LITIGATION SNT


What is a Litigation (First Party) Special Needs Trusts?

A settlement or judgment received by a disabled person could cause that person to lose certain essential public benefits. Often, the award will be exhausted quickly to pay for medical expenses that otherwise would have been paid by Medi-Cal. The person would then have no other means of support. The solution to this dilemma is to transfer the award into a federally mandated First Party Special Needs Trust (sometimes called a d4A Special Needs Trust or a Self-Settled Special Needs Trust).

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What is a First Party Special Needs Trust?

A Special Needs Trust is a trust authorized by federal law. The purpose of a SNT is to allow a disabled individual to receive the benefit of their personal injury award while preserving their right to receive their essential “needs-based” public benefits. Primarily, the benefits at issue are Medi-Cal and Supplemental Security Income (SSI). Moreover, the SNT can provide expert money management by a professional money manager and provide appropriate care for the individual with a disability utilizing care managers, if appropriate.

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Is a Special Needs Trust Required for all persons with a Disability?

No. The use of a SNT will depend on several factors. Initially, the type of public benefits the disabled person receives will indicate whether a SNT is appropriate. Certain public benefits would not be impacted by a personal injury judgment or award. Next, how much is the award? In many situations where the proceeds are relatively small, other planning techniques may be available to avoid establishment of a SNT. For example, the purchase of an “exempt” asset, like a residence or automobile or spending down the award on the person’s debts. The establishment of a SNT will cause loss of control by the SNT beneficiary, thus in certain circumstances losing public benefits may be in the person’s best interests. The Urbatsch Law Firm will help the person decide the best option available.

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How are Special Needs Trust Established?

It depends. Federal law authorizes a “parent, grandparent, legal guardian or the Court” is required to establish a SNT. Thus, if a disabled person has capacity to manage their own affairs and a parent or grandparent alive; the trust may be established through a Power of Attorney. However, if the disabled person does not have capacity or is a minor, then the SNT has to be established through the Court.

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What are the Legal Requirements for a Special Needs Trust?

Special Needs Trusts are authorized by federal law at 42 U.S.C. §1396p(d)(4)(A). The requirements are as follows:

  1. The SNT must be funded with assets of the person;
  2. The person must be under 65 years of age at the time the SNT is funded;
  3. The person must be disabled;
  4. The SNT must be for the “sole benefit” of the disabled person;
  5. The SNT must be established by a “parent, grandparent, legal guardian, or a court:” and
  6. Upon the death of the disabled person, Medi-Cal must be repaid for benefits paid during the disabled person’s lifetime.

There are additional requirements under California if the disabled person is a minor or lacks capacity, the SNT must be Court approved and the Court must find:

  1. That the minor or person with a disability has a disability that substantially impairs the individual's ability to provide for the individual's own care or custody and constitutes a substantial handicap.
  2. That the minor or person with a disability is likely to have special needs that will not be met without the trust.
  3. That money to be paid to the trust does not exceed the amount that appears reasonably necessary to meet the special needs of the minor or person with a disability.

The Department of Health Services and other agencies must be notified of the Petition to Establish the SNT. In addition to these requirements, California court established SNTs must also comply with the following requirements:

  1. Not contain "no-contest" provisions;
  2. Prohibit modification or revocation without court approval;
  3. Clearly identify the trustee and any other person with authority to direct the trustee to make disbursements;
  4. Prohibit investments by the trustee other than those permitted under California Probate Code section 2574;
  5. Require persons identified in (3) to post bond in the amount required under California Probate Code section 2320 et seq.;
  6. Require the trustee to file accounts and reports for court approval in the manner and frequency required by California Probate Code sections 1060 et seq. and 2320 et seq.;
  7. Require court approval of changes in trustees and a court order appointing any successor trustee;
  8. Require compensation of the trustee, the members of any advisory committee, or the attorney for the trustee, to be in just and reasonable amounts that must be fixed and allowed by the court. The instrument may provide for periodic payments of compensation on account, subject to the requirements of California Probate Code section 2643 and rule 7.755.
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What is the Payback Provision in a SNT?

The payback provision requires that upon the death of the disabled person that any assets remaining in the trust be used first to payback MediCal for any benefits they have provided to the disabled person during his or her life. Additional monies remaining in the trust may be distributed to persons designated by the disabled person or his or her heirs in law or next of kin. If all funds in the trust are expended for the disabled person during his lifetime, the state is not entitled to a recovery. If the beneficiary has other assets outside the trust, such as a home, those may be subject to a separate lien. This risk may be minimized with advice from an attorney familiar with Medi-Cal.

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What Public Benefits are Available to a Disabled person?

