Hanlon Niemann Blog | A Freehold, New Jersey Law Firm

By Fredrick P. Niemann, Esq., NJ Special Needs Trust Attorney

Self-Settled Special Needs Trusts are often use when a person with disabilities receives a personal injury settlement, an inheritance, equitable distribution, alimony or child support.  However, in many instances a Self-Settled Special Needs Trust is not appropriate.  A disability lawyer must make an analysis on the onset to make this determination. 

Some of the reasons that the trust may be inappropriate are:

•   The beneficiary does not qualify. For example, the beneficiary may not be disabled or may be over age 64.
•   The beneficiary may not be receiving means-tested public benefits, such as SSI and Medicaid, and may never require such benefits in the future. Also, the amount may be so large that benefits may not be necessary.  In those situations a determination should be made whether a special needs trust is appropriate for other reasons. Perhaps a support trust would be adequate.
•   The amount of the net settlement may be too small. For net amounts under $100,000 it is usually better to seek an alternative to a standalone Self-Settled Special Needs Trust, because of the expense associated with establishing and maintaining the trust. If the net settlement is between $100,000 and $200,000, then a trust may or may not be appropriate. If an individual trustee is available then the trust cost may not be prohibitive. A pooled or community trust may be a good option.
•   It is difficult to find a professional trustee if the amount of liquid assets to be placed in the trust is less than $500,000 - $1,000,000. If a substantial percentage of the settlement is in the form of a structured settlement annuity, there will be insufficient liquid assets to interest a financial institution in serving as trustee.

If you have questions about protecting eligibility for government benefits when filing a personal injury lawsuit or near the end when settlement or verdict is a reality, contact Fredrick P. Niemann at 732-863-9900 or 888-800-7442.  He’s happy to be of assistance.

Massive move to change state insurance law
In Washington state, Reza and Arzu Forough pay more than $1,000 a week for behavior therapy for their 12-year-old autistic son.  In Indiana, Sean and Michele Trivedi get the same type of therapy for their 11-year-old daughter. But they pay $3,000 a year and their health insurance covers the rest.  Two families. Two states. Big difference in out-of-pocket costs.  If autism advocates get their way, more states will follow Indiana’s lead by requiring health insurers to cover intensive and costly behavior therapy for autism.  In the past two years, six states — Texas, Pennsylvania, Arizona, Florida, South Carolina, Louisiana — passed laws requiring such coverage, costing in some cases up to $50,000 a year per child.  The powerful advocacy group Autism Speaks has endorsed bills in New Jersey, Virginia and Michigan and is targeting at least 10 more states in 2009, including New York, California and Ohio.  Other states, including Illinois, have similar bills in the works but aren’t working directly with Autism Speaks.  “This is the hottest trend in mandates we’ve seen in a long time,” said J.P. Wieske, a lobbyist for an insurance coalition that argues that these state requirements drive up insurance costs for everyone. “It is hard to fight them.”  For lawmakers, voting against these measures means voting against parents who are struggling to do the best for their children.  Parents tell moving stories about how behavior therapy works better than anything they’ve tried. In two states, bills got nicknames like “Steven’s Law” and “Ryan’s Law,” so voting against them was tough.

By Fredrick P. Niemann, Esq., NJ Special Needs Trust Attorney

Introduction: Special Needs Trusts can themselves be complicated and confusing. The rules governing their creation and administration, and the effect on public benefits eligibility of specific trust payments, can be even more complicated. Let us try to simplify some of the rules, particularly those governing provision of food and shelter to a Special Needs Trust beneficiary.

Background: A “Special Needs” Trust is one established for the benefit of an individual with a disability — as that term is defined by federal Social Security rules. Such a trust is not counted as an available resource for a Supplemental Security Income (SSI) or Medicaid recipient. Its primary purpose — whether funded by gifts from others or with the beneficiary’s own money — is to improve the individual’s quality of life without the loss of public benefits.
 
Where the assets come from is critical and determine how SSI and Medicaid will view the trust, but many of the rules are the same regardless of the source of funds. While the trust is not a resource, payments from the trust may be counted as income to the beneficiary depending on how and to whom the payments are made.

