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Special Needs Trusts and Settlement Protection for Trial Lawyers


If your client receives a settlement award, the settlement award may hurt rather than help the client by causing the client to lose vital current and/or future government benefits.

Often, a client is receiving Medicaid, SSI, Food Stamps, housing assistance or other need-based government benefits. These benefits, particularly Medicaid health insurance, are often irreplaceable or have an incalculable replacement value. For example, clients who are receiving Medicaid may not qualify for any other health insurance by reason of their disabilities. Yet the settlement can cause the clients to lose their benefits because they would no longer meet the financial tests for eligibility. In order to qualify for Medicaid and other need-based government benefits, the clients must have under a certain amount of assets and be earning below a certain income. The settlement you worked so hard to achieve may therefore substantially harm the client by causing the client to lose his or her health insurance or other need-based government benefits. Some clients may not be on need-based government benefits at present but may require those benefits in the future. Often the client is not receiving the benefits because they simply did not apply or because the government improperly denied eligibility. Other times, the client may not now qualify but, due to the nature of the injuries and the prognosis for future care, the client may outlive the money and may require need-based benefits in the future. If the settlement did not contemplate this issue at the outset, it may be difficult or impossible to reverse the error in the future. Important benefits are therefore at risk due to the settlement award and the way it was delivered.


The Solution

Settlement awards may be legally protected so that the clients keep their entitlement to public benefits and get the benefit of the settlement award.It is completely unjust for a disabled person to have won a court case but to then lose their government benefits; but that is exactly what happens if the settlement award is not protected. Fortunately, there are sound legal methods to protect the proceeds of civil actions. The goal of all settlement protection
planning is to provide a safe harbor for the money without jeopardizing the client’s need-based government benefits.There are certain trusts and transactions that the government permits (or has been forced to permit) to allow the disabled person to qualify or retain eligibility for need-based benefits while keeping the benefit of the settlement award. This outline will cover the basics of some of these settlement protection devices and will show you when and how to make referral to special needs counsel.


What Special Needs Settlement Protection Devices Will Not Do

Special needs settlement protection devices such as special needs trusts seek to preserve the client’s eligibility for government benefits.

But there is one important thing that settlement protection cannot do: No settlement protection device may defeat the government’s existing liens and claims. While special needs counsel may be familiar with the process of obtaining lien amounts and negotiating those liens and while special needs counsel may be able to assist the trial lawyer with the liens, the liens must be paid prior to the settlement being protected. Special needs trusts cannot be used to shelter assets from valid existing liens.


Criteria and Action for Special Needs Settlement Protection

The following clients may be suitable for special needs settlement planning:

1. Clients who were or are currently receiving need-based public benefits: These programs include but are not limited to: Medicaid, Healthy Kids, KidCare, Supplemental Security Income (SSI) (a.k.a. “Disability”), Nursing Home Program (Medicaid ICP), Medically Needy Program, Section 8, Housing Assistance, State Waiver Program benefits and other government (and quasi-government) programs that depend on financial need for eligibility.

2. Clients who are indigent but for the Settlement: If a client is indigent (usually defined as having less than $5,000 for a single person or as much as $90,000 for a couple), the client may be suitable for special needs settlement protection regardless of whether need-based benefits are now being received; OR
3. Clients with Expensive Care Costs: If a client’s care costs appear capable of “outliving” the settlement proceeds, special needs settlement protection seeks to preserve future eligibility options for needbased health insurance and other benefits. If the client meets any of the above criteria, arrange for a consultation with a qualified special needs counsel. Special needs counsel will arrange the planning or can prepare a waiver and acknowledgment to protect the trial lawyer and the trial lawyer’s firm. DO NOT LET THE SETTLEMENT SIT IN YOUR TRUST ACCOUNT!! (Ineligibility for benefits can result)


What Special Needs Settlement Protection Can Do

The goal of all special needs settlement protection planning is to preserve entitlement to need-based public benefits while helping to maximize the value of the settlement to the client. This settlement protection is accomplished through varied devices including special needs trusts. The value to the client can be incalculable. Medicaid benefits alone can mean a seven-figure value to a client’s life care. If the settlement causes the client to lose such important benefits, not only may it be malpractice but it can have a real life or death impact on the client. Money buys care. Without money or public benefits, people are routinely denied care. Special needs settlement protection preserves
entitlement to need-based benefits and that preservation can made a tremendous difference in your client’s life. Special needs settlement protection also protects the trial lawyer from malpractice claims and damage to reputation and revenue by serving as “due diligence” for practice standards.


