[Note the following article was authored by Lawrence A. Freidman, attorney-at-law, and appeared under the name Special Needs Trusts to Safeguard Disability Benefits in Personal Injury and Divorce Settlements and Estate Planning in the Spring 2001 issue of Elder's Advisor journal.]
People with severe disabilities encounter many obstacles in modern society. While government disability aid can make their lives a little easier, these programs contain tough eligibility requirements and are replete with traps for the unwary. As a result, many disabled people need professional help to obtain or retain benefits.
It is especially daunting to hire an attorney to pursue a tort or divorce claim or develop an estate plan only to have the lawyer needlessly disqualify a client or client's loved one for government disability aid. Yet, lawyers who aren't sensitive to these concerns frequently settle cases and draw wills and trusts in ways that jeopardize government benefits.
Fittingly, it isn't just the hapless client who suffers from a counsel's malfeasance. More and more, lawyers who don't take account of government disability benefits when representing disabled people and their families are finding themselves on the wrong end of a malpractice claim. As a front page article in the July 29, 1996 issue of Lawyers Weekly USA notes, "Plaintiffs' P.I. [personal injury] lawyers are being sued for malpractice by clients who are losing Medicaid because their recovery wasn't put into a 'Supplemental Needs Trust', experts tell Lawyers Weekly USA.... Failure to do so [recommend special, also called supplemental, needs trusts (SNT)] is probably negligence...."
Government Benefits for Disabled People
Government disability benefits range from cash assistance to health care, subsidized housing, and social services. Most programs condition eligibility on meeting the Social Security Act standard under which a person is considered disabled only if he cannot engage in any substantial gainful activity due to a medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of 12 months. 42 U.S.C. 423(d)(1)(A) and 20 CFR 416.905 et. seq. Nevertheless, some programs, particular state aid for people with mental retardation and other developmental disabilities (E.g. New Jersey Developmental Disabilities Act, N.J.S.A. 30:6D-25), use their own (often quite different) definitions of disabilities . The most common disability benefits probably are Social Security Disability (SSD), Medicare, Supplemental Security Income (SSI), Medicaid, HUD Section 8 housing subsidies, and state social services.
As a component of the Social Security insurance programs, SSD is available to anyone who becomes disabled and has sufficient Social Security employment history. Generally, eligibility and benefits are based on an applicant's personal work history, but sometimes work history of a parent or spouse can be used. Thus, persons who are disabled at birth or in childhood frequently qualify for SSD under the account of a parent. Required work history varies with age, and like Social Security retirement benefits, the particular SSD benefit depends on age, work history, and earnings. SSD becomes effective after an eligible individual has been disabled for six months. SSA Publication No. 05-10029, Disability Benefits (Sept., 1999).
Medicare is provided to individuals who have received SSD for two years. While Medicare covers most mainstream medical care, Medicare doesn't pay for long term care. When enrolling in Medicare, individuals may choose from traditional fee for service programs and various group options (Medicare HMO). Medicare recipients can face substantial personal health care expenses. Relatively high deductibles and co-payments apply to the Medicare fee for service program while Medicare HMOs set their own, normally lower service charges. Normally, Medicare doesn't provide prescription drugs although Congress appears poised to expand Medicare to cover prescriptions. Some Medicare HMOs have experimented with prescription benefits, but generally haven't found them to be profitable.
SSD and Medicare do not discriminate based on finances. Even Bill Gates could qualify for SSD and Medicare if he should become disabled. Not so with most other disability aid. SSI, Medicaid, and HUD Section 8 housing subsidies are limited to people with modest means. While some state programs are open to everyone with covered disabilities, most either base eligibility on financial-need or require disabled people who aren't poor to pay to participate.