If a disbursement is made in cash directly to the beneficiary, the money received is unearned income that will reduce the individual’s monthly SSI benefit dollar-for-dollar, after considering any applicable exclusion. Of course, if the beneficiary’s income is from Social Security Disability, or from some other Social Security program that is not means-tested (and there are several), then payments to the beneficiary will not have any effect on the Social Security payments. That does not mean that such payments are a good idea, however, as they might still affect Medicaid eligibility. Besides, if the beneficiary’s disability has an effect on his or her ability to handle money, outright distributions may cause problems beyond their effect on benefits eligibility.

Direct payments to others: If disbursements are made from the trust to third parties that result in the beneficiary receiving non-cash items (other than food or shelter), the beneficiary receives in-kind income if the items would not be a partially or totally excluded non-liquid resource if retained into the month after the month of receipt. Take as an example a trust which buys a car for the beneficiary, even though the beneficiary’s spouse already has a car which is being excluded for SSI eligibility calculations. The second car is income in the month of receipt since it would not be an excluded resource in the following month.

In-kind Support and Maintenance (ISM): If disbursements are made from the trust to third parties that result in the individual receiving food or shelter, the individual is charged with the receipt of income in the form of “in-kind support and maintenance.” Rather than causing a dollar-for-dollar reduction in benefits for the value of the ISM payment, however, it is valued at no more than the “presumed maximum value,” a concept unique to SSI regulations. The presumed maximum value is calculated each year for all SSI beneficiaries by dividing the maximum SSI payment ($637 in 2008 for a single person, and $955 for a married couple) by three, and then adding $20.00. That means that the “presumed maximum value” for 2008 is $232.33 for an individual and $338.33 for a couple.

For purposes of calculating this reduction, the notion of “shelter” which might be provided by in-kind payments includes only the following household operating expenses:

•    Mortgage payments
•    Home insurance (but only if it is required by the terms of a
      mortgage)
•    Rent
•    Real property taxes
•    Heating fuel
•    Gas
•    Electricity
•    Water
•    Sewer, and
•    Garbage removal.

Other in-kind payments from the trust: Other direct payments from the trust to providers do not result in the receipt of support and maintenance and are not treated as income for SSI purposes. Those disbursements might include payments for educational expenses, therapy, medical services not covered by Medicaid, phone bills, recreation, entertainment, therapy, companionship, and many other beneficial services.

If payments from the trust to a third party result in the beneficiary receiving non-cash items other than food or shelter, they will not be counted as income when the item would become a totally or partially excluded non-liquid resource if retained into the month after the month of receipt. For example, if the trust purchases a computer for the beneficiary, there would be no affect on SSI or Medicaid benefits. Since the computer would be excluded from resources as household goods in the following month, the computer is not  income. The same principles would apply to purchases of furniture, adaptive or assistive devices, clothing and other goods.

Summary: This explanation of the “in-kind support and maintenance” rules may seem confusing, but the application and effect are straightforward. If a Special Needs Trust purchases services directly, the purchase will not cause a reduction or loss of the beneficiary’s SSI benefits. If the trust purchases goods that are exempt from being counted as assets, there should again be no effect. If, however, the trust pays for housing-related expenses or food, there may be a reduction in benefits and, in some limited cases, even a complete loss of eligibility. Similarly, purchase of non-exempt assets that could be converted to food or shelter will cause problems.

Of course, the best choice for the trustee of a Special Needs Trust is to seek competent legal advice before making a decision about paying any in-kind goods or services. A good special needs attorney will be able to explain the effect of proposed payments not only to the trustee, but also to the beneficiary and his or her family, who may have expectations that simply can not be met given the constraints of public benefits eligibility rules.

If you have any questions concerning a Special Needs Trust, contact Fredrick P. Niemann at FNiemann@hnlawfirm.com or 732-863-9900 or 888-800-7442.  He is always pleased to be of assistance.