Avoiding Malpractice by Identifying the Right Clients

Not every case requires special needs settlement protection but many do require the planning. The following practice insert is designed to assist you and your firm in identifying suitable cases. Photocopy this page, cut out the insert and distribute it throughout your firm. If posted near the desk, it may help to flag attention to the suitable cases and help to ensure that those cases do not get missed.


Special Needs Settlement Protection Devices (Or, “My Arsenal as Special Needs

All special needs settlement protection devices share the common goal of protecting the client’s present and/or future eligibility for needbased government benefits. There is no one way of protecting settlements. There are many more options than special needs trusts though special needs trusts are a very important option for certain clients. Settlement protection planning depends heavily on the facts of each case.When examining various settlement protection options, we consider such factors as the client’s age, the type of benefits being received, the type of benefits the client may benefit from in the future, the family dynamics, the client’s care plan, the client’s and family’s expectations and needs and desires, the client’s living arrangements and numerous other factors bearing on the client’s special needs. All special needs settlement protection devices have pros and cons but all are infinitely better than doing nothing in the right cases.


Advantages of Special Needs Settlement Protection:

Some of the advantages to special needs settlement protection are as follows:

1. Stops Malpractice Claims: It may not be fun to contemplate, but a serious benefit of special needs settlement protection is to protect not only the client but the trial attorney as well. Huge lawsuits have been successful against attorneys who failed to take the proper steps toward special needs settlement protection.

2. Retention of Public Benefits: The obvious advantage is that the settlement award is sought to be excluded from countability when the government is determining whether the client is eligible for need-based programs such as Medicaid and “Disability.”

3. Leaves Benefit Options Available for Client’s Future: Whether or not the client is receiving benefits now, special needs settlement protection seeks to leave open the door to need-based benefits the client may want or require in the future.

4. Money Management Enhancements: While not the purpose of the planning, a major side benefit of special needs settlement protection is the fact that assets are often protected from foolish spending and mismanagement. For example, when trusts are used to protect the settlement award, the trust can include prudent investor provisions and protections against a family member wasting money or spending the money too early.

5. Creditor Protection: Special needs settlement protection planning often helps to protect the settlement award from future creditors

6. Structured Settlement Enhancement: Special needs settlement protection can work hand in hand with structures and other annuity pay-outs. By combining structured settlements (settlement annuities) with special needs settlement protection, the client and the client’s family may be able to protect even more of the settlement (see structured settlements as a settlement option below).

7. Savings on Cost of Care: Since there is a very large differential between the private-pay rate for medical services and the Medicaid rate, the cost of care can be greatly reduced without giving up access to the best of care. Even if a client’s estate may need to eventually reimburse the government, the savings is similar to the client paying wholesale as opposed to retail.

8. Avoids Costs and Anxiety of Guardianship: Special needs settlement protection devices can avoid the need for ongoing guardianship services. Certain trusts are deemed a substitute for guardianship by providing what Chapter 714 refers to as a “less restrictive means” to guardianship.

9. Creates New Payor Options: With special needs settlement protection, the client may choose Medicaid to pay for certain services while still being able to turn to other assets to cover other services.


Disadvantages of Special Needs Settlement Protection

Some of the disadvantages to special needs settlement protection are as follows:

1. A. Pay-back Provisions: Some special needs settlement protection devices require that the government be repaid, upon the death of the client, for monies it paid out for the client during the client’s lifetime. Most special needs trusts, for example, require a payback to the government if there is anything remaining in the trust upon the death of the client. Proper planning takes pay-back into consideration in such a way as to minimize or eliminate the client’s pay-back obligation but while still honoring the government’s entitlements.

2. Restriction on Availability of Assets: All special needs settlement protection devices restrict the availability of the settlement award to the client. Some planning options allow greater freedom and access than other planning options. For example, the trustee of a special needs trust cannot be the client and so the client himself cannot access the trust assets. Moreover, when using special needs trusts, there are significant restrictions on for what the money can and cannot be used. Other special needs settlement protection options can offer more flexibility than is available with special needs trusts.

