for means-tested public benefits.

• Settlement protection trust

  • A support trust used when public benefits are not required.

• Settlement protection trust with special needs provisions

  • Often used for a minor who won’t be eligible for public benefits till age of 18, due to parents’ income.

  • Funds transferred to a special needs trust when/if means-tested public benefits are needed.

• Settlement protection trust with both special needs and MSA provisions.

  • Begin by funding the MSA and settlement protection trust, then transfer settlement protection trust funds to a special needs trust when/if means-tested public benefits are needed.

The benefits of structured settlements are huge. Many people receiving personal injury settlements are not financially sophisticated, and it’s reported that the average settlement lasts three to five years. A structured settlement establishes “a rated age” as the basis for regular monthly payments that are guaranteed for life. Often those payments are larger than the individual could expect if they were to invest a lump sum settlement on their own. The structured settlement payments are tax-free, protected from creditors and avoid the possibility that the settlement will be squandered.

My firm usually begins by assuming that we will structure 50 percent of the settlement, then we revise that figure based on the individual’s specific circumstances.  Most trustees will only administer a trust if there is some lump sum cash involved.

I’d like to alert you to several issues relating to settlement protection trusts with special needs provisions.  New Jersey, where I practice, requires that when there’s a special needs trust, the structured settlement contract must contain a commutation rider, and the payee of the commutation rider must be the settlement protection trust. They do this so that they get their Medicaid payback right away. We recently had a case where the plaintiff died shortly after the settlement, and due to the rider, the parents, who were beneficiaries upon death, lost about a million dollars. Attorneys and structure brokers need to ensure that families understand such risks or they could be open to charges of malpractice.

In addition, the Dallas region of Social Security has said that a special needs trust is invalid unless there is a letter from Social Security determining the individual to have a disability. When you have a settlement protection trust with special needs provisions, parents typically don’t apply to SSI on behalf of their child until the child is 18, when they would become eligible for that benefit.  I have always assumed that if the child did, in fact, have a disability at the time that the trust was established, they would not need a letter, but it’s unclear how this will play out. 

Another objection raised by Social Security is that a trustee could theoretically transfer funds from a settlement protection sub-trust to a special needs sub-trust gradually so that the Medicaid payback could be avoided. If the person were receiving Medicaid because of their SSI, you couldn’t do that because you’d have too much money in the settlement protection sub-trust. But if they were receiving Medicaid under Obamacare or some other program, that would be a possibility. You need to evaluate these factors if you’re considering a settlement protection trust with special needs provisions.

Five IRS Rules On How Lawsuit Settlements Are Taxed

Five key IRS tax rules to be aware of if you’ve won or settled a lawsuit from tax attorney Rob Wood of Wood LLP. He writes about the rules in a recent Forbes article and talks to us about them. He says a little tax planning goes a long way.