Disabled people with resources below a cap ($2,000 individual or $3,000 couple, 20 CFR 416.1205) are eligible for monthly SSI cash assistance. In 2000, the federal SSI benefit for single people is $512, but most states provide a modest supplement to the federal SSI benefit. For instance, combined state and federal single SSI benefits are $543.25 in New Jersey and $599 in New York. SSA Publication No. 05-1101, A Desktop Guide to SSI Requirements (Jan., 2000). However, the benefit is reduced (dollar for dollar of unearned income and fifty cents to the dollar of earned income) when income exceeds nominal disregards. 20 CFR 416.11 et. seq. In other words, if a New Yorker ($599 maximum SSI benefit) realizes $120 in unearned income for May and the first $20 of unearned income is disregarded, the May SSI benefit will be reduced to $499. Similarly, if a New Yorker realizes $165 of earned income and the first $65 of earned income is disregarded, the benefit will be cut to $549.
The SSI regulations define income and resources as cash or in-kind assets that can be used to meet an individual's needs for food, shelter, or clothing (i.e. support). 20 CFR 416.120(c) et. seq. Resources are amounts owned at the outset of a month. Amounts received during a month are income, but they become resources if retained to the following month. Many tax exempt receipts (such as Social Security benefits, gifts, inheritances, child support, divorce property settlements, and litigation recoveries) may be income or resources for SSI purposes.
In most states, people who qualify for SSI also receive Medicaid. Although Medicaid is often thought of as a federal program, it actually is administered by the states pursuant to broad federal mandates. Federal Medicaid law sets minimum benefit and eligibility standards but permits states to pick and choose from various options. In addition to government funded medical care, therapies, and prescriptions, Medicaid pays for long term care and programs for people with mental retardation. However, because states have great flexibility in designing their Medicaid programs, Medicaid benefits and eligibility requirements vary considerably from state to state. Thus, New Yorkers potentially are eligible for very broad Medicaid home care benefits, while New Jersey residents enjoy more limited home care options.
People who aren't eligible for SSI often can qualify for Medicaid (although sometimes only for limited benefits) under alternative eligibility criteria. While income and resource caps and exemptions differ to some extent from state to state, states must follow SSI eligibility methodology to determine income and resources. Thus, even though a New Jersey, resident's countable income must be under $543.25 to receive SSI but under $1,536 to qualify for certain Medicaid long term care benefits, Medicaid administrators generally must follow SSI rules in determining income and resources.
Although Medicaid and Medicare both fund health care, Medicaid provides much broader benefits. Medicaid, covers drugs, long term care, and other costs for which Medicare normally won't pay. On the other hand, people enrolled in the traditional Medicare fee for service program generally have access to a wider array of physicians than Medicaid beneficiaries, as many doctors refuse to accept Medicaid because its reimbursement rates are too low. Individuals who qualify for both Medicaid and Medicare enjoy the best features of both programs. Since Medicaid will pay Medicare deductibles and co-pays and cover medicines and other costs outside of Medicare, dual enrollees enjoy the fee for service Medicare program's nearly universal access to physicians without having to pay Medicare deductibles and copayments. Consequently, even a disabled person who receives Medicare will suffer if he loses Medicaid.
State housing agencies grant HUD Section 8 housing subsidies to disabled people with limited incomes. Because subsidies are based on area median incomes, subsidy amounts and rent and income caps vary from region to region. A Section 8 subsidy equals the excess of allowable rent over a percentage of the disabled person's income. Consequently, as income rises, the subsidy falls. As a result, a lawyer, who resolves litigation in a manner that causes a disabled person to realize income will impair his HUD Section 8 housing subsidies.
Although there are wide disparities in benefits from state to state, typical state benefits include community housing and day programs for people with developmental disabilities such as mental retardation and autism, sheltered workshops, job training, and mental health services. State programs usually limit eligibility based on income and resources or charge disabled people who come into money for benefits they previously received without charge.
