Article Re Special Needs Trusts

8/6/2019 Article Re Special Needs Trusts

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ELDERLAW

This article was first presented at the North

Carolina Academy of Trial Lawyers:Structured Settlements and More, May 11,

2007 at the Academy Headquarters inRaleigh.1

SNTS What Are They?

Conventional Standards ofTrust Law Triangular LegalProtective ShelterStandard Trust Protections

A trusta fiduciary relationship withrespect to property, arising from a manifesta-tion of intention to create that relationshipand subjecting the person who holds title tothe property to duties to deal with it for thebenefit of charity or one or more other per-sons, at least one of whom is not the soletrustee.2

A trust may also be described as a fiduci-ary relationship in which one person is theholder of the title to property, subject to anequitable obligation to keep or use the prop-erty for the benefit of another.3

Third Party and OthersAs Fiduciary TrusteeA trustee is a person, persons or legal enti-

ty or entities with legal capacity to receive,hold and manage property in trust. In cer-tain instances, the settler and/or the benefici-ary of the trust may be a co-trustee.4

Spend Thrift ProtectionA spend thrift trust is a trust that restrains

voluntary and involuntary alienation of all or

any of the beneficiarys interests.5 The spend-

thrift [provision] trust protects the in

and principal interests of its beneficiary the claims of creditors as long as the inand or principal in question is properlyin the trust.6

Shield Against Undue InfluenceA trust generally protects the benefi

from those attempting to gain access tincome or principal of the trust by exaundue influence on the beneficHowever, the protections of the trust usdo not extend to distributions made

the trust corpus to the beneficiary.

An Expanded Shelter forGaining GovernmentalBenefits Eligibility UnderState and Federal Laws.

What Is a Special Needs Trust?Historically the special needs

(SNT) is a hybrid of the irrevocable dtionary trust. In the 1970s, parents of dren with severe, chronic disabilities (prrily mental retardation) worked with

and estates counsel to develop legal vehthat would not only provide for the traof funds for the benefit of their childrensevere disabilities, but more importmandate to the trustees detailed instructhat addressed the quality of care andquality of life of the children to be servethe trustee.

SNT History With more than twenty years of

Special Needs Trusts Including Special NeedsWhat are they? When are they needed, or not?

BYA. FRANKJOHNS

Change YouCan Believe In!Change is in the air,

and with that some-thing in the air comesuncertainty. I can say with confidence that were going to getsome Change WeCan Believe In. And by Believe In, Imean something that will befelt.

The problem is that no one can say withany certainty what the change will be.

To think that the Democrat-controlledCongress and an Obama administration willbe more friendly to senior concerns ismighty tempting. For example, we all wit-nessed the ham-fisted, budget-slashingapproaches the Republicans took withoutbothering to fix any of the underlying prob-

lems associated with financing long termcare.

The Chairs Comments

Bob Mason

See COMMENTSpage 2

Inside This Issue:

7 Special Needs Trusts Power Tools for Planners

8 The Use of Qualified SettlementsFunds, Qualified Assignments andSpecial Needs Trusts in PhysicalInjury Settlements

5 Tips and Tales Pay Back SpecialNeeds Trusts Not Always the OnlySolution

6 Board Certification in Elder Law Coming Soon to your State Bar

Published by the NCBAs Elder Law Section Section Vol. 13, No. 2 November 2008 www.ncb

See SNTpa

1

1
http://www.ncbar.org/http://www.ncbar.org/http://www.ncbar.org/


2/203 AUGUST 2006

ELDERLAW

VOL. 13, NO. 2 NOVEMBER 2008

Published by the NCBAs

Elder Law Section

EditorAaron Terry

Editorial AddressP.O. Box 3688Cary, NC 27519

SECTION OFFICERSChairBob Mason

mmediate Past Chair

Dennis Toman

Vice ChairBrent Stephens

SecretaryMargaret A. Lorenz

TreasurerNicole Bryan

Board LiaisonL. Neal Ellis Jr.

SECTION COUNCILAndrew Atherton

Nicole Bryan

Elizabeth Caviness

Anne Duvoisin

Patricia Gibbons

Lawrence S. Graham

Richard Hall Jr.

Larry Rocamora

Carole Spainhour

Brent Stephens

Kimberly Whitley

J. Gregory Wallace

North Carolina Bar Association 2008No portion of this publication may be reprinted without per-mission.