Disabled persons usually receive either a combination of Supplemental Security Income (SSI) and Medi-Cal or Social Security Disability Insurance (SSDI) and Medicare. SSI and SSDI are both income assistance programs. Medi-Cal and Medicare are medical payment programs. Both SSI and Medi-Cal are means-tested programs, which means that there are limits on the income and assets that the disabled person may have. SSDI and Medicare are insurance programs. These are not means-tested. They have no income or asset limits.

If a beneficiary is receiving SSDI and Medicare and never expects to require any monies paid by Medi-Cal, or group housing, vocational training, etc. and never expects to need Section 8 Housing or any other means-tested public benefit programs, a Special Needs Trust may not be necessary. If the disabled person is receiving SSI and institutional Medi-Cal at any age or community Medi-Cal at age 65 and over, a Special Needs Trust is required unless there can be another way of achieving the Medi-Cal spend down.

Generally speaking, the SSI/Medi-Cal recipient can have very limited income and the following assets:

  • $2,000 in liquid assets;
  • Household goods;
  • A residence occupied by the disabled person;
  • One automobile;
  • A term life insurance policy or a prepaid funeral in an irrevocable funeral trust.

If distributions of cash are made to an SSI beneficiary, this will cause a dollar-for-dollar reduction in benefits. If the SSI benefit is reduced to zero, the disabled person loses SSI and Medi-Cal. If a Special Needs Trust pays directly for goods and services, there is no reduction in SSI benefits unless the services are for food, clothing and shelter, in which event there is a reduction but not necessarily a loss of benefits. As long as the SSI benefits are not completely lost, Medi-Cal will be maintained. If the trustee of the Special Needs Trust makes improper distributions, both SSI and Medi-Cal can be lost.

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What is SSI?

SSI provides a monthly stipend to supplement the recipient's income to a maximum amount defined by regulation. The maximum 2005 rate for a disabled individual living independently in California is $812 per month and for a married disabled couple the maximum 2005 rate is $1,437 per month.

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What is Med-Cal?

Medi-Cal eligibility is usually met by qualifying for SSI. In California, a person receiving SSI is automatically entitled to Medi-Cal. There are some exceptions to this general rule. Medi-Cal is often the most important public benefit the disabled person receives because it pays the person’s medical bills. Medi-Cal provides:

  • Medical services and treatment;
  • Prescriptions;
  • Personal Care Attendant;
  • Hospitalization (including nursing care);
  • Psychiatric care and dental care;
  • “Medically necessary” durable medical equipment;
  • Long-term nursing home care.
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What is In Home Supportive Services

In-Home Supportive Services is the primary state-wide program designed to provide care at home that is not primarily medical. IHSS provides personal care services, as well as some related care services, to low-income elderly and disabled persons. The IHSS recipient must be unable to perform the services and must be unable to remain safely in the home unless the services are provided. Disabled persons would always prefer to remain at home, and this is a significant advantage.

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What is Social Security Disability Income (SSDI)?

SSDI is an entitlement program paid for through Social Security taxes. Because it is an insurance program, it is not means-tested. Eligibility is based on the work history and the amount of benefits is based on prior earnings. To be eligible, the beneficiary may not be able to engage in any substantial gainful activity, as defined in the Social Security Act.

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What is MediCare?

Medicare is a federal entitlement medical insurance program for people over 65 and people under 65 who are disabled for two or more years.

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Who Should Manage a SNT?

Anyone can be a Trustee of a SNT, except the beneficiary, their spouse, or their agent. The ideal Trustee of a Special Needs Trust should have all of the following qualities.

  1. Must understand public benefits;
  2. Will use discretion in the best interest of the disabled beneficiary;
  3. Can wisely invest and conform to all statutory fiduciary requirements;
  4. Understands taxes;
  5. Keeps perfect books;
  6. Carries insurance, is bondable, or has deep pockets;
  7. Can identify second rate services or abuse; and
  8. Is immortal

Many Special Needs Trusts fail because of ill equipped Trustees and ongoing changes in the facts and circumstances of trustees, beneficiaries, and the laws surrounding public benefits. We have found that a system of checks and balances works best in trust administration. It allows for professional financial management of the trust, while protecting the unique needs of the disabled beneficiary in their care and management.

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What can a Special Needs Trust Distribute to Help a Disabled person?