Poorly Planned Recoveries and Inheritances Jeopardize Disability Aid
Inheritances and recoveries that cause a disabled person to realize income are likely to be of little value or even prove harmful. SSI benefits, and HUD Section 8 housing subsidies, are cut as a disabled person's income rises and may phase out completely at relatively modest income levels. Some states require Medicaid recipients who realize income to spend it on medical care that Medicaid otherwise would cover. In other states, small receipts won't affect Medicaid benefits, but a disabled individual will lose Medicaid entirely if he receives income beyond a modest cap. Losing Medicaid can prove disastrous, as some treatment programs and workshops only accept Medicaid recipients even though a person who doesn't qualify for Medicaid may be willing to pay privately. Other benefits provided without charge to a disabled person with modest means, such as room and board in a group home, may be available only at a hefty charge to disabled people of means.
Under SSI principles, which also govern Medicaid and other programs, outright payment of inheritances and litigation recoveries to a disabled person constitutes SSI countable income because the disabled person can use the payment for his support. This income (which also becomes a resource if not spent in the month received), in turn, trigger cutbacks or elimination of most disability aid.
Typical estate tax planning trusts similarly jeopardize government aid because these trusts direct trustees to distribute for a beneficiary's health, education, and support. Under the Social Security Administration's Program Operations Manual System (POMS), which provides internal guidance to Social Security Administration officials, a trust is an SSI countable resource if a beneficiary has authority to revoke a trust and use it to meet his needs for food, shelter, or clothing (i.e. support) or to direct the trustees to apply the trust for his support. (POMS SI 01120.200). Consequently, a trust for the beneficiary's support is an SSI countable resource because the beneficiary has a legal right to require the trustees to expend the trust for the beneficiary's food, shelter, and clothing. In contrast, the POMS provide that a trust isn't a resource where the beneficiary can't control or revoke the trust and doesn't have a legally enforceable right to access it for his support.
Sometimes estate planners advise clients to disinherit a disabled child in favor of another son or daughter who can spend his inheritance for his disabled sibling. Even though this approach preserves disability aid, it also is ill advised. The non-disabled sibling to whom amounts are diverted may choose not to spend them for the disabled person or may be precluded from doing so due to divorce, disability, death, or financial difficulties. In addition, expenditures for the disabled person may constitute taxable gifts that frustrate the sibling's own estate planning.
Disabled people may be tempted to circumvent government benefit income and resource caps by giving excess resources (such as a large personal injury recovery or inheritance) to others to hold for the disabled person. Unfortunately, most programs temporarily disqualify a donor from benefits. In addition, the same risks apply to these gifts as to disinheritance since the disabled person has no guarantee that the donee will spend the gift as the disabled person wishes.
Special Needs Trusts Preserve Eligibility
To avoid disqualifying a disabled person for government aid, amounts shouldn't be paid outright to the disabled person or to a trust for his support. Instead employ an SNT. Federal law explicitly excludes from SSI and Medicaid eligibility determinations amounts held in qualifying SNTs. 42 U.S.C. 1382b(e)(5)- SSI and 42 U.S.C. 1396p(d)(4)- Medicaid. Although other aid programs don't provide statutory exemptions for SNTs, SNTs often prove helpful to preserve HUD Section 8 subsidies and state social services because under the principles enunciated in POMS SI 01120.200 SNTs generally aren't attributable to the SNT beneficiary.
An SNT is a discretionary trust to provide for a disabled person's needs beyond support. It must be governed by a written trust instrument. Because the overriding purpose of an SNT normally is to provide for the disabled beneficiary, the trust instrument usually authorizes trustees to expend the entire trust for the disabled life beneficiary without regard to the interests of remainder beneficiaries.
SNT expenditures normally supplement support, and, therefore, won't impact eligibility for most kinds of government aid. SNTs commonly pay for housekeeping; upgrades from basic accommodations; telephone service; personal items; furniture; equipment; supplies; amusements; entertainment; personal and professional services; repairs and maintenance; disability/geriatric case management evaluation and services; legal fees and court costs such as the cost of proceedings to appoint a guardian; other professional fees; luxuries; training; education; outings; vacations; fuel; travel and transportation; vehicles; costs to make vehicles and facilities accessible; expenditures so that family and friends can visit; and costs of funeral and final resting. Because enabling legislation generally prohibits Medicaid and Medicare from paying where someone else has responsibility to pay for a disabled person's care, SNTs normally don't pay for basic health care except for extensive dentistry and therapies. Even though Medicaid covers normal dental costs, people with developmental disabilities often require far more extensive dental work than Medicaid will fund. SNTs also may be called on to provide speech, physical and other therapies that supplement Medicaid funded basic health care.