Views and opinions expressed in articles published herein arehe authors only and are not to be attributed to Elder Law, the

Elder Law Section or the NCBA unless expressly stated. Authorsare responsible for the accuracy of all citations and quotations.

Comments from page 1Time for a Pop Quiz! Ill set the scene: A

major bill eventually passes both houses ofCongress (mostly along party lines), mandat-ing (among many items) tough new restric-tions on certain eligibility standards andmore robust estate recovery efforts.

Ultimately the measure passed the House bya handful of votes, and in the Senate the vice-president had to step in and vote a tie-break-er in favor of the bill.

Your choices are:(A) Deficit Reduction Act of 2005(B) Omnibus Reconciliation Act

of 1993(C) Both (A) and (B)

Answers appear at the bottom.

My point is this: Democrats are not at alladverse to belt tightening when pressed.

And lets face it, were pressed. President-Elect Obama is sending every signal that fix-ing the economy will take precedence, atleast for a time, over sweeping changes.

My guess is that there will be continuingefforts by program administrators to tightenup and to explore new and novel ways ofinterpreting eligibility rules and enforcingestate recovery.

I cannot envy the new president, and

Congress, for the tasks they face. So whoknows what will happen? Anything frommore budget cuts to Universal Healthcare.

We all, each of us, owe it to ourselves andour clients to stay on top of developments(well help you with that) and to think out-side the box (youll have to do that yourself).

Professionalism At its first meeting of the current year

held in Asheboro in August, your sectioncouncil created a Professionalism Task Forceto explore various approaches to PresidentCharles Bectons call for an emphasis on pro-

fessionalism. As a result, we are going tobegin an outreach effort to other sections. Apart of that effort well be advising our col-league sections of our interest in respondingto elder-oriented inquiries from other sec-tions (particularly in the area of ethics andprofessionalism), of our desire to appear andspeak at their CLE programs, and to makeavailable to them elder law articles that mightbe of interest to attorneys practicing in othersubstantive areas of the law.

If you would like to be part of this effort,

let us know.Nikki Melby, a relative newcomer toNorth Carolina from Florida, has beennamed CLE Committee Chair. While NicoleBryan is planning the program for theFebruary symposium, Melby is focusing herefforts on July 2009 - June 2010 programplanning. She needs and wants volunteers.

If you would like to be part of this effort,let Nikki Melby know.

There are plenty of ways to get involved inthe section. We need interesting speakers andauthors. We need people who are willing to

help plan programs and activities. We needpeople who understand that getting involvedis a great way to strengthen ties with col-leagues and be in the loop if conditionschange (as predicted).

~ Bob MasonAnswer key: Both A & B!!

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development, consumer driven organiza-tions, including the ARC of America, and allaffiliated organizations in every state, theNational Alliance for the Mentally Ill and theNational Autistic Society, and its affiliatesacross the states, just to mention a few, have

been advising their members, numbering inthe millions, to utilize the SNT for estateplanning purposes.

SNT PoliticsIn the early nineties, Congress became

concerned with escalating Medicaid costs.With the shift in control to the Republicansin 1992, a concerted effort was made to stiff-en the regulations by which persons becomeMedicaid eligible.

As various committees rewrote legislationfocused on so-called Medicaid planningloop-holes, repeal of the MedicaidQualifying Trust became a primary target.However, the consumer groups identifiedabove teamed with the AARP and otherorganizations in the aging network, includingthe National Academy of Elder Law

Attorneys, to negotiate the exemption of sev-eral trusts that if designed to allow for a pay-back or reimbursement of the state forMedicaid expenditures on behalf of the trustbeneficiary at the end of the trust beneficia-rys life would be exempt and not counted

under Medicaid eligibility requirements.

New Life for SNTsNew life was breathed into SNTs and in

addition, testamentary SNTs were continuedas exempt under the statutory and regulatoryrevisions to Medicaid that became law in1993.

(1) Primary SNTs. There are several statu-torily exempt SNTs. However, the three cre-ated under the Revenue Reconciliation Act of

1993, better known as OBRA 937,

require a pay-back provision.(2) The d4A Individual SNT. The d4A,

individual SNT is created by court order, aguardian, parents or grandparents of the trustbeneficiary, irrevocable, and for the sole ben-efit of the trust beneficiary if under the age of65 and disabled as defined under federal law.