3. Finding Good People: Sometimes, in special needs settlement protection planning, it is necessary for the client to secure good, trusted people (or entities) to play a role in the settlement protection. For example, a special needs trust requires a trustee and a personal service contract (discussed below) requires a care provider. It is sometimes difficult to decide who is best for the role.

4. Administration Costs: Administration costs can be notable in some special needs settlement protection planning. For example, special needs trusts must have a trustee and this trustee is usually a professional trustee which earns a fee.


Types of Planning

1. Special Needs Trusts (Individual or D4A): Individual special needs trusts are among the most widely-known and widely- discussed special needs settlement protection devices. Sometimes, individual or pooled special needs trusts are the only options discussed, apparently because counsel may not be aware of any other choices. Special needs trusts can be wonderful protections for settlement awards. Some of their attributes are as follows:

a. Individual special needs trust are authorized by federal law at 42 U.S.C. § 1396p(d)(4)(A). Due to their code section, these trusts are often referred to by special needs counsel as “D4A” trusts.

b. Federal and state rules and laws specifically exempt assets in a properly drafted special needs trusts from being counted towards eligibility for need-based government benefits.

c. Federal and state rules and laws specifically except transfers to special needs trusts from the government’s normal penalty rules. Ordinarily, transfers to truss are punished by making the person ineligible for assistance and the government can ordinarily “look back” five (5) years at such transfers. Transfers to qualified special needs trusts are excepted from the government’s transfer penalties.

d. A good D4A special needs trust is individually tailored to the client’s particular needs. When a specialist drafts special needs trusts, no two trusts are the same because each client has different special needs and each client may require a different mix of public and quasi-public benefits. What may disqualify one client from benefits may be helpful to another client.

e. Though there are exceptions, the Trustee of the special needs trust can use the money in the trust for those things that the government is not covering through the provision of public benefits. If, however, the trustee uses the monies for services the government is already providing, the client may suffer a diminution or loss of government benefits. It is therefore critical that the Trust not only be drafted properly but that it be administered properly. In many (but not al) instances, some of the things a Trust may provide are:

i. The purchase of housing or modifications/improvements to housing.

ii. The purchase of a specially-equipped van or other vehicle necessary to provide safe and comfortable transportation.

iii. The hiring of caregivers, some of whom may be family members.

iv. A private room in a nursing home rather than having to share a room.

v. Private nurses, nurse’s aides or other attendant care.

vi. Care management and/or guardian services.

vii. Attorneys, accountants or fees of other professionals.

viii. Family and mental health counseling not covered by government benefits.

ix. Medical procedures not covered by government benefits.

x. Most travel expenses.

xi. Entertainment expenses.

xii. Education expenses.

xiii. Most other expenses not covered by the client’s public benefits.

f. A D4A Trust must, by law, include a “pay-back” provision to the government. This means that, upon the death of the client, the government gets repaid from whatever remains in the trust up to the extent of what the government paid out for the client. This provision requires careful planning, drafting and administration to ensure the greatest benefit to the client while honoring the government’s recovery rights. If there is anything left after pay-back, the client’s beneficiaries get the money.

g. Can only be created for people who are under the age of 65.


2. Special Needs Trusts (Pooled or D4C): A pooled trust is very much like an individual (D4A) special needs trust but has the following unique characteristics:

a. Many people are a part of the pooled trusts, not just one person as with an individual special needs trust. There are many sub-accounts in a typical pooled trust.

b. All of the participants’ monies are “pooled” together for investment purposes though each account is separately administered and tracked.

c. The Trustee of a pooled trust must be a not-for-profit institution.

d. There is no age restriction on pooled trusts (as there is with individual trusts) though in some states a transfer to a pooled trust is met with a period of ineligibility for benefits.

e. Upon the death of the client, the trustee may retain whatever is left and use it for its charitable purposes including possibly contributing to the care needs of those subscribers who have run out of money. Anything that the Trustee does not retain must be paid to the government to reimburse the government for its expenditures spent on behalf of the client.

