Preventing Your Success from Becoming Your Client’s Distress
By Tyler Johnson
Are you representing an individual on needs-based government benefits, such as Supplemental Security Income (“SSI”) or Medicaid, in a personal injury or other litigation matter? If so, you should consider using a first party special needs trust to protect your client from losing his or her eligibility for government benefits. Needs-based government benefits have strict, resource limited eligibility requirements, and it does not take many assets to render an individual ineligible. When an individual is ineligible for needs-based benefits, the individual is often forced to spend the settlement proceeds or litigation-based recovery for his or her primary care, when he or she could have otherwise used the proceeds to improve his or her quality of life. A first party special needs trust can help an individual maintain eligibility for government benefits while leveraging the assets received in a settlement for his or her life. This article first discusses eligibility for SSI and Medicaid benefits generally for background, and then follows with how a first party special needs trust can be used to protect those benefits in the event of a personal injury settlement or other litigation-based recovery.
II. Benefits Programs
When representing a client who is receiving, or may receive, governmental benefits, a lawyer should at least have a basic understanding of public needs-based benefits eligibility and administration. The Social Security Act establishes both SSI and Medicaid benefits. The Supreme Court has stated “[t]he Social Security Act is among the most intricate ever drafted by Congress. Its Byzantine construction. . . makes the Act ‘almost unintelligible to the uninitiated.'”1 The associated regulations and the Social Security Administration’s (the “SSA”) interpretations of the federal statutes via the Programs Operations Manual System (the “POMS”) are critically important in helping to understand the benefits programs created under the Social Security Act. Courts have determined the POMS, including the ones interpreting the code section governing first party special needs trusts (42 USC § 1396p(d)(4)(A)), warrant significant deference as they are part of a “long-standing and consistent interpretation that ensures universal applicability of the statute.”2
a. Supplemental Security Income
The purpose of the SSI program is “to assure a minimum level of income for people who are age 65 or over, or who are blind or disabled and who do not have sufficient income and resources to maintain a standard of living at the established Federal minimum income level.”3 SSI is not to be confused with Social Security retirement benefits or Social Security disability benefits (“SSDI”). Both Social Security retirement benefits and SSDI are governed under Title II of the Social Security Act4 and are paid to individuals or members of their family based upon the individual’s work history.5 Both Social Security retirement benefits and SSDI are considered entitlement programs as the beneficiaries of such programs have paid for the benefits they receive through their Social Security taxes and there are no resource limited eligibility restrictions.6 SSI on the other hand is governed under Title XVI of the Social Security Act7 and is a welfare-based or needs-based program. Receipt of benefits under one program does not preclude receipt of benefits under another; individuals can be eligible and receive Social Security retirement benefits, SSDI and SSI.
To be eligible for SSI under the Social Security Act an individual must (i) be age 65 years or older, blind, or disabled; (ii) be a resident of the United States; (iii) be a United States citizen or an alien lawfully residing in the United States; (iv) have resources and income within certain specified limits; and (v) file an application for SSI benefits.8 For purposes of determining eligibility, the main focus is generally whether an individual satisfies the disability criteria and resource and income limitations.
An adult individual is “disabled” for purposes of SSI if he or she has a medically determinable physical or mental impairment which renders the individual unable to engage in substantial gainful activity and can be expected to result in death, or has lasted or can be expected to last for a continuous period of not less than twelve months.9 If an individual is able to engage in a substantial gainful activity, that person is not considered disabled and thus not eligible for SSI benefits.10
A person must also satisfy the resources and income limitations. To qualify for SSI, an individual must have $2,000 or less in resources.11 Resources are items such as cash, stocks or bonds, bank accounts, real or personal property, or other liquid assets that can be converted to cash and used for an individual’s support or maintenance.12 Certain resources, however, are excluded and do not count against the $2,000 limit. Examples of excluded resources are an individual’s home, household goods and personal effects, one vehicle, and, of special note for this article, assets held in a properly drafted and established special needs trust.13
Income is anything an individual receives in cash or in kind that can be used to meet his or her needs for food or shelter.14 Income, like resources, is counted on a monthly basis.15 Anything received in the current month that can be used to meet the individual’s basic food and shelter needs is considered income and anything the individual owned prior to the month under consideration, including income previously received, is a resource.16 The SSA will consider an individual’s income to determine whether, and to what extent, the individual is entitled to benefits. Generally, the more income an individual has, the less his or her benefit will be.
Medicaid is a federal insurance program that provides medical assistance for low income individuals who are age 65 and over, blind or disabled.17 It is jointly funded by the states and the federal government and is administered by the states.18 Medicaid eligibility generally flows from SSI; however, eligibility requirements vary by state.
Similar to the SSI program, an individual’s eligibility for Medicaid in Nebraska is predicated, in part, on his or her monthly resources and income. Nebraska’s monthly resource and income limits are less restrictive than those under the SSI program. For example, to be eligible for Medicaid, an individual in Nebraska is limited to having resources of $4,000.19 As a result, in some cases, an individual in Nebraska may meet the resource and income requirements for Medicaid eligibility, but may not be eligible for SSI.
III. First Party Special Needs Trusts
A first party special needs trust is a trust that is established by a competent disabled individual, parent, grandparent, legal guardian or court to hold the assets of a disabled individual.20 It is authorized under 42 USC § 1396p(d)(4)(A) and, for clarity, is different from a third party special needs trust, which is funded with the assets of others for the benefit of a disabled individual. If properly drafted and established, the assets of a first party special needs trust are not counted as resources of the beneficiary, for purposes of determining eligibility for needs-based government benefits. As such, a first party special needs trust can be used to help a person expecting to receive a personal injury settlement or other litigation-based recovery from losing his or her needs-based government benefits.
a. Trust Requirements. A first party special needs trust requires careful drafting and must meet the following requirements.
