By Lauren Pierucci, Associate Attorney at DDV Law, Ltd.
Special needs trusts are multi-functional tools that deserve consideration in a variety of practice areas. These dedicated estate planning tools are more than solely estate planning resources for parents of children with disabilities, despite the common usage in this area. Personal injury and medical malpractice attorneys can ensure immediate and long-term benefits for their disabled clients by considering the use of a special needs trust as the recipient of the settlement funds they obtain for their clients.
The contemporary attorney seeking to be a dutiful and conscientious advocate for his or her clients will be well-advised to have at least the basic knowledge of special needs trusts and how they can be used to assist clients across a variety of legal planning and settlement situations.
Special Needs Trusts: Background and Breakdown
Established through amended Federal law 42 U.S. C. § 1396p(d), the Omnibus Reconciliation Act of 1993 (OBRA ’93) allows for funds received by a disabled individual to be funded to a special needs trust without causing ineligibility for public benefits such as Medicaid[i] or Supplemental Security Income (SSI)[ii].
OBRA ’93 outlines three types of special needs trusts (SNT), two of which are available and commonly used in Illinois. Each of the two SNTs of use in Illinois are aptly named pursuant to the provision of the Federal law from which they stem: the d(4)(a) SNT, and the pooled trust, commonly referred to as a d(4)(c) SNT. For both types of SNT, they are funded with the assets of the disabled individual, must be irrevocable and non-assignable, and must be structured to ensure that the disabled individual is not and can never be trustee. Further, the trust funds are limited to be used for the sole benefit of the disabled individual, above and beyond any medical assistance or public benefits the individual receives[iii].
Self-Settled SNTs
A first party d(4)(a) SNT is a planning tool limited to grantors under age 65 and must be established by a parent, grandparent, or legal guardian of the disabled individual, or a court of competent jurisdiction[iv]. The trust must name the State as primary beneficiary up to the amount of the total medical assistance actually received by the disabled individual during his or her lifetime, but contingent beneficiaries can be named to receive any remaining trust corpus[v]. In this regard, it is important for the drafting attorney to consider the age, capacity, relationships, and the potential for family growth when including contingent beneficiaries so as to not inadvertently cause eligibility issues to remainder beneficiaries.
For Your Drafting Consideration…
One practice pointer in this regard is to include additional special needs trust provisions within the d(4)(a) SNT distribution provisions after the death of the grantor, to allow for SNT creation or receipt on the behalf of a contingent beneficiary who is disabled at the time of distribution, if necessary. At most, this causes some additional drafting time for you, the attorney. At best, however, this extra consideration will certainly earn the drafting attorney the trust and gratitude of his or her clients and their beneficiaries should this become an issue in the future.
Another drafting tip in relation to the named contingent beneficiaries of a d(4)(a) SNT is to utilize careful and more pointed language to ensure that any potential contingent beneficiaries after the death of the grantor are identifiable beneficiaries. Problems can arise if language such as “the remainder to Grantor’s Estate” is inserted instead of something more precise like “the remainder to those individuals who would have inherited from Grantor had she died intestate.” While the essence of the two phrases is the same, fastidious drafting may help to avoid potential issues pursuant to the Doctrine of Worthier Title. Although this seemingly archaic legal concept has been abolished in Illinois,[vi] Federal agencies are not necessarily beholden to Illinois statutory provisions. Further, in this area of drafting, it would certainly be beneficial to one’s client to be a bit more diligent in drafting to avoid potential nullification of special needs planning if it becomes an issue of trust interpretations across state lines.
Pooled Trusts
With d(4)(c) SNTs, or “pooled trusts,” the trust must be managed by a non-profit entity[vii] and a financial institution, which will generally have a master trust agreement, for which the disabled individual executes a separate account as a beneficiary of the trust[viii]. While a d(4)(c) pooled trust generally requires corporate fiduciary trustee’s fees, the corpus is composed of the pooled assets of numerous disabled individuals in order to obtain more beneficial investment interests for the individual beneficiaries.
Pay it Forward…
Pooled trusts often allow beneficiaries the option to name family or friends as beneficiaries after necessary payback to the State, but often encourage beneficiaries to instead leave any remaining funds after death in the trust, to be further used for the benefit of other disabled individuals. Think of it as paying it forward for the greater good of those similarly-situated who may not have enough assets personally and may otherwise outlive their savings.
Use of SNTs across practice areas
Utilization of a d(4)(a) or d(4)(c) SNT as a tool in settlement planning lends itself perfectly to personal injury and medical malpractice lawsuits. In a typical personal injury or medical malpractice situation, the settlement recipient, if not disabled prior to the lawsuit, is likely to be disabled[ix], or at least require considerable medical and care assistance as a result of the incident subject to the settlement.
