This article was adapted from the book The Art of Settlement, written by Jason Lazarus.
Jane Doe is sixty-eight. She never worked outside of the home and was recently the victim of medical malpractice. She has a private insurance policy that she can no longer pay for after becoming disabled from the stroke she suffered, which wasn’t diagnosed in a timely manner. She needs to be in an assisted living facility due to the stroke.
She qualified for both Medicaid and Supplemental Security Income (SSI) after the stroke. In addition, she gets a small amount of Social Security benefits as a result of her husband’s death. Jane’s personal injury lawyer settled her case for the policy limits of the doctor who had missed the diagnosis, which is $250,000. This is completely inadequate to care for Jane. How will she qualify for nursing home care paid for by Medicaid given the small settlement? Can she keep her SSI intact? Will the death benefits cause an income problem?
A Special Needs Trust is a trust that can be created pursuant to federal law whose corpus or any assets held in the trust do not count as resources for purposes of qualifying for Medicaid or SSI. These trusts are an indispensable planning tool for making sure your clients remain eligible for means-based benefits like Medicaid after receiving a settlement. But there are several types of special needs trusts, including a standalone (d)(4)(A) Special Needs Trust, and a (d)(4)(C) trust, commonly known as a pooled trust. What’s the difference, and what’s right for Jane?
Four Major Differences between the Standalone (d)(4)(A) SNT and Pooled (d)(4)(C)
Creating a Special Needs Trust for a disabled injury victim gives them the ability to enjoy the settlement proceeds while preserving critical healthcare coverage along with government cash assistance programs. The 1396p provisions in the United States Code govern the creation and requirements for such trusts. First and foremost, a client must be disabled in order to create a SNT. Beyond that basic similarity, the pooled (d)(4)(C) trust and the (d)(4)(A) SNT have four significant differences.
First, a (d)(4)(A) Special Needs Trust can only be created for those under age sixty-five. However, a (d)(4)(C) pooled Special Needs Trust has no such age restriction and can be created for someone of any age.
Second, a pooled Special Needs Trust is not an individually crafted trust like a (d)(4)(A) Special Needs Trust. Instead, a disabled individual joins a pooled trust and a professional nonprofit trustee pools the assets together for purposes of investment, but each beneficiary of the trust has his or her own sub-account.
Third, a pooled trust is managed by a not-for-profit entity who acts as trustee overseeing distributions of the money. The nonprofit trustee may manage the money themselves or hire a separate money manager to oversee investment of the trust assets.
Fourth, at death, the nonprofit trustee may retain whatever assets are left in the trust instead of repaying Medicaid for services they have provided, which is a requirement with a (d)(4)(A) Special Needs Trust. By joining a pooled trust, a disabled aged injury victim can make a charitable donation to the nonprofit who manages the pooled trust and avoid the repayment requirement found within the federal law for (d)(4)(A) Special Needs Trusts.
Other than the aforementioned differences, it operates as any other Special Needs Trust does, with the same restrictions on the use of the trust assets.
The Financial Differences between (d)(4)(A) and (d)(4)(C)
Whether your client has a pooled or standalone SNT, most trustees will charge an ongoing annual fee, which is typically a percentage of the trust assets. These fees vary between 1–3 percent depending on how much money is in the trust. From there, the financial management of these two types of trusts diverge.
With a (d)(4)(A) Special Needs Trust, a trustee needs to be selected, unlike the pooled trust where it is automatically a nonprofit entity. This provides some flexibility to the family or loved ones to have a hand in the selection of the trust company or bank acting as trustee. However, it is important to have a trustee experienced in dealing with needs-based government benefit eligibility requirements so that only proper distributions are made. Many banks and trust companies don’t want to administer Special Needs Trusts with a corpus under $1,000,000, which can make it difficult to find the right trustee.
With the (d)(4)(A), there are no startup costs except the legal fee to draft the trust which can vary greatly. The (d)(4)(C) pooled trusts typically have a one-time fee at inception which can range from $500 to $2,000, which is typically much cheaper than the cost of establishing a (d)(4)(A) Special Needs Trust.
A (d)(4)(A) will offer unlimited investment choices for the funds held in the trust while a (d)(4)(C) will have fewer investment choices. Meanwhile, most pooled Special Needs Trusts will accept any sized trust and the nonprofit is experienced in dealing with people receiving disability-based public benefits.
Decide on a Client-by-Client Basis
Each type of trust discussed above has advantages and disadvantages. Some think of pooled trusts as only being appropriate for a smaller settlement, which is not the case. Some think of pooled trusts just for the elderly, which is not the case either. In the right case, the pooled trust is an excellent alternative to a (d)(4)(A). Just the same, in some cases, a (d)(4)(A) may be the best option because of the flexibility in selecting a trustee and the customizable money management options.
Because of the intricacies of each type of trust and each client’s situation, you must decide on a client-by-client basis. In Jane Doe’s case, the solution is to create a pooled Special Needs Trust. As Jane is over sixty-five, she cannot create a stand-alone SNT, so her only option is a pooled trust, which will protect both her Medicaid and SSI eligibility.
In the end though, a Special Needs Trust, be it pooled or a (d)(4)(A), must be considered because it will safeguard a disabled client’s recovery from dissipation and protect future eligibility for needs-based public benefits. Just as importantly, the different types of trusts and their advantages, as well as disadvantages, should be closely considered before making a decision since Special Needs Trusts are irrevocable along with bringing substantial restrictions on how the money may be used.