3. Special Needs Personal Support and Maintenance Agreement: This device allows the client to transfer settlement funds to a reliable family member, friend or caregiver in exchange for the promise of future care. A Special Needs Personal Support and Maintenance Agreement has the following characteristics.

a. Client transfers some or all of the settlement proceeds to a third party. This party may be a family member, friend or other caregiver. Because the transaction is deemed to be a “fair market value” transaction, the government cannot rightly impose a period of ineligibility for the transfer. In effect, the client is “paying” a caregiver for the promise of future care. Drafted as an executory contract, the Agreement is binding on the caregiver and allows the client to get money out of his or her name without causing a period of ineligibility.

b. The caregiver who gets the money may do whatever the caregiver wants to do with the money. The caregiver can take the money and go to Tahiti or the caregiver may choose to use the money for the special needs client for allowable expenditures.

c. I have won an appellate decision, on behalf of one of the my clients, which effectively forces the government to accept his planning option in a Medicaid context so long as we can prove that the client receives a “fair market value” exchange for the transferred assets. I have developed an approved formula and method for proving up this value in a special needs settlement protection context. This court victory allows for greater assurance when dealing with the government.

d. The agreement is a real deal such that the care provider will be performing care services and doing so in a way that is verifiable. Moreover, the transfer of assets to the care provider is deemed income to the caregiver for federal income tax purposes. With proper planning, it is possible to substantially reduce this tax burden.

4. Loans to Special Persons or Entities: The client may be able to loan some or all of the settlement proceeds to an entity or to another person.

a. Clients may successfully loan assets to trusts, corporations, family members or friends in such a way as to remove the assets from their names while keeping it accessible to the other person or entity.

b. Loans may be secured or unsecured depending on the situation.

c. The client may wish to forgive the loan(s) through his or her estate plan.

d. The borrower can do whatever the borrower wants with the money including using the money for the special needs client.

5. Structured Settlements and other Annuities: The use of annuities either through a structured settlement or even after the settlement is made can help to protect the settlement proceeds.

a. Annuities have a special significance in public benefits planning. Annuities are special because some annuities cannot be counted as assets for government benefit eligibility determinations.

b. Structured settlements make use of annuities and can offer great flexibility in how the payments are designed to pay out to the client. If the annuity is funded by the defendant and specially structured in a tort case, the proceeds may be exempt from federal income tax.

c. Annuities can themselves be used as an asset protection device or can be used in conjunction with a special needs trust. In combining annuities with special needs trusts, great financial rewards can be had. In some cases, the rewards can equate to six and seven figure savings to the client’s beneficiaries and/or estate.


How to Protect Yourself and Your Client

The cost of the client losing government benefits can be very high, often in the hundreds of thousands or millions of dollars. The big costs are usually those of health and longterm care. By protecting the client against the loss of government benefits, you are performing a huge service – you may be helping the client to save the only health insurance that the client may be able to get or cash payments or housing assistance and so forth. But you are not just giving a value-added service. When discussing special needs settlement protection, you may be saving the client from great harm that could have come by the loss of benefits. If the settlement you obtain for the client ends up causing that client to lose his or her government benefits and you could have avoided that loss by protecting the settlement or by just making a referral, you have a serious malpractice issue with which to contend. Major settlements have been had from trial lawyers who failed to take public benefits into consideration for the client. Not only does the client lose from a failure to protect the settlement, but so too does the trial lawyer and his or her firm.

If you have concerns about a case or if you believe that the client fits the criteria detailed in the cut-out practice insert, consider making a referral to special needs counsel. With special needs counsel, just as with a trial lawyer, the difference among attorneys can make a tremendous difference. Few attorneys regularly practice in the area of special needs settlement protection. There are only a handful of attorneys in Florida who are so qualified. At present, some of the most well-known practitioners in the special needs arena are EAGLE members of the Academy and can therefore be easily identified. Another way to find qualified special needs counsel is to call my office. If I cannot myself assist you, I can refer you to someone who can.

If your client does not go forward with the planning, it is advisable for you to secure a “Waiver, Release and Acknowledgment” so that you are protected against a future claim that you did not adequately guide the client. In addition to the waiver, some special needs attorneys will provide the trial attorney with a letter for the file that further evidences the trial lawyer’s due diligence.



Bottom line – Consider the client’s present and future entitlement to public benefits when considering a settlement. Form a relationship with an attorney specializing in special needs settlement protection planning.

For questions or comment, please feel free to contact the us at 561-733-4242.

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