Articles
When is a Payback Special Needs Trust Not the Answer?
By Bailey Liipfert III
Your child is injured at birth due to medical malpractice and her case is about to settle. While the money from the settlement will help, it will not be enough to cover her medical and living expenses without continued eligibility for Medicaid and Supplemental Security Income. How can the money from the settlement be sheltered to allow eligibility to continue?
Most attorneys have heard that payback special needs trusts can help clients with severe disabilities stay eligible for vital benefits, such as Supplemental Security Income and Medicaid. A payback special needs trust allows a beneficiary to shelter the assets from settlement for life and use these assets to pay for things not covered by government benefits.
Unlike special needs trusts you set up yourself with your own money for your child, payback special needs trust are funded with the child’s own money, such as money from a medical malpractice settlement. In order to shelter the child’s money in a payback trust, the trust must require that the state be reimbursed for its Medicaid expenditures when the child passes away.
Payback special needs trusts should be considered whenever a child with disabilities receives is receiving public benefits; however these trusts are not always the right answer for every child. Alternatives to payback special needs trusts include placing the money into a conservatorship under the supervision of a probate court or, perhaps, funding a trust intended to provide support that does not include Medicaid payback provisions.
Does the child really need public benefits?
Some settlements may be sufficient to meet the needs of a special child without the need for a payback special needs trust. Many parents have spent countless hours wishing they could avoid the frustrations of dealing with ever decreasing Medicaid budgets and poor services.
Before opting against a payback trust, a parent or a child with a disability should carefully consider what expenses the child will need covered. A life care planner can help assess the medical and other needs of the child with a disability and can help the parent or child decide whether the settlement is ample enough to cover the child’s needs for life. Often, life care planners are expert witnesses in medical malpractice cases. If not, the child’s attorney or a special needs trust attorney can help the parent or child find a reputable life care planner. Along with the life care planner, seek expert financial advice on whether the likely investment returns will be sufficient to cover the care plan. A certified public accountant or certified financial planner may help a parent or child make an informed decision.
Does the child have special needs?
Payback trusts are an option only for persons who meet the Social Security Administration's (SSA’s) definition of disabled. A veteran receiving compensation for 30% disability rating but capable of working will not qualify. A child who is eligible for Medicaid based on low family income cannot be a payback trust beneficiary unless he or she meets SSA's definition of disabled.
What are the goals of the child?
If the exceptional child intends for other people to benefit from the trust, a payback trust may be inappropriate. The payback SNT is generally for the sole benefit of the child with special needs, not for the benefit of the child’s entire family.
An exceptional child who one day marries and has children may not like the restriction that the trust be for his or her sole benefit. For example, the payback trust could not pay for the exceptional child’s own children to attend college nor could the trust pay for the child’s spouse to make a trip to Europe.
It is possible, however, for the payback trust to indirectly benefit other family members. A spouse may live in a house owned by the payback trust or ride in an accessible van owned by the trust. In some states, a spouse or child may even be paid by the trustee to be an attendant for the beneficiary who has special needs.
How does state law limit the use of payback trusts?
While federal law permits the use of payback special needs trusts, states have taken latitude in determining what can be done using funds of such a trust. Arizona, by statute, lists all distributions which it permits the trustee to make and checks trust agreements to ensure the trust limits distributions consistent with its statute. Other states micro-manage distribution decisions of special needs trusts, requiring regular reports by trustees and specific prior approval of the state Medicaid agency before trustees make certain distributions. Yet others, probably still the majority of states, give little guidance to trustees concerning what is permitted. Before recommending a payback special needs trust, an attorney must be aware of what can be done using a payback trust in the beneficiary's home state. If the beneficiary is likely to move to another state, the attorney should investigate restrictions on the use of payback trusts in the other state.
Can the child cope with the trustee's control of trust assets?
Anytime a trustee stands between a child with disabilities and the child’s settlement, there will be a certain amount of tension. Some children with disabilities may be so opposed to having anyone else dictate how their settlement proceeds will be spent that they will not be interested in having a payback trust established, even if it means losing benefits.
Often certain compromises may make the payback trust more palatable to the potential beneficiary, such as the inclusion of a family trustee or family trust protector with the power to fire a trustee. Sometimes, due to the strong relationship created while pursuing the client's claim, plaintiff's attorney is the logical choice to be trust protector.
Another compromise may be to place part of the settlement proceeds in a payback trust and have the beneficiary take part of the proceeds directly. While the person with disabilities loses government benefits now, the payback trust can be a safety net in the event the beneficiary exhausts what he or she took directly. The payback trust should be funded with enough assets to cover the vital services needed but which are not supplied by Medicaid or other public benefits. For example, Medicaid rarely pays for sufficient attendant care to enable a severely physically challenged adult to live independently. Where the beneficiary's condition is stable and these expenses can be predicted, the use of a structured settlement paid into the payback trust should be considered as an option. In the event beneficiary must re-qualify for Medicaid and SSI, the structure payments to the payback trust should not be counted as income to the beneficiary.
What benefits does the beneficiary want to preserve? Some attorneys and many beneficiaries with special needs may think an exceptional client needs a payback trust to stay eligible for Medicare and Social Security Disability Insurance (SSDI). Unlike Medicaid and SSI, Medicare and SSDI eligibility depends on whether you, or a parent or spouse, have paid into the Social Security system for a sufficient time. Medicare and SSDI are not lost due to having too many assets or unearned income, so payback trusts are not needed to stay eligible for these benefits.
Is the beneficiary too old for a payback special needs trust?
Payback trusts come in two types: the under 65 payback special needs trust under 42 U.S.C. §1396(d)(4)(A) and the pooled trust under 42 USC §1396(d)(4)(C). The under 65 payback special needs trust allows flexibility on deciding who the trustee of the trust should be, including an individual or corporate trustee.
If the beneficiary of the trust is 65 or older, only the pooled trust is a possible choice. The pooled trusts must be established and managed by a nonprofit association which is often also the trustee of the pooled trust. States vary in whether they allow pooled trusts for beneficiaries 65 or older.
Seek a competent attorney’s advice in your state before funding any payback trust. Members of the Special Needs Alliance can help you with deciding whether a payback trust is appropriate for you or your special child. Locate a knowledgeable, caring attorney at www.specialneedsalliance.com.