Larger settlement amounts are typically awarded to those who will require expensive and enduring long-term care needs throughout the remainder of the recipient’s lifetime. These are the types of injuries and long-lasting disabilities that can easily disqualify an individual from individual health insurance plan coverage. Further, personal injury and medical malpractice incidents often cause the settlement recipient to have reduced or no ability to earn meaningful wages, making the longevity of the one-time settlement agreement that much more significant.
Perhaps the most important consideration in structuring personal injury and medical malpractice settlements is consideration of how direct receipt of settlement funds will impact the recipient’s eligibility for public benefits, such as Medicaid. Knowledgeable forethought and anticipation of the true reality of care costs after the ink dries can be the difference between an attorney who simply puts the deal in place and the attorney who truly understands his or her clients’ situation and acts as a true advocate for the clients’ best interests.
Important Considerations with Establishing an SNT as a Settlement Recipient
Trustee Selection/Succession
If an SNT is established to act as the recipient of personal injury or medical malpractice settlement funds through the purview of a guardianship, the guardian should be the trustee of the trust. If the size of the settlement is very large, or perhaps the details of the settlement are complex, a suitable corporate fiduciary is a wise choice to select as trustee.
Recruiting a trustworthy corporate fiduciary could serve as a solid negotiation tool during the personal injury or medical malpractice settlement stages. If a defendant and/or judge is reassured that the settlement funds will be managed by a professional fiduciary, which is bonded and insured, it is generally less likely that there will be issues with wrongful or wasteful spending, as opposed to a lay person.
Also, in association with a guardianship, the fact that the SNT is incorporated into the Ward’s guardianship estate, and thus overseen by the court, is an even stronger tool towards increasing the settlement amount, since there will be less risk of squandering of the funds[x].
Even if the personal injury or medical malpractice settlement does not become associated with a guardianship, in this attorney’s opinion, it would be worth the time to at least have a frank discussion with one’s client about hiring a corporate fiduciary to act as trustee of the SNT. While it may be a balancing act of a conversation to have, trust management by an unsophisticated or unorganized individual trustee can result in ineligibility of benefits to the grantor. Further, experience shows that it is much more appealing to spend the necessary funds towards corporate fiduciary fees rather than risk personal liability or even court admonishment if wrongful or wasteful spending is discovered.
That said, whether the assistance of a corporate fiduciary is worth the investment also depends on the size of the settlement received. Corporate trustee fees may not be worth the cost if the settlement is small.
Distribution Standards
Another consideration of utilizing SNTs for personal injury and medical malpractice settlements comes from the essence of the instrument itself. Whether it be a d(4)(a) trust or a d(4)(c) pooled trust, funds held in a special needs trust should be paid directly to the provider of good and/or services on behalf of the grantor. No funds should be directly disbursed to the disabled individual. Further, no cash should be given to the disabled grantor.
Instilling the confidence that settlement funds will not be allowed to be withdrawn from the account without any accounting of when and where the funds were disbursed can help reassure a hesitant or exacting defendant or judge that the maximum amount sought should be granted.
Discretionary Standards
Depending on the situation of the disabled settlement recipient, it may be necessary to distribute all or only some of the full settlement amount into an SNT, due to the discretionary standards apparent in a suitable special needs trust. Knowledge and understanding of proper SNT discretionary standards is important in determining the appropriateness of the tool for each client’s individual circumstances and needs.
Some of the basic characteristics of a typical special needs trust are as follows:
– The funds must be for the sole benefit of the disabled individual
o A d(4)(a) or d(4)(c) trust may not be appropriate for a competent individual who is the main breadwinner for his or her family, and has minor dependents to care for, still at home. If this is the case, it may be suitable to only put a portion of the settlement into an SNT for the benefit of the disabled individual, so that the remaining funds are not so restricted as to be prohibited from being used for other things.
– The lifetime beneficiary has preferential rights
o A special needs trust is typically designed to be exhausted during the disabled individual’s lifetime, on necessary and appropriate goods and services, of course. Unlike a revocable living trust, which can serve as a staggered generational wealth savings and distribution vessel (to a point), an SNT is not supposed to be a savings vehicle for other beneficiaries or the heirs of the grantor.
– SNT funds must be used to supplement, not supplant other income or resources or public benefits
o For example, an individual receiving Supplemental Security Income (SSI) may risk reduction or loss of his or her SSI benefits if funds from his or her SNT are used to pay for food and shelter needs since SSI is designed to cover those basic necessities.