(3) The d4B Individual Income OnlySNT. The d4B individual SNT, is the so-called Miller or income only trust withthe same criteria as the d4A. Income is divert-ed to the trust, with a mandatory amount just

under the income cap calculated for distribu-tion by the trustee to pay the patient month-ly liability. Funds remaining in the trust mustbe used for the sole benefit of the beneficiaryto supplement his or her quality of life. At theend of the beneficiarys life, if there is remain-

ing corpus, then it must be used to pay backthe state.

(4) The d4C Pooled SNT. During the early90s, the federal government and many states,including North Carolina, created statutoryinitiatives to privately fund organized non-profit organizations to care for Medicaidrecipients through the use of pooled trusts.8Pooled trusts are special needs trusts com-prised of the assets of elder citizens and peo-ple with disabilities and consolidated underan umbrella nonprofit organization, servingas trustee and responsible for the care of thetrust beneficiaries. The concept originated ina more narrow focus where families wantingto leave portions of their estates to care fortheir family members with developmentaldisabilities would leave funds in special needstrusts. The focus has expanded to includevulnerable elderly persons who either needasset preservation of their estates to sustainthe quality of their lives, or need individual-ized care giving because they have out-livedtheir families or never had a family. Sincepooled trusts are exempt under Medicaid,

each beneficiary of the pooled trust would bean eligible Medicaid recipient.The assets of the special needs trusts are

pooled for management and cost efficiency, with accumulating interest credited to eachindividual. The supplemental or special needsof each individual are funded with the assetsascribed categorically to the individual dur-ing the individuals lifetime, or until the indi-viduals funds are exhausted.

A nonprofit organization providing directcare and advocacy for the individual must bethe trustee of the pooled trust. Rather than

repaying Medicaid for all of the expenses thatthe client accumulated in long term care, thenonprofit organization would retain theassets remaining in the trust in order to serveother Medicaid recipients of similar need.

The importance of the concept deservesrestatement. If Medicaid recipients have noone to care for them, and no families avail-able to advocate their interests, then the non-profit organization, as trustee of the pooledtrust for the benefit of the Medicaid recipi-ents, would supplement the Medicaid needs

of the beneficiaries of the pooled trust order to sustain the quality of their lives. Aassets remaining in the pooled trust beyothe lives of the beneficiaries would retained by the nonprofit organization to used for its purposes and mission in serv

similarly situated vulnerable elder citizenspersons with disabilities.

It is important to note that the dpooled trust is available for persons over tage of 65.

(5) Non-pay back SNTs.9 Non-pay baSNTs under these statutory provisions allparents and grandparents to transfer thassets to a trust without penalty if establishsolely for the benefit of the transferors ch

with disability. Neither the parent, grandpent transferor, nor the child beneficiary disqualified if certain conditions are met. Tconditions10 require that the child beneficibe blind or disabled as defined under fedelaw.11 For those states eligible under differcriteria, the child must be blind or permnently and totally disabled, without referento any additional definition.12 There is statutory requirement that the trust pay baMedicaid after the death of the trust benefiary if all qualifications are met.

(6)Management and Distribution of SNInsurance and other security products shoube creatively merged to provide the ca

needed by the trustee to supplement tneeds of the trust beneficiary while at tsame time addressing the declining balannature of the trust and building as mugrowth as possible under the circumstance

(7) Benefit to Clients. The benefit to client being served by the development aadministration of the SNT is that it maMedicaid immediately available to the eldly or disabled beneficiary, while at the satime stretching the assets in the trust in sua way as to provide additional years increased quality of life through the truste

purchase of supplemental quality services the trust beneficiary. Additionally, the SNTthe vehicle often incorporated into persoinjury awards or settlements in order stretch funds to cover the life of the disabplaintiff.13

Standard Discretionary Trust LanguaVersus Support Trust Language(1.) Discretionary Trust Language

A discretionary trust is a trust wherein

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trustee is given the discretion to determinewhether and to what extent to pay or applytrust income or principal to or for the bene-fit of a beneficiary. [N.C. Gen. Stat. 36C-5-504]. Under a true discretionary trust, thetrustee may withhold the trust income andprincipal altogether from the beneficiary andthe beneficiary, as well as the creditors andassignees of the beneficiary, cannot compelthe trustee to pay over any part of the trustfunds. A trust wherein the trustee has discre-tion only as to the time or method of makingpayments to or for the benefit of the benefi-ciary is not a true discretionary trust.14

(Reference to NCUTC Chp. 36C by author)(2.) Support Trust Language

A trust that has mandatory provisions forthe trustee to provide for the health, welfare,

maintenance, food, clothing, shelter and edu-cation of the beneficiary that may not beignored by the trustee in an exercise of discre-tion.