1. Sole Benefit. The first party special needs trust must be established for the sole benefit of a disabled beneficiary, and the trustee must have complete discretion over distributions to the beneficiary.21 The beneficiary cannot direct the use of trust assets. Any provision providing benefits to others during the beneficiary’s lifetime or that allows for termination of the trust prior to the individual’s death and payment of the trust assets to another individual or entity will result in the trust assets being counted toward the individual’s resources for government benefits purposes.22
2. Funding. The first party special needs trust must contain the assets of an individual who is under the age of 65 and is disabled.23 The disabled beneficiary generally cannot add to the trust after he or she reaches the age of 65.24 However, additions do not include interest, dividends, or other earnings of the trust, or annuity or support payments that have been irrevocably assigned to the trust when the beneficiary was under the age of 65. 25
3. Medicaid Payback. The trust must provide that upon the death of the disabled beneficiary, the trustee will reimburse the state Medicaid agency up to an amount equal to the total medical assistance paid on behalf of the beneficiary to the extent funds remain in the trust at the beneficiary’s death. 26 If Medicaid has paid for medical assistance on behalf of the beneficiary during the beneficiary’s lifetime, such payments are considered a debt and are held in abeyance until the beneficiary’s death. 27 Medicaid then has a claim against the estate and highest priority over other creditors and beneficiaries of the disabled beneficiary’s estate. 28 Because Medicaid will need to be repaid upon the beneficiary’s death, a first party special needs trust should never be funded with a third party’s money or assets. Instead, the appropriate vehicle for a third party to convey money or assets to an individual receiving needs-based benefits is a third-party special needs trust.
4. Irrevocable. Finally, a first party special needs trust must be irrevocable.29
b. Use in Litigation or Settlement Negotiations.
If your client on needs-based governmental benefits is likely to receive a personal injury settlement or other litigation-based recovery, you should consider putting a first party special needs trust in place before accepting the settlement or recovery. Without one, you risk putting him or her in a worse financial position, as proceeds from a personal injury settlement or other recovery disbursed directly to the beneficiary will be counted as income for the month in which the proceeds are received. Additionally, the proceeds would then be counted as a resource in the succeeding months, further jeopardizing the individual’s eligibility. If the proceeds are deposited directly into a first party special needs trust, however, the proceeds do not count against the income or resource limitations and the beneficiary can continue to receive his or her government benefits. Once the proceeds are in the trust, the assets can grow without effecting the beneficiary’s eligibility and the trustee can use those assets on items or care to improve the individual’s quality of life that he or she would not otherwise receive on needs-based benefits alone. A first party special needs trust is generally the best mechanism for leveraging the settlement proceeds for the beneficiary’s benefit.
For more information on Special Needs Trusts, contact Tyler Johnson.
1 Schweiker v. Gray Panthers, 453 U.S. 34, 43 (1981)(quoting Friedman v. Berger, 547 F.2d 724, n. 7 (2d Cir. 1976).
2 Draper v. Colvin, 779 F.3d 556, 561 (8th Cir. 2015).
3 20 C.F.R. § 416.110.
4 42 U.S.C. §§ 401 – 434.
5 For eligibility related to Social Security retirement benefits see 20 C.F.R. § 404.310. For eligibility related to disability benefits see 20 C.F.R. § 404.315. See also Social Security Benefits Planner https://www.ssa.gov/planners/ (last accessed May 29, 2020).
6 Fact Sheet Social Security and Supplemental Security Income (SSI): What’s the difference? https://www.ssa.gov/sf/FactSheets/aianssavsssifinalrev.pdf (last accessed May 22, 2029).
7 42 U.S.C. §§ 1381 – 1383f.
8 20 C.F.R. § 416.202.
9 42 U.S.C. § 1382c(a)(3).
10 20 C.F.R. § 416.971.
11 20 C.F.R. § 416.1205; POMS SI 01110.003(A)(2).
12 20 C.F.R. § 416.1201.
13 42 U.S.C. § 1396p(d)(4)(A); 20 C.F.R. § 416.1210; POMS SI 01110.210.
14 20 C.F.R. § 416.1102.
15 42 U.S.C. § 1382(c); 20 C.F.R. § 416.1207(a) (“Resources determinations are made as of the first moment of the month”); 20 C.F.R. § 416.1100 (stating that income is counted on a monthly basis).
16 POMS SI 00810.010(A).
17 42 C.F.R. §430.0; see 42 C.F.R. §§ 435.520 – 435.541 (containing categorical requirements for eligibility).
18 42 C.F.R. § 430.0.
19 477 Neb. Admin. Code Appendix § 012; see Nebraska Dept. of Health and Human Services: Medicaid Eligibility http://dhhs.ne.gov/Pages/Medicaid-Eligibility.aspx (last accessed May 28, 2020).
20 POMS SI 01120.203(C).
21 POMS SI 01120.203(B)(6); see POMS SI 01120.203(C)(4).
23 POMS SI 01120.203(C).
24 POMS SI 01120.203(B)(3); see POMS SI 01120.203(C)(4).
26 42 U.S.C. § 1396p(d)(4)(A); POMS SI 01120.203(B)(10).
27 Neb. Rev. Stat. § 68-919.
28 Neb. Rev. Stat. § 68-919(4)(a).
29 POMS SI 01120.200(D)(2)-(3).