The administration of a SNT is governed by the Foster Care Independence Act of 1999, the Program Operating Manual System of the Social Security Administration (POMS) and the regulations of the Department of Health Services. The following list of non-support items is provided for purposes of description and shall not limit the trustee in making other distributions for other items of amenities that the trustee may believe are in the best interest of the beneficiary. Those items may include, but are certainly not limited to:

  1. Automobile/Van
  2. Accounting services
  3. Acupuncture / Acupressure
  4. Appliances (TV, VCR, stereo, Microwave, stove, refrigerator, washer/dryer)
  5. Bottled Water or water service
  6. Bus pass/public transportation costs
  7. Camera, film recorder and tapes, development of film
  8. Clubs and club dues (record clubs, book clubs, health clubs, service clubs, zoo, Advocacy Groups, museums)
  9. Computer hardware, software, programs, Internet services
  10. Conferences
  11. Courses or classes (academic or recreational) including supplies
  12. Curtains, blinds, drapes and the like
  13. Dental work not covered by Medi-Cal (through Denti-Cal), including anesthesia
  14. Down payment on home or security deposit on apartment.
  15. Dry cleaning or laundry services
  16. Elective surgery
  17. Fitness equipment
  18. Funeral expenses
  19. Furniture, home furnishings
  20. Gasoline or Maintenance for automobile
  21. Haircuts / Salon services
  22. Holiday Decorations, parities, dinner dances, holiday cards
  23. Home alarm or monitoring/response system
  24. House cleaning / maid service
  25. Insurance (automobile, home or possessions)
  26. Legal Fees/Advocacy
  27. Linens and towel
  28. Massage
  29. Musical Instruments (including lessons and music)
  30. Non-food grocery items (laundry soap, bleach, fabric softener, deodorant, dish soap, hand and body soap, personal hygiene products, paper towels, napkins, Kleenex, toilet paper, any household cleaning products)
  31. Over the counter medications (including vitamins and herbs, etc.)
  32. personal Assistance Services not covered by Medi-Cal
  33. Pet and pet's supplies, veterinary services
  34. Physician specialists if not covered by Medi-Cal
  35. Private counseling if not covered by Medi-Cal
  36. Repair services (appliance, automobile, bicycle, household, fitness equipment)
  37. Snow removal/Landscaping/Lawn Service
  38. Sporting goods/equipment/uniforms/team picture
  39. Stationary, stamps, cards, etc.
  40. Storage Units
  41. Taxi cab
  42. Telephone service and equipment, including cell phone, pager, etc.
  43. Therapy (Physical, Occupational, Speech) not covered by Medi-Cal.
  44. Tickets to concerts or sporting events (for beneficiary and an accompanying companion)
  45. Transportation (automobile, motorcycle, bicycle, moped, gas, bus passes)
  46. Utility bills (direct TV, cable TV, electric, heating)
  47. Vacation (including paying for personal assistance to accompany the beneficiary)

Examples of Trust Distributions which will Reduce SSI Benefit

  1. Basic shelter related expenses
  2. Food
  3. In Kind Support and Maintenance
  4. Cash (after the first $20) if directly distributed to Beneficiary

Examples of Impermissible Trust Distributions

  1. Paying for a service already paid for by another source
  2. Distribution not in the best interest of the beneficiary (made primarily for the benefit of another person)
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Can a SNT own a home?

Yes. A trust may own a home. The problem is that when the disabled person dies, the home will be subject to the payback provision to repay Medi-Cal and the home may be lost. Before deciding whether the trust should purchase a home, The Urbatsch Law Firm can provide advice as to this option compared to other options. In some cases, trust ownership of a home is avoidable, and in other cases, it is not.

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How Are Structured Settlements Dealt with in a SNT?

A structured settlement annuity is a payment of money for a personal injury on a periodic payment basis over a period of time. The time can be the life of the disabled person, a fixed term of years, or a combination of both. Structured settlements are regulated by both federal and state law. The structured settlement can guarantee that the monies last a lifetime. This is very important for most disabled beneficiaries.

The problem with structured settlements is that monies paid under a structured settlement are not available to pay unexpected expenses based on a change in circumstance. Designing a life care plan and allocating a portion to a lump sum and a portion to a structure will often solve this problem.

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May trust funds be used to supplement the salaries of caregivers paid for by Medi-Cal?

No. The trust funds cannot be used to supplement the salaries of caregivers paid for by Medi-Cal or In Home Supportive Services, but the trust funds can be used to provide for additional hours. The number of hours for caregivers in California are limited, with further expected limiting changes in the law. The trust could pay for additional hours if they are required.

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Can the Trust Make Payments for Family Caregivers?

Generally Yes, However, a family member may have a legal obligation to support another family member. If the care provided is not deemed to be a legal obligation or support, then payments to family caregivers are permitted. For example, if the disabled person were under the age of 18 and required extraordinary care, or if he or she was over the age of 18, the legal obligation of support is generally reduced or ends and such payments would be appropriate.

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