Supplemental Security Income (SSI)Supplemental Security Income and

Medicaid have merged for determining eligi-bility for benefits.

Special Assistance

Medicaid

Other Means Tested Federal or StatePrograms or Services

SNTs WHEN NEEDEDAND WHEN NOT

When NeededHow is the SNT Attorney Engaged?(1) Through the Personal Injury Lawyer(2) Through the Plaintiff, or Plaintiff

GAL or Guardian.

(a) Guardian of the Person.Actually,the guardian of the person carriesthe power for hiring an attorney forthe ward, not the guardian of theestate.

The guardian of the person may give any consent or approval thatmay be necessary to enable the wardto receive medical, legal, psycholog-ical, or other professional care,counsel, treatment, or service.15

(b) Guardian of the Estate.However, for the purpose of assur-ing that any settlement is acceptable

within the jurisdiction of 35Aguardians, the guardian of the estateshould be involved in all aspects ofthe settlement process, includingthe timing of the SNT setup andthe distributions into the SNTrather than into the guardianshipestate.

(14) To employ persons, includingattorneys, auditors, investmentadvisors, appraisers, or agents toadvise or assist him in the performance of his duties as guardian16

(3) Through the Defendant(4) Through Insurance Defense.

Disabled(1) Defined by Social Security Act(SSA). If a beneficiary has been deter-mined to be disabled under the SSA, thenthe beneficiary is considered disabled forMedicaid qualification and eligibility.17

(2) Per Se Disabled. The federal govern-ment has also identified in its rules thosedisabilities and medical impairments thatare considered per se disabling.18

(3) Defined by OBRA 93. The enablingfederal legislation that created specialneeds trusts acknowledges other govern-mental designations of disability.19

The Need for Supplemental SupportGenerally, there are more funds available

than would ordinarily be spent down withpurchases for the benefit of the plaintiff/vic-tim, but insufficient funds to meet the totallife plan needs of the plaintiff/victim.See fur-ther analysis below.

Standard Shelter Protections(1) Circumvent Probate(2) Spendthrift Protection(3) Undue Influence

When NotNo Disability to Qualify for Benefits(1) Special Assistance, but not skilled levelof care(2) SSD denial of disability claim(3) TBI person regaining ability and cog-nitive function

No Need for Standard Trust Shelter

Too Little Money Funding SNT(Net Proceeds Going into the SNT)(1) Is there a number under which the cre-ation of the SNT is not cost efficient orbeneficial?(2) Under $10, 20, 30, 50 or 80,000 ?(3) Is it just the number, or do other ele-ments and qualifiers come intoplay?

Too Much Money Funding SNT (NetProceeds Going into the SNT)(1) Is there a number over which thecreation of the SNT of not real value?(2) Over $10, 20 30,000,000 ?(3) Is it just the number, or do other

elements and qualifiers come into play?

Primary Components ofSpecial Needs Trusts Related toStructured Settlements andPersonal Injury Litigation

Grantor FundedStatutory LimitationsDepending upon the kind of SNT being

developed, the federal law limits who maycreate the SNT if the assets are the assets of

the beneficiary and therefore a grantor trust:a. (d)(4)(A). A (d)(4)(A) trust may onlybe created by a parent, grandparent, legalguardian or a court. Note that the individ-ual may not create the trust.b. (d)(4)(C). A (d)(4)(C) trust may be cre-ated by a parent, grandparent, legalguardian, the individual or a court. Notethat the individual may create the trust.However, the individual must be over theage of 65.

Grantor Trusts Require pay back or

Retention

also consider:IrrevocabilitySole BenefitSupplemental StructureControlled DistributionsAmendmentTermination and Governmental

Pay-Back

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Optional Componentsof the Special Needs Trust

Corporate TrusteeCorporations, Banks and Trust

Companies whose charters specificallyempower the entities to engage in trust serv-

ices and the entities have all necessary licens-es and state authorizations.

Nonprofit Trustee(1) Not for profit corporations, banks and

trust companies whose charters specificallyempowers the entities to engage in trust serv-ices, and the entities have all necessary licens-es and state authorizations.

(2) Additional requirement that the non-profit serve clients with disabilities similar tothat of the beneficiary named in the pooled

trust, or have a formal relationship with suchan entity.

