Preserving Disability Benefits When Settling Personal Injury, Divorce & Worker Comp. Claims

[Note- the following article authored by Lawrence A. Friedman, Esq. was published August, 2002 in New Jersey Lawyer journal


Preserving Disability Benefits When
Settling Personal Injury, Divorce & Worker Comp. Claims


Copyright by Lawrence A. Friedman, Esq.,
Lawrence A. Friedman Law Office, 12 Cushing Drive, Bridgewater, NJ 08807


Achieving a large personal injury or other recovery should prompt kudos for any attorney. However client cheers will quickly turn to jeers if the settlement you work so hard to achieve disqualifies your client for government benefits. A disabled person benefits little if his settlement supplants rather than supplements government aid. Therefore, when arranging nearly any kind of payment for a disabled person'“ whether litigation or administrative award, alimony, child support, gift, or inheritance'“ lawyers must take account of disability program regulations, which are complex, often defy common sense, and may be at odds with tax considerations

To better serve clients and minimize malpractice exposure, many personal injury, family, and estate planning lawyers routinely consult an elder law attorney before concluding a settlement, divorce agreement, will, or trust when a client or his spouse or child has serious disabilities. An elder law consultation also can help avoid the personal liability that a lawyer may incur when settling a case without also resolving Medicaid and Medicare claims.

Identifying Government Aid that May be At Risk

The first step in designing a plan that safeguards eligibility is to determine the kind(s) of government aid your disabled client (or her loved ones) receives. Unfortunately, this apparently simple task can prove surprisingly daunting for the uninitiated. Many aid recipients are unsophisticated, and government programs are easily confused. For instance, Medicaid and Medicare sound alike but have very different benefits and eligibility requirements. By the same token, the Social Security Administration may pay either Social Security Disability (SSD), Supplemental Security Income (SSI), or Old Age Benefits depending on the age, work history, and financial need of a Social Security recipient or the recipient's deceased, retired, or disabled parent or spouse. Adding to the difficulty of ascertaining benefits, New Jersey residents may participate in several different Medicaid (e.g. institutional care, community health care, home care waivers, traumatic brain injury waiver, Etc.) and subsidized housing (HUD §8, developmental disability, self determination initiative, Etc.) programs, each with its own mix of eligibility standards and benefits. Because techniques that preserve eligibility for one government program may not be the best way to protect participation in another, errors in nomenclature can prove costly.

Although each aid program has its own financial eligibility requirements, certain principles are common to many government programs. Thus, several programs that maintain their own income and resource eligibility caps apply SSI rules to determine an applicant's countable income and resources. On the other hand some programs employ their own unique eligibility standards.

Example, Ellen has $3,000 savings, principal residence worth $250,000, and a car worth $3,500. Under SSI rules, countable resources include savings but exclude an applicant's principal residence and car worth under $4,500. Because Medicaid generally applies SSI income and resource determination rules, Ellen's countable resources for purposes of both SSI and Medicaid are $3,000. Ellen doesn't qualify for SSI because the SSI resource cap is $2,000 for a single individual. However, if Ellen satisfies income and other requirements, Ellen can obtain Jersey Care Medicaid, which caps countable resources at $4,000

Example, A recent auto accident left Fred, age 30, with the mental acuity of a three year old. Since Fred can't work due to a medical condition expected to last at least 12 months, Fred is disabled for Social Security purposes and, therefore, may qualify for SSI, SSD, Medicaid, Medicare, and HUD §8 housing subsidies if Fred satisfies other eligibility criteria. However, because Fred's disability did not arise prior to age 22, Fred is not eligible for New Jersey Department of Human Services Division of Developmental Disabilities ('DDD') benefits.

Even if a client currently participates only in disability programs that don't limit eligibility by finances (e.g. SSD and Medicare), nearly any settlement or estate plan should be drawn with a view toward eventually qualifying for financial-need based aid. A disabled individual who doesn't get Medicaid now may need it later to pay for long term care. Likewise, someday a disabled person, who currently lives with family, may seek housing subsidies or a DDD group home placement. Furthermore, plans to preserve potential Medicaid eligibility also may protect against liens to recoup publicly funded health and psychiatric care and residential placements such as institutional and group homes.

Ordinary Recoveries Jeopardize Government Aid

Any recovery may jeopardize disability benefits if it counts against income or resource eligibility caps. Unless statutorily exempt, every amount is an SSI and Medicaid countable income or resource if it is available for a disabled person's support (i.e. to pay for food, shelter, or clothing). Similar rules apply to other financial-need based disability programs such as housing aid.