Although an SNT, itself, isn't an SSI countable resource, its distributions will be countable income to the extent they are available to meet the SNT beneficiary's needs for food, shelter, or clothing (i.e. support). Consequently, SNTs generally are intended for needs beyond support. This model usually works well except when disabled people live on their own in private housing. Family and modest government aid can usually cover clothing, room, and board when an individual lives with family. Similarly, people who live in group homes or institutions normally receive room and board at no charge and can pay for their clothes with SSI or SSD benefits. However, government aid is rarely sufficient to provide desirable housing when living independently.
Therefore, SNTs frequently provide shelter in-kind by purchasing or renting housing for a disabled person. Fortunately, SSI regulations cap the value of income received in-kind at one third the federal benefit rate (plus $20 if the SNT beneficiary does not receive the in-kind support while living in another person's household). 20 CFR 416.1130 et. seq. Consequently, in-kind income reduces the SSI benefit, but the in-kind income valuation cap keeps in-kind support from disqualifying an individual for SSI and Medicaid unless he also receives significant cash (or investment grade) income in addition to in-kind food, shelter, or clothing. For example, where an SNT rents a $2,000 per month apartment for the disabled trust beneficiary, the beneficiary actually realizes $2,000 in value. Nevertheless, for SSI and Medicaid purposes, the in-kind income is limited to $190.67, (i.e. one third the federal SSI benefit plus $20) since actual value of the in-kind income exceeds the SSI in-kind income valuation cap. This reduces the beneficiary's SSI benefit by $170.67- $190.67 (depending whether the $20 monthly SSI unearned income disregard already has been applied against other unearned income). This reduction isn't large enough to completely eliminate the benefit. By the same token, the in-kind income is less than every state's Medicaid income cap.
So long as an SNT instrument establishes a discretionary rather than a support trust, it generally need not contain any particular language unless the SNT will be self-settled (i.e. contain an amount such as a litigation recovery that the disabled trust beneficiary has a legal right to receive outright). Nevertheless, it is customary to state that an SNT is intended to supplement rather than supplant government aid. Furthermore, because trust instruments are creatures of state law, lawyers must ensure that applicable state law doesn't mandate particular provisions to avoid creating a support trust. In addition, an SNT instrument must address issues that applicable to all trusts.
Like any other well-drafted trust instrument, an SNT instrument should inform the trustees of the settlor's desires and goals. Otherwise, the trustees will have little to go on in administering the trust. By the same token, an SNT instrument should identify trustees and remainder beneficiaries as well as alternates for both, cover trustee removal and resignation, describe general trustee powers, give investment guidelines, achieve desired tax treatment, authorize informal accountings, waive surety bonds (unless bonding is desired or required by court order), and guard against spendthrift and rule against perpetuities problems.
When creating a self settled SNT, the trust instrument must be irrevocable and provide that amounts remaining in trust when the disabled beneficiary dies will be used to repay Medicaid expenditures for the disabled beneficiary. The Omnibus Budget Reconciliation Act of 1993 curtailed the use of trusts in nursing home planning by providing that most trusts containing a beneficiary's assets shall be treated as owned by the beneficiary for Medicaid eligibility purposes. However, Congress excluded amounts held in SNTs that satisfy 42 U.S.C. 1396p(d)(4)(A) or (C). An A SNT is an SNT with one beneficiary that commits to repay Medicaid to the extent amounts remain in trust when the beneficiary dies. A C SNT is a pooled trust that invests together contributions for many disabled but maintains separate accounts for each beneficiary. A C SNT must be maintained by a non-profit organization, which may retain amounts remaining in trust when a beneficiary dies. Amounts not retained by the sponsor must repay Medicaid in the same manner as an A SNT. Some states impose additional requirements on self settled trusts. Thus, New Jersey has a several page long unpublished checklist of requirements applicable to self settled special needs trusts. Pennsylvania requires such trusts to meet certain administrative requirements and limits allowable expenditures.