– SNT funds can be used to purchase items that would be considered “exempt” assets for purposes of public benefit laws
o A prepaid funeral or burial plan can, and in many cases, should be purchased during the individual’s lifetime. If purchased, and if designed pursuant to benefit-compliant requirements, the prepaid plan will not count as an accessible resource or disqualify one for public benefit programs.
Other SNT Considerations and Potentials
Nursing Home Litigation
Settlements that arise out of nursing home litigation lawsuits may be exempt assets for purposes of Medicaid[xi], but are not exempt from estate recovery by the State[xii]. Proper knowledge of how best to invest these settlement funds can help make the money last longer and be used for desired purposes. Due to the payback provisions inherent in d(4)(a) or d(4)(c) trusts[xiii], these instruments may not be the best recipient of nursing home litigation funds. However, protection of such assets via placement in a well-drafted revocable living trust could help reduce the risk of exposure to recovery by the State upon the death of the grantor.
Reformation and Decanting of Non-Compliant Trusts
Especially for individuals who have existing settlement funds held in a trust that is not currently a valid OBRA trust, reforming or decanting the existing trust into a new trust that is compliant can help the disabled individual further protect his or her funds for the long haul.
The Illinois Trust and Trustees Act was amended effective January 1, 2013, to allow for the distribution of one irrevocable trust into a second further trust for certain purposes, through the process known as “decanting,”[xiv] in certain situations.
Within 760 ILCS 5-16.4(d), there is a special exception for “supplemental needs trust” which states, “Notwithstanding the other provisions of this subsection (d), the authorized trustee may distribute part or all of the principal of the interest of a beneficiary who has a disability in the first trust in favor of a trustee of a second trust which is a supplemental needs trust if the authorized trustee determines that to do so would be in the best interests of the beneficiary who has a disability.”[xv]
Estate Planning Tools
Special needs trusts have long been used by estate planning attorneys to properly protect funds for clients and to ensure appropriate asset distribution upon the death of the grantor. The suitability of using d(4)(a) or d(4)(c) SNTs for personal injury or medical malpractice settlements does not change this.
It is recommended that any attorney assisting his or her clients with estate planning take the time to ask some questions about the client’s family tree to help determine if utilizing the protections inherent in special needs trusts are suitable for a client’s estate plan and long-term care needs.
Wrap Up
Special needs trust are unique planning tools that can serve as versatile depositories for personal injury and medical malpractice settlement funds. Their inherent restrictions serve not only as dependable guidelines according to which the funds will be used, but may help to appease weary parties concerned about the longevity of large amounts of funds being negotiated.
If not already familiar with the different types of special needs trusts, any attorney practicing in the areas of personal injury or medical malpractice litigation can amplify the role as “special needs advocate” for his or her clients by understanding how these types of estate planning and special needs planning tools can not only potentially increase the amount of the settlement received, but can help ensure eligibility for much-needed public benefits with the use of a properly-drafted SNT.
[i] 89 Ill. Admin. Code § 120.347
[ii] Social Security Administration’s Program Operation Manual System (POMS) at SI 01120.203A-B
[iii] 42 U.S.C. § 1396p(d)(4)(a); 42 U.S.C. § 1396p(d)(4)(c)(i-iv)
[iv] 42 U.S.C. § 1396p(d)(4)(a)
[v] Id.
[vi] 765 ILCS 350 et seq.
[vii] 42 U.S.C. § 1396p(d)(4)(c)(i)
[viii] 42 U.S.C. § 1396p(d)(4)(c)(ii)
[ix] 42 U.S.C. § 1382c(a)(3)
[x] While the risk of misappropriated funds can never be completely eliminated when accounted for under the purview of guardianship, the requirement of a bond as delineated in 755 ILCS 5/12 et seq., as well as the duty to account as described in 755 ILCS 5/24 et seq., and the amplified discovery and recovery authorities granted by the Illinois Probate Act in 755 ILCS 5/16 et seq. tend to offer greater oversight of assets than management without court involvement.
[xi] 89 Ill. Admin. Code § 120.381(m); 210 ILCS 45/3-605
[xii] Once such funds become part of one’s individual estate, unless structured otherwise, they may be subject to recovery just like other resources; See Illinois Department of Healthcare and Family Services, HFS 3419B: Property Liens & Estate Claims (2015)
[xiii] 42 U.S.C. § 1396p(d)(4)(a) and 42 U.S.C. § 1396p(d)(4)(c)(iv)
[xiv] 760 ILCS 5/16.4
[xv] 760 ILCS 5/16.4(d)(4)