An amount is available for a disabled person's support, if she receives it, can control its expenditure, or has a legal right to require fiduciaries to spend it for her support. Consequently payments outright or to a trust that calls for mandatory principal or income distributions will jeopardize a disabled beneficiary's eligibility. Since a trust is available for support once an event occurs to trigger distribution, trusts for disabled people clearly should not require distributions at set intervals or upon occurrence of a particular contingency. Less obviously, such trusts also must avoid tying distributions to an ascertainable standard, which sets Medicaid and tax planning trusts on a collision course.

In certain instances, a trust may trigger tax liability unless it limits trustee distribution discretion by an ascertainable standard. Therefore, trusts drafted with tax planning in mind normally direct trustees to distribute for a beneficiary's health, education, support, and/or maintenance, which ascertainable standard is sanctioned by Internal Revenue Code sections 2041 and 2514. However, should the trust beneficiary seek SSI, Medicaid, or other financial-need based government aid, the trust will count against income and resource eligibility caps because the beneficiary has a legal right to turn to the trust for support. For this reason, support trusts are anathema to disability benefit planning.

Only discretionary trusts can provide for a disabled person without disqualifying him for financial-need based government programs. Because a bare bones trust may be construed as a support rather than discretionary trust despite the author's contrary intent, special needs trusts are the vehicle of choice to hold litigation recoveries, alimony, child support, gifts, inheritances, and other amounts to benefit a disabled person.

Special Needs Trusts to Safeguard Government Benefits

A special needs trust is a discretionary trust that clearly spells out its purpose of supplementing rather than supplanting government benefits. While special needs trusts may pay nearly any cost beyond food, shelter, clothing, and health care without affecting government benefits, common expenditures include housekeeping, telephone, cable television, personal items, furniture, equipment, entertainment, professional and other services, luxuries, education, training, vacations, and transportation.

Special needs trusts can supplement basic expenses to afford a lifestyle beyond bare subsistence, but strict compliance with applicable rules is essential. For instance decent housing, necessary dental work, or helpful rehabilitation therapies may be out of reach if a disabled person must rely entirely on government aid. However, failing to appreciate seemingly minor nuances when a trust funds basic costs can have grave consequences. For instance, designating a trust for health care may not appear problematic since only amounts available for food, clothing, or shelter count against Medicaid income and resource eligibility caps. However, while a health care trust doesn't violate Medicaid qualification requirements, it runs afoul of Medicaid liability ordering rules. Therefore, because Medicaid is payer of last resort, Medicaid won't cover the beneficiary's bills that could be presented to the trust for payment even though the trust doesn't disqualify the beneficiary for Medicaid.

Trusts do not count against government aid eligibility caps only if the trust beneficiary has no legal right to tap the trust for support (generally food, shelter, or clothing), which depends on applicable law and the terms of the trust. Thus, a so-called special needs trust will jeopardize government aid, if courts interpret it as a support trust. Such rulings typically arise where the trust instrument is ambiguous or distribution limitations violate public policy (e.g. N.J.S.A. 30:4d-6f). For instance, a lawyer is asking for trouble when he drafts, 'The trustee shall distribute Tom's trust as the trustee, in her sole discretion, deems necessary for Tom's comfortable support.' While a judge could construe the trust to grant the trustee absolute discretion to distribute or accumulate, the judge instead might view the trust as intended to fund Tom's support. To avoid such an unfavorable ruling, the trust could say, 'The trustee shall distribute as the trustee considers appropriate to cover expenses beyond Tom's basic support, and Tom's trust shall not have any obligation to pay for Tom's support.' However, a far better approach would be to elaborate on the kinds of costs the trust is intended to fund.

Special needs trusts funded solely by persons other than the beneficiary may be revocable or irrevocable, testamentary or inter vivos, and include multiple primary and remainder beneficiaries. Prevalent primarily in estate planning, such trusts also may arise in divorce.

In contrast, far less flexibility is permitted when drafting special needs trusts that contain amounts attributable to a beneficiary ('self settled'). Self settled special needs trusts typically contain a disabled person's litigation or worker compensation recovery, alimony, or equitable distribution. However, self settled special needs trusts also may be used to salvage (in part) a disabled person's inheritance from a decedent who ignored special needs trust planning.

A self settled special needs trust will disqualify the beneficiary for SSI and Medicaid unless it is irrevocable and inter vivos, has only life beneficiaries who are disabled per the Social Security definition, and satisfies Medicaid payback requirements. Self settled special needs trusts also must comply with reporting and administrative requirements and distribution limitations that vary from state to state. Self settled special needs trusts may be either stand alone or pooled.