Family Member Trustee(1) Not favored often creates problems

with Sole Benefit mandate and the wayin which the family member makes distri-butions; often little or no over-sight.(2) More difficult when beneficiary in thehome of the family member trustee.(3) May be required by the Clerk ofSuperior Court to file an inventory, doannual accountings and post a bond.

Trust Advisory Committee(1) Always a good component of the SNT(2) Naming members of the TAC

a. Parent(s)b. Siblingsc. Other Family membersd. Medical, Health care orTherapeutic Professionalse. Financial, accounting, securitiesor insurance professionalsf. Legal or Advocacy Professionals

3. Duties and Responsibilities of the TAC

Trust ProtectorTrust Protector Defined

A trust protector is a person or entity witha special power over the trust or over theTrustee. Usually holding no day to day fidu-ciary responsibilities, the trust protector maybe an individual an entity or even a commit-tee of several people serving as a kind ofboard of directors overseeing fundamentalaspects of the management of the Trust.

Varying Powers At the recent national conference of the

Academy of Special Needs Planners, nation-ally recognized expert, Ira Wiesner wrote:

Trust Protectors are given a wide variety ofpowers, including but not limited to thepower to remove, add and replace trustees;to veto or direct trust distributions; to addor delete beneficiaries; to change the situsand governing law of the trust; to veto ordirect investment decisions; to consent tothe exercise of a power of appointment; todetermine whether an event of duress hasoccurred; to amend the trust as to admin-istrative provisions as well as to amend thetrust for changes in the law and to bringthe trust into compliance with changinggovernment rules and practice; to approveTrustee accounts; and to terminate the

trust. In addition, the Protector may hold(1) the right to remove the Trustee; (2) toappoint successor Trustees; (3) to transi-tion oversight between a Trustee and itssuccessor; (4) the right and responsibilityto bring matters to the attention of a

judge; and (5) the right to control invest-ments.20

Applying the NCUTCIf the trust protector has powers of direc-

tion, and if the state in which the SNT is cre-ated and is the situs of law, then the provi-

sions of the UTC must be taken into consid-eration. Consider the following sections ofNorth Carolinas recent enactment of theUTC:

(b) If the terms of a trust confer upon aperson other than the settlor of a revoca-ble trust power to direct certain actions ofthe trustee, the trustee must act in accor-dance with an exercise of the power unlessthe attempted exercise is manifestly con-trary to the terms of the trust, or thetrustee knows the attempted exercise

would constitute a serious breach of a

fiduciary duty that the person holding thepower owes to the beneficiaries of thetrust.

(c) The terms of a trust may confer upona trustee or other person a power to directthe modification or termination of thetrust.

(d) A person, other than a beneficiary,who holds a power to direct is presump-tively a fiduciary who, as such, is required

to act in good faith with regard to the pposes of the trust and the interests of tbeneficiaries. The holder of a power direct is liable for any loss that resufrom breach of a fiduciary duty.21

When to Use or NotConventional texts on trusts do not ind

the term trust protector for reference analysis. However, the consensus of opiniamong the special needs planning bar is ththe greater sophistication in the developmof special needs trusts makes not havingtrust protector the exception rather than rule.22While there are those that do not maany reference to the inclusion of a trust ptector in the special needs trust23, many oers provide ample discourse on the use aimport of the trust protector.24

BondWhile the imposition of the expense obond on special needs trusts has often drivthe decision to require a bond, the protectishould be considered necessary in view of tgreater complexity of SNT administratand distribution. If left to the plaintiff benficiary or the family member trustee, expense is always the primary factor. course, when the initial amount that funthe SNT is modest ($50,000 to $150,00the expense seems unjustified. The larger tcorpus of the trust, the greater the need

bonding, and also the greater expense.

Accountings Filed with Clerkof Superior Court

Clerks PreferenceClerks of superior court across No

Carolina are becoming increasingly cocerned with the way SNTs are set up afunded when there is also a guardianshestate in existence ready to receive and control the proceeds of personal injury set

ments. The powers granted guardians of estate make specific reference to exemtrusts:

(23)To create a trust for the benefit of tward pursuant to 42 United States Co1396p(d)(4), provided that all amouremaining in the trust upon the deaththe ward, other than those amounts whmust be paid to a state government athose amounts retained by a nonproassociation as set forth in 42 United Sta

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Code 1396p(d)(4)(C), are to be paid tothe estate of the ward.25

Options to Considera. Do Nothing. Proceed on the assump-tion that the superior court order for set-tlement and the creation and funding ofthe SNT trumps the jurisdiction of theClerk over guardianships.b. Direct Funds to the GuardianshipEstate. Have the Superior Courts orderdirect all funds to the guardianship estate,relying on the guardian of the estate tocreate and fund the SNT under the powergranted under 35A-1251 (23). This isa quick and easy way out, but the person-al injury attorney, the plaintiff/ward andthe family lose significant control and are

subjected to probable periods of ineligibil-ity for Medicaid or other means-testedbenefits because the receipt of funds bythe guardian of the estate has no way toshelter the estate assets from being count-able.

