Special Needs Trusts

The Benefits and Features of Special Needs Trusts

This article discusses special needs trusts and their potential significance when settling legal claims.

Background

When a person is disabled as a result of an accident, it may be possible to recover compensation from the party responsible for the injury. Any monies eventually received in a settlement, however, are often inadequate. Typically, settlements do not fully replace an individual's economic losses. Compromises may have been necessary due to the uncertainties of litigation, the difficulties in proving negligence, the limited insurance coverage available to satisfy a judgment, medical or other liens, and the costs of pursuing the claims.

Even in cases where a recovery approximates the individual's economic loss, it is wise to coordinate the settlement with any governmental benefits which that person may also be receiving. Doing so may help assure that he or she will be able to maintain as secure and independent a future as possible.

Special Needs Trusts

Special needs trusts are becoming increasing popular for maximizing an injured party's assets after a settlement. In the past, lawyers had traditionally relied on "structured" settlements, whereby sums were paid directly to the injured person in installments. Such periodic distributions offered certain advantages. They spread income over time. They avoided the risks of a single, "lump sum" payment which increased an individual's exposure to liens and the potential for squandering by relatives or others. Like "lump sum" payments, however, periodic or "structured" payments were made directly to recipients and thus jeopardized their eligibility for governmental needs-based benefits, like Supplemental Security Income (SSI) and Medicaid. Similarly, lump sum "buyouts" have generally presented the same disadvantages and risks.

Special needs trusts provide a better alternative. They are essentially ordinary trusts, but are designed for a specific purpose. Like most trusts, they authorize a trustee or fiduciary to distribute monies for the benefit of a beneficiary. They also help protect a person's assets from unwise or fraudulent distributions.

A special needs trust goes further, however. It specifically limits the trustee's ability to spend trust assets on services and goods covered by a government program. It also prevents the government from accessing trust funds in order to reimburse itself for benefits provided by programs like SSI and Medicaid. Since most needs-based government programs are based on the availability of assets and a person's actual distributions of income, the special needs trust helps preserve a disabled person's financial resources. These trusts can substantially enhance the value of any settlement that the individual receives.

Common Features

No single type of special needs trust is ideal in every situation. A successful trust strikes a proper balance. Its language will be rigid enough to withstand attempts to invade it by forcing the payment of assets otherwise covered by governmental programs. At the same time, it will be flexible enough to adapt to the possibility of changed circumstances, both in the beneficiary's personal needs and in the eligibility criteria of the particular programs involved. A well-written trust will permit amendments to keep up with changing legal requirements.

Eligibility under SSI and Medicaid may differ somewhat from state to state. Trust planning thus requires a careful analysis of the laws in each jurisdiction where the beneficiary now lives and where he or she may foreseeably move in the future. This is an area of potential pitfalls, because the law frequently changes. Only a specialist in this field should be consulted and relied upon. In general, however, a sound special needs trust has the following common features and operates in the following manner:

*the trust must be irrevocable;

*the beneficiary cannot have direct access to, or be able to demand, the assets;

*cash distributions are not made directly to the beneficiary (instead, payments for items like food, clothing and shelter are tendered directly to the third party providing these services);

*the trustee is given the discretion to make distributions to the beneficiary, but is not required to do so;

*language in the trust provides that any distributions are intended to supplement, and not replace, governmental benefits; and

*the trust's terms allow amendments for future changes in the law or in the beneficiary's circumstances.