By Fredrick P. Niemann, Esq., NJ Special Needs Trust Attorney

Personal injury attorneys should avoid receiving payment from the defendant or the defendant’s insurer into the attorney’s trust account for any funds that are intended to be placed into a special needs trust for the benefit of the plaintiff.  Payment of funds by the defendant to the plaintiff’s personal injury attorney constitutes constructive receipt by the person with a disability.  Therefore, checks from the defendant should be made payable directly to the trustee of the special needs trust.  Payments from the structure should also be made payable directly to the trustee of the special needs trust.  Constructive receipt by the beneficiary will cause a loss of public benefits because the SSI income and resource rules have been violated, if the funds are held by the personal injury attorney for a long period of time.  If the funds are disbursed by the personal injury attorney in the month received, there is an overpayment of one month and SSI would have to be repaid.
 
In situations where there is a lump sum settlement and the defendant insists on paying the plaintiff’s attorney quickly, the court may order that the monies be held in the attorney’s trust account subject to conditions, such as satisfaction of Medicare and Medicaid liens.  This should avoid a constructive receipt argument by SSA.  The trial attorney then makes the plaintiff’s check payable to the trustee of the special needs trust at such time as all of the conditions imposed by the court order are satisfied.
 
There are two unpleasant consequences that can flow from constructive receipt:

• Public benefits eligibility.  If an SSI recipient receives income during a month, it may result in an overpayment.  However, if the income is from a personal injury, inheritance or equitable distribution, then an argument can be made that the income is infrequent and irregular and should not be counted.  If the funds are still available on the first day of the following month, they become a resource.  Not all of an individual’s assets are resources.  A resource is defined as cash and any other personal property, that an individual owns; has a right, authority, or power to convert to cash (if not already cash); and is not legally restricted from using for his support and maintenance.  If settlement funds are held in a lawyer’s trust account, they are constructively received by the individual, but if there is a restriction on the use of those funds not related to the support and maintenance of the individual, they will not be counted as a resource.  Therefore, unless there is a legal restriction to making the funds available for the individual’s support and maintenance, the funds held in the attorney’s trust account will be considered a countable resource available to the SSI recipient.  Examples of what might constitute a legal restriction include the following:

• Allocation among claimants as yet to be determined.  The lawyer must make a determination within a reasonable period of time. 

• Determination of liens amounts and their compromise.

• Determination of amount of attorneys’ fees and costs to be paid, but this is typically set forth in a contingency fee agreement and only benefits the claimant to the extent the personal injury lawyer is contemplating reducing his fees.

• The need to have a guardian of the estate or a conservator appointed, but the lawyer must act within a reasonable amount of time.

• The settlement agreement that is contingent upon court approval, which is typically the case where there is a minor or incompetent adult.

• Taxation.  From a tax standpoint, the concept of constructive receipt analyses the timing of recognizing income with an eye toward preventing taxpayers from manipulating which tax years they will report income.  Generally, “the amount of any item of gross income shall be included in the gross income for the taxable year in which it is received by the taxpayer, unless under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.”  Therefore, if a structured settlement is constructively received, the income generated on the entire value of the settlement will be currently taxed.  Constructive receipt is defined as “income, although not actually reduced to a taxpayer’s possession, is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year, if notice of intention to withdraw had been given.  However, income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.”
 
Disclosure by a defendant of the cost or present value of an annuity to be purchased to fund its monthly settlement obligation will not cause constructive receipt of the present value of the amount invested in the annuity.  What constitutes a substantial limitation is decided on a case-by-case basis.  Taxable receipt occurs when funds are received by the payee’s agent (i.e., plaintiff’s attorney).  In the case of Gale v. Commission, a check was placed in an attorney’s escrow account pending resolution of disputes over attorney’s fees and the amount owed to the taxpayer’s ex-wife.  The court held that this constituted constructive receipt, because any restriction was placed on the account only by the taxpayer’s creditors and that did not delay petitioner’s receipt of income for income tax purposes.
 
In another case it was held that funds held in escrow pending a court order are subject to substantial limitations.

If you have questions about protecting eligibility for government benefits when filing a personal injury lawsuit or near the end when settlement or verdict is a reality, contact Fredrick P. Niemann at 732-863-9900 or 888-800-7442.  He’s happy to be of assistance.