Trustees Waiver of LiabilityMany corporate trustees with ancillary

non-profit entities take a position that ahybrid like the SNT requires some form of

waiver of liability. Personal injury lawyers andSNT specialists representing plaintiff/benefi-

ciaries should ask hard questions about theneed for such protection. It raises the assump-tion that the corporate trustees know so littleof the special needs area that they have greaterexpectations of error and therefore greater-risk.

The Special Needs of thePlaintiff/Beneficiary

Defined Disabled or QualifyingDisability

Rehabilitation of Disability orRestoration of CapacityCycles of DisabilityLife Plan Components

ConclusionThis outline provided a summary of

points to weigh when considering whether ornot an SNT is needed in a personal injurycase. It first set out the basics of standard trustprotection, and then set out the history and

unique characteristics of SNTs. The outlinemoved through when SNTs are needed and

when they are not, what the primary compo-nents of the SNT are and consideration ofoptional provisions that may enhance theoperation of the SNT. The outline ends witha brief review of the special needs of SNTplaintiff/beneficiaries.

End Notes1. Copyright 2007 All Rights Reserved

by A. Frank Johns, J.D., Florida StateUniversity College of Law; CELA, certified asan elder law attorney by the National ElderLaw Foundation; partner in the firm ofBooth Harrington & Johns L.L.P., Charlotteand Greensboro, North Carolina, concentrat-ing in Elder Law; Fellow and Past President

of, and current chair of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys; pastCharter Chair, Elder Law Section of theNorth Carolina Bar Association; fellow

American College of Trust and EstatesCounsel (ACTEC); Charter Advisory Board

Academy of Special Needs Planners; associatemember, Society of Settlement Planners; fac-ulty, Stetson College of Law Ninth AnnualNational Special Needs Trusts Conference;Charter Board member NationalGuardianship Association, associate visiting

professor dual program Masters inGerontology/MBA, University of NorthCarolina Greensboro.

2. SeeRestatement Third, Trusts 2, at 17(Cumm. Supp. 2006); Charles E. Rounds,

Jr., Loring A Trustees Handbook, 1 (2007 ed.).3. SeeGeorge G. Bogert, Handbook of the

Law of Trusts, 1 (1963); see also Blacks LawDictionary, 1047 (abg 6th ed. 1991).

4. See Restatement Third, Trusts, supranote 2, 3, at 36; Loring A TrusteesHandbook, supra note 2, at 47, NorthCarolina Uniform Trust Code 36C-1-103

(22) (Hereafter NCUTC).5. See Restatement Third, Trusts, supranote 2, 58, at 355; NCUTC 36C-5-502,and accompanying general comment.

6. Id., 58, comment d, at 361.7. See42 U.S.C. 1396p(d)(4).8. SeeN. C. Gen. Stat. 36D-1 et seq.

North Carolina Community Trust forPersons with Severe Chronic Disabilities(2007).

9. See42 U.S.C. 1396p(c)(2)(B)(iii).10. See42 U.S.C. 1396p(c)(2)(A)(ii)(II).11. See 1382c of the same title.

12. SeeClifton B. Kruse, Jr., Third-Partyand Self-Created Trusts Planning for theElderly and Disabled Client (3rd ed. ABA2002).

13. A. Frank Johns, The Civil LitigatorsExpanded Advocacy: Preserving Disabled ClientDamage Awards with the Supplemental NeedsTrust, Trial Magazine (November, 1998).

14. Lineback by Hutchins v. Stout, 79 N.C.App. 292; 339 S.E.2d 103; 1986 N.C. App.LEXIS 1976; Fortune v. First Union, 323N.C. 146; 371 S.E.2d 483; 1988 N.C.LEXIS 518. By definition, under a discre-tionary trust the trustee has discretion

whether, and to what extent, to apply trustincome or principal to, or for the benefit of,the beneficiaries. Id., 371 S.E.2d at 489 (dis-sent); NCUTC 36A-5-504, 8-814.