Under 42 U.S.C. 1396p(d)(4)(A), self settled SNTs must be established by a parent, grandparent, guardian or court and not by the disabled beneficiary. This may create difficulties in some states, as courts may question their authority to establish such trusts and a disabled plaintiff or heir may not have living or cooperative parents or grandparents.. For this reason, the author drafted a recently enacted law to explicitly authorize New Jersey courts to establish SNTs per 42 U.S.C. 1396p(d)(4)(A). Another option to preserve litigation recoveries is to place them in a pooled trust administered for disabled people by a non-profit organization per 42 U.S.C. 1396p(d)(4)(C). Pooled trusts accounts may be established by the disabled person as well as a parent, grandparent, guardian or court. They are similar to self settled SNTs except that they invest together the assets of several disabled people while maintaining separate book accounts for each beneficiary. However, because pooled trusts may retain amounts remaining in trust when a disabled beneficiary dies, there is little chance that amounts not expended during the disabled person's lifetime may pass to individual remainder beneficiaries.
When to Employ SNTs
Lawyers should consider SNTs whenever their work may lead to payments for a disabled person because most disability programs are only available to people with limited financial means. Thus, estate planners always should ask clients whether any potential beneficiary has disabilities. Similarly, personal injury lawyers must be sensitive to government benefits considerations when settling claims for disabled people. Although it might seem that family lawyers need not be concerned with SNTs, divorce can trigger alimony, property settlements, or child support for a disabled spouse or child. Because these amounts can constitute SSI countable income or resources, they should be paid into an SNT, to avoid jeopardizing financial-need based disability benefits.
SNTs aren't needed to preserve eligibility for SSD, Medicare and other disability benefits that are provided without regard to financial-need. Nevertheless, SNTs still may be appropriate because even a disabled person who doesn't currently get financial-need based aid may need it later. For instance, a disabled adult who currently receives only SSD and Medicare eventually may apply for Medicaid funded long term care. By the same token, an SNT can protect a minor's potential eligibility for future aid. Few disabled minors receive financial-need based benefits because the SSI rules usually attribute a parent's income to a minor child. However, if a minor's medical malpractice recovery is paid outright rather than into an SNT, he won't be eligible for SSI or Medicaid when income attribution ceases at age eighteen.
To preserve government aid, an SNT instrument must be drawn in accordance with complex regulations that govern SSI, Medicaid, and possibly other programs. Because most lawyers aren't knowledgeable in government benefit law, litigators, family lawyers, and many estate planners retain elder law attorneys to draft SNT instruments.
Tax Considerations
Like other trusts, SNTs also should be designed with tax considerations in mind. Because the Internal Revenue Code doesn't address SNTs, they are taxed in the same manner as other trusts. Consequently, attorneys have the option to design an SNT so that income is taxable to the settlor, trust, or beneficiary. Similarly, SNTs are compatible with most estate and gift tax planning techniques. They can be readily adapted to serve as credit shelter trusts and irrevocable life insurance trusts and can hold shares in family limited partnerships and limited liability companies.
If an SNT is revocable, it normally will be treated as if owned outright by the settlor, although it may be possible to draw the instrument to yield different tax consequences. Thus, payments into a revocable SNT aren't gifts for tax purposes, but SNT distributions are gifts from the settlor to the beneficiary. Because SNT distributions aren't future interests, they normally are eligible for the annual gift tax exclusion. Irrevocable SNTs can be drawn either to cause payments into trust to constitute gifts for tax purposes or to preclude gifts depending whether the settlor retains authority over the SNT. If payments into an irrevocable SNT are not gifts, distributions will be. It generally is risky to give a disabled SNT beneficiary Crummey withdrawal rights in order to qualify contributions into an irrevocable SNT for the federal gift tax annual exclusion. Although not settled, there is strong reason to believe that the beneficiary can be considered to contribute to the SNT amounts subject to the beneficiary's unexercised Crummey withdrawal right. In that case, the SNT may have to provide for Medicaid repayment in compliance with 42 U.S.C. 1396p(d)(4)(A) or risk disqualifying the beneficiary for SSI and Medicaid.