A stand alone trust is a traditional trust with just one beneficiary whereas a pooled trust maintains separate accounts for each beneficiary which are invested together but spent solely for the particular account beneficiary's special needs. Pooled special needs trusts must be sponsored by non-profit organizations. Self settled special needs trusts may be established by a parent, grandparent, guardian, or court. (Note, however that New Jersey law requires court approval for a guardian to fund a trust.) The disabled beneficiary also may establish his own pooled self settled special needs trust account but not his own stand alone self settled special needs trust

Stand alone and pooled special needs trusts both have advantages and disadvantages. A client may choose the trustee of his stand alone self settled special needs trust, but the non-profit sponsor picks the trustee and investment terms for a pooled trust. However, pooling accounts can result in substantial savings. Pooled trusts may enjoy investment economies of scale and access to professional management that may be beyond the reach of small stand alone trusts. When the disabled beneficiary dies both stand alone and pooled self settled special needs trusts must repay Medicaid before anything may be distributed to remainder beneficiaries. However, pooled trusts typically also retain at least some of the remainder for charitable purposes.

Medicaid and Medicare Liens

Because neither Medicare nor Medicaid covers health care costs for which another person or entity is liable, public benefit recovery liens frequently apply to personal injury settlements. Where liability is uncertain or disputed, Medicare and Medicaid advance normal benefits but seek repayment from any future recovery against the alleged tortfeasor. To protect government interests, state and federal law require litigators to notify Medicaid and Medicare administrators of personal injury and worker compensation claims for program participants. If a recovery is disbursed without resolving Medicaid or Medicare liens, the trial attorney can incur personal liability to pay them (42 C.F.R. 411.24(g) and N.J.S.A. §30:4D-7.1).

Because only health care attributable to the personal injury must be repaid from a recovery, Medicaid and Medicare claims should not be paid without careful review. Challenging health care costs that generally aren't related to personal injuries, such as treatments for diseases, longstanding conditions, and preventive medicine may lead to substantial reductions from initial Medicaid and Medicare claims. Claims also may be reduced by a share of the cost of procuring a recovery. With proper planning, some Medicaid and Medicare liens may be compromised..

Special considerations arise when settling worker compensation claims (as contrasted with personal injury tort recoveries) for Medicare participants. A tort recovery must reimburse only Medicare disbursements for pre-recovery treatment. However, the Medicare secondary payer rules (42 U.S.C. 1395y and 42 C.F.R. 411.40 et. seq.) charge to worker compensation carriers rather than Medicare all costs for pre-recovery and future health care compensable under a worker compensation program. Medicare will cover work related health care only if worker compensation benefits have been exhausted. Medicare will not accept liability if a worker compensation settlement self-servingly characterizes as non-medical damages amounts that really compensate the employee for prior or future medical costs. To ensure that Medicare will cover post-recovery medical costs, worker compensation awards either should require the worker compensation insurer to pay future medical costs related to the injury as they arise or be allocated fairly between anticipated future health care costs and compensation for other losses. In the latter case, the award share properly allocated to pay future medical bills related to the injury should be placed in trust. So long as Medicare accepts the award allocation and trust terms as reasonable, Medicare and the trustee should be able to coordinate payments so that either the trust or Medicare covers all treatments of a kind normally funded by Medicare.

Even exemplary prosecution of a disabled client's claim is of little use if the client loses government aid upon receipt of a settlement. To preserve crucial disability aid, attorneys must be sensitive to government benefit rules when resolving personal injury, divorce, and worker compensation claims or planning an estate. Lawyers also must take care to resolve Medicaid and Medicare liens or personal liability may result. As a primary means to safeguard public benefits, special needs trusts should be part of every lawyer's arsenal to protect disabled litigation, divorce, and estate planning potential beneficiaries.

Lawrence A. Friedman practices disabilities, elder, estate planning, and tax law in Bridgewater, NJ and frequently writes and lectures on these topics. He has been Certified as an Elder Law attorney by the A.B.A. approved National Elder Law Foundation. A former chair of the New Jersey State Bar Association Elder Law Section, Friedman received the NJSBA's Distinguished Legislative Service Award for writing legislation to further special needs trusts in New Jersey. He conducts annual programs for ICLE on sophisticated elder law concepts and special needs trust settlement and estate planning. Friedman received his LL.M. in Taxation and J.D. from New York University School of Law.