15. SeeN.C. Gen. Stat. 35A-1241 (a)(3)(2007).

16. SeeN.C. Gen. Stat. 35A-1251 (14)(2007).

17. 42 U.S.C. 1382(c)(a)(3).18. See Dana Shilling, Legal Issues of

Dependent and Incapacitated People, 12.5, n.20, citing20 C.F.R. pt. 404, subpt. P, appx. 1.(2007).

19. See 42 U.S.C. 1614 (a)(3) (SSI);OBRA 93, HCFA Transmittal 64, 3259.7(A) (1994).

20. SeeIra S. Wiesner, The Special NeedsTrust: The Trustee, The Beneficiary and Whoare all Those Other Folks? 1 Academy ofSpecial Needs Planners National Conference,Section 2 (2007).

21. N. C. Gen. Stat. 36C-8-808 and809 (2007).

22. SeeMichael Gilfix, New Developmentsin the Evolution of an SNT Practice, 1

Academy of Special Needs Planners NationalConference, Section 5 (2007).

23. SeeStephen Elias, Special Needs Trusts:Protect Your Childs Financial Future, Chp. 8(2005).

24. SeeMichael T. Palermo, AARP CrashCourse in Estate Planning: The Essential Guideto Wills, Trusts and Your Personal Legacy, Chp.6 Using a Trust Protector, 125-136 (2005); seeEstate Street Partners LLC, What is a TrustProtector? Powers of a Trust ProtectorDifferences from a Trustee,http://ultratrust.com/trust-protector.html(author last accessed the Web site on May 1,2007).

25. SeeN. C. Gen. Stat. 35A-1251 (23)(2007).

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Special Needs Trusts Power Tools for PlannersBY VINCENTJ. RUSSO

When I met Mrs. Jones at her house, sheseemed anxious. She has been worrying abouthow her daughter, Amy, for some time. Whowill take care of Amy if something happens toher? In the meantime, she wants the best for herdaughter and is very confused about what shecan afford to do and what government benefitsare available for Amy. I was glad to be there,especially with my tool box in hand!

As caring planners, we want to be pre-pared and to take advantage of all the avail-

able tools that can improve the quality of lifeof a client with special needs. Our objectivesoften include providing financial stability,maximizing government benefits, ensuringadvance directives are in place and coordinat-ing available resources in the community.This article will focus on one of the mostpowerful tools at our disposal - Special NeedsTrusts.

Trusts can be a wonderful vehicle for assetmanagement, creditor protection and maxi-mizing government benefits for the lifetimeof a loved one with special needs. Special

needs most often last a lifetime, and mayrequire specialized care beyond that availablefrom a family care giver. Such care mayrequire the services of physicians, hospitals,and even long-term care in a nursing home.In some cases, structured living, such as in agroup home, may be the most appropriatesetting.

We need to be clear about the differenttypes of trusts that are in our tool box, just ascarpenters can select among various saws tocut wood. We also need to be mindful of

where we live. State laws can affect whatworks and does not work. The carpenter willuse different materials in a bathroom versus abedroom.

Third-PartySupplemental Needs Trusts

Mrs. Jones can set up this trust under a Willand name Amys sister as the Trustee.

Alternatively, Mrs. Jones can set up aSupplemental Needs Trust immediately that canbe funded now or in the future, by Mrs. Jones or

other family members. The funds in the Trustcan be used to supplement Amys governmentbenefits to pay for her living expenses and toenhance her quality of life. Amy can continue toreceive monthly payments from SSI to help withliving expenses and Medicaid to pay for hermedical needs.

Care givers are often troubled over how toleave money for a person with special needs

without interfering with eligibility forMedicaid or Supplemental Security Income

(SSI). An outright gift or bequest to a personwith special needs will affect his or her ongo-ing eligibility for such programs, which arenecessary for the persons maintenance andhealth care needs. The solution is a Third-Party Supplemental Needs Trust (sometimesreferred to as a Third-Party Special NeedsTrust)

First-Party Special Needs Trusts Amy had received a $50,000 inheritance

from a well-intentioned uncle who unexpected-ly passed away. Mrs. Jones met with a specialneeds attorney to obtain guardianship so shecould manage the money for Amy. Mrs. Jonescan now set up Special Needs Trust for Amywith the $50,000 and she can be the Trustee.The funding of the Trust will prevent Amy fromlosing SSI and Medicaid. Like the Third-PartySupplemental Needs Trust, the funds in thisTrust can be used to supplement her governmentbenefits to pay for her living expenses and toenhance her quality of life. Upon Amys demise,any money remaining in the Trust must first beused to reimburse the State for the amount of

Medicaid provided to Amy during her lifetime.

