Special Needs Trusts FreedomBy: Patrick Farber

About 40 million Americans (approximately one in seven) have some sort of disability according to a 2007 report by the Institute of Medicine. That number is expected to rise as more and more younger people are joining the disabled ranks.

While government assistance is available to the vast number of disabled persons, it is oftentimes insufficient. Knowing this, in 1993 Congress created the foundation for special needs trusts (SNTs) so that funds set aside for disabled individuals could be placed in an irrevocable trust and not be counted as an asset for purposes of Medicaid or SSI eligibility.

Structured Settlement and SNT Benefits

For some individuals, their disability is the result of a catastrophic personal injury or from medical malpractice. SNTs are often used together with structured settlements resulting from legal actions taken when these types of injuries occur. When used in tandem, SNTs and structured settlements offer complimentary benefits that can enhance the quality of life for severely injured plaintiffs and their families.

Structured settlements provide a steady stream of income to an injured party through an annuity purchased by a defendant. Strict rules apply to how structured settlement funds are invested. Typically, a defendant’s insurance company funds its payment obligation to the injured party by purchasing one or more annuities from a highly-rated life insurance company which makes the payments to the injured person.

Underlying structured settlement assets are required by law to be placed in safe investment vehicles (typically high-quality investment grade fixed income securities) to guard against market fluctuations and help avoid misuse of assets. Just as important, structured settlement annuities offer competitive returns that enjoy a tax-free status–making investment returns hard to beat. When the settlement amount is significant, these annuities can provide life-long income.

The single most important benefit of an SNT is that it enables the disabled individual to retain Medicaid and SSI benefits (or become eligible for them if under age 65) and other medical care not covered by government assistance. At the same time, funds are also available for needs not covered by government programs including additional home care, companions, vehicles and in some cases, a residence.

Client’s needs vary, but most SNT/structured settlement plans strive to meet these goals:

  • protect the financial assets of the special needs individual
  • create a better quality of life by providing additional income
  • maintain government benefits
  • consider the needs of family members and other beneficiaries.

 

Here are steps to follow when establishing a SNT/structured settlement:

  • Select professional advisors who understand your client’s current and long-term needs. These include a trust and estate attorney (knowledgeable in state-specific requirements, special-needs law updates and how to obtain additional benefits), accountant, life care planner and structured settlement broker. A life care planner assesses the injuries of the plaintiff and determines future medical costs. A structured settlement broker assists in ensuring the SNT and the structured settlement properly interface. The goal is to create a plan that will help protect the injured party and his or her family’s assets and provide resources to improve the injured party’s quality of life.
  • Select the SNT trustee. The trustee must be qualified and willing to manage the trust assets, distribute the income and principal for qualified purposes, pay bills, keep accurate records and help with trust tax return preparation. Unlike the relatively straightforward duties of trustees in a typical trust, managing a SNT is significantly more complicated. Consider hiring a trustee who provides professional fiduciary trust services.
  • Create the SNT. “A trust and estate attorney who specializes in special needs planning is best qualified to create an SNT and to coordinate the governmental benefits unique to each state,” says Paul Hansen, a financial advisor and member of The HTC Group at Morgan Stanley Smith Barney LLC, member SIPC, in New York City. “The trust and estate attorney can assist with the difficult decision of how much of the settlement should be placed in the annuity to ensure a secure income stream while taking into account the liquidity feature of trusts.”In addition, the attorney must ensure that Supplemental Security Income (SSI) and Medicaid are protected. When setting up a SNT/structured settlement, advisors must be cognizant of federal and state requirements and follow them properly so not to forfeit the client’s ability to access these government benefits. If estate planning documents are incorrectly drafted, the government may demand reimbursement of government payments prior to the injured party’s death.
  • Fund the SNT. When an SNT is funded with proceeds from a structured settlement, structured annuity payments are directly deposited into the SNT to protect the beneficiary from violating any governmental asset constraints. “If specific assets are not properly transferred or earmarked to a client’s SNT,” notes Hansen, “beneficiaries may be restricted from receiving supplemental government benefits.”
  • Ensure others don’t jeopardize the planning efforts. “In addition to creating and funding the SNT, it can be helpful for injured parties to discuss these plans with family members,” says Hansen. “Well-meaning relatives could make gifts that jeopardize carefully thought-out plans. To qualify for SSI, the limit for countable resources is $2,000 for an individual and $3,000 for a couple. Instead, with an open communication channel, family members who wish to help could be encouraged to make those gifts to the SNT. Second, open communication can help ease siblings’ fears of being left out of the planning process.”

Rules to Remember

When using SNTs and structured settlements, several rules must be followed. The structured settlement must identify the SNT as the recipient of future settlement payments (instead of the disabled individual) with the trustee of the SNT as the “payee.” The trust must be irrevocable and the beneficiary considered disabled as determined by Social Security guidelines and be under age 65. The trust must be created and funded with cash in part or all of a structured settlement at the time the settlement is created and prior to the individual’s turning age 65.

The trust can be used only for the benefit of the disabled individual; and, at death of the disabled beneficiary, Medicaid must be reimbursed for that which it had paid for the disabled individual, up to the total amount remaining in the trust.

Putting the structured settlement and the SNT together in a settlement package is complex. If it is created correctly, the disabled individual’s life can be greatly enhanced, well beyond that which the settlement alone could have provided.

Not every injured party will benefit from the SNT/structured settlement combination. Younger parties who are expected to recover and not need long-term public benefits may only need a structured settlement to meet their temporary needs. For others with long-term injuries, however, combining these two powerful tools can help achieve a higher standard of living, free from financial worry.

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