Addressing Liens When Settling Personal Injury Claims
In 1993, Congress amended Federal Medicaid law to permit disabled plaintiffs to maintain Medicaid eligibility so long as personal injury recoveries are paid into an SNT. Nevertheless, since Congress sought to help disabled people supplement the Spartan lifestyles afforded by government aid, not provide a windfall to disabled Medicaid recipients' heirs, special needs settlement trusts generally must reimburse Medicaid when the beneficiary dies. However, these Medicaid reimbursement obligations would prove illusory should trustees exhaust an SNT during the disabled beneficiary's lifetime. Consequently, states sought to tap disabled people's settlements to repay Medicaid expenditures that precede the settlement, but advocates for disabled people resisted.
Initially, the courts were sympathetic. An influential line of several New York lower court rulings beginning with Matter of Link, 616 N.Y.S. 2d 171 (Sup., 1994), reargued 620 N.Y.S. 2d 729 (Sup. 1994), held that Medicaid liens should be deferred until an SNT beneficiary dies. The Link court doubted that Congress would mandate immediate repayment of pre-settlement Medicaid expenditures but permit deferral of post-settlement Medicaid liens, particularly since plaintiffs with similar injuries and settlements could have vastly different Medicaid repayment obligations depending how quickly they settle.
Former Health Care Financing Administration (HCFA) Medicaid Bureau Director Sally Richardson sought to counter the Link line of cases. In a June 5, 1996 letter to state Medicaid directors ("Richardson Letter"), Ms. Richardson concluded that states may access the portion of a personal injury recovery intended to pay a disabled plaintiff's medical expenses, and a plaintiff who diverts a settlement into an SNT rather than repaying Medicaid forfeits Medicaid eligibility. Agreeing with Ms. Richardson, the New York Court of Appeals' reversed Link and its progeny in Cricchio v. Pennisi and Link v. Smithtown, 1997 WL138005, No. 31 & 32 (March 25, 1997, NY). As of late 2000, the author is not aware of any ruling contrary to Cricchio that hasn't been reversed by a higher court. Consequently, it appears to be settled that a personal injury recovery may be paid into an SNT only after first satisfying pre-settlement Medicaid liens.
In many sates, personal injury attorneys are personally liable to ensure that Medicaid is repaid from a disabled person's personal injury recovery. Medicare imposes similar liability on trial attorneys to satisfy Medicare claims. Thus, before paying out any personal injury recovery for an individual who ever may have received Medicaid or Medicare, a litigator should obtain lien releases from Medicaid and Medicare.
Conclusion
Losing disability aid truly can prove tragic. Eligibility to receive government aid can determine whether a disable person barely subsists or enjoys a reasonable quality of life. In some cases, disabled people can access valuable therapies and other opportunities only if they qualify for Medicaid.
Because most government disability programs are limited to people with financial-need, outright receipt of a personal injury award, inheritance, or divorce settlement, usually will jeopardize government aid. By employing SNTs when settling claims and planning estates, lawyers can help clients set aside amounts for a disabled person without disqualifying him for disability benefits.
Lawrence A. Friedman practices elder, disabilities, trust and estate, and tax law in Bridgewater, NJ. He is Certified as an Elder Law Attorney by the A.B.A. approved National Elder Law Foundation and has chaired the New Jersey State Bar Association Elder Law Section. He received the NJSBA's Distinguished Legislative Service Award for drafting new law to protect elderly and disabled people. Mr. Friedman has an LL.M. in Taxation and is a frequent author and lecturer.
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