In the event that the person with specialneeds has his or her own assets, planningmust be done to access government benefits.The person with special needs may haveassets from (i) a lawsuit based on negligenceor medical malpractice, (ii) an inheritance, or(iii) his or her own labors prior to becomingdisabled. In order to access government ben-efits, the individual can transfer his or herassets into a Special Needs Trust, sometimes

referred to a (d)(4)(A) Trust or a Pay BaTrust. Upon the individuals demise, the Sthas the right to be reimbursed for tMedicaid paid to the individual to the exteof the assets in the Trust at that time.

Why Establish aSupplemental Needs Trustor Special Needs Trust?

Mrs. Jones wants to make sure that Amy wbe eligible for Medicaid and SSI for life. Y

have the answer in your tool kit - the ThiParty Supplemental Needs Trust for Mrs. Joassets and a First-Party Special Needs Trust

Amys assets.

To preserve eligibility for MedicaMedicaid, a joint federal-state program, pvides medical assistance to those who are dabled and can demonstrate financial neChildren and adults can qualify for Mediconly if their monthly income and the valuetheir other assets fall below certain lim

which vary from state to state.

In determining eligibility for Medicaidstate may count only the income and assthat are legally available to the applicant.Supplemental or Special Needs Trust restrithe beneficiarys own direct access to assets in the trust to such an extent that tassets are not considered legally available the beneficiary. Thus, a Supplemental Special Needs trust can protect Medicaid gibility because assets in the trust uncountable.

Such trusts can be especially useful to suplement what Medicaid covers or to fill t

gaps not covered by Medicaid. AlthouMedicaid pays for a number of medical coincluding hospital bills, physician servicand long-term care, it will not subsidize iteand services considered nonessential. Thmay include health-related expenses like eglasses, dental care, rehabilitation servicand home health aide services, as well as psonal expenses such as transportation, coputer equipment, and vacations.

See POWER TOOLSpage


8/208 NOVEMBER 2008

To preserve eligibility for SupplementalSecurity Income (SSI). SupplementalSecurity Income is a monthly income benefitthat children and adults with special needs

who have limited income and resources can

receive. These cash benefits can be used forbasic needs such as housing and food. SSIbenefits are needs-based, so having too manyassets or too high an income can affect eligi-bility or how much one is entitled to receivemonthly. Naming a Third-PartySupplemental Needs Trust, instead of a child,as the beneficiary of your assets allows thoseassets to be devoted to the care of a loved one.

To provide financial management. TheTrust approach can be a helpful tool to ensurethat a financial plan is implemented for all of

the assets that are available to the person withspecial needs. Sound financial managementcan make the difference by extending theassets and income over the lifetime of the per-son. Life Insurance is another tool that can

also be helpful in creating a fund of assets inthe event a parent predeceases a child withspecial needs.

Mrs. Jones said goodbye to me at the frontdoor of her home. She smiled and thanked me.For the first time in a long time, she saw somedaylight in her daughters future, and hers aswell. I felt the rays of the sun upon me and it felt

good.

VINCENT J RUSSO, J.D., LL.M.,CELA IS THE MANAGING

SHAREHOLDER OF THE LAW FIRMOF VINCENT J. RUSSO &

ASSOCIATES, P.C. OF WESTBURY,LIDO BEACH, WOODBURY ANDISLANDIA, NEW YORK. VINCENT IS A

CO-FOUNDER OF THE ACADEMY OFSPECIAL NEEDS PLANNERS(WWW.SPECIALENEEDSPLANNERS.COM) AND CO-FOUNDER OF THETHERESA ALESSANDRA RUSSOFOUNDATION WHICH ENHANCESTHE LIVES OF CHILDREN WITH SPE-CIAL NEEDS (WWW.THERESAFOUN-DATION.ORG). HE IS A NATIONAL

ADVOCATE FOR THE RIGHTS OFPEOPLE WITH SPECIAL NEEDS ANDOF SENIORS.

Power Tools from page 6

The Use of Qualified Settlements Funds,Qualified Assignments and Special NeedsTrusts in Physical Injury SettlementsBYJOHNJ. CAMPBELL, CELA, MSCC

Copyright 2008 National Academy of Elder

Law Attorneys. Reprinted by permission fromNAELA.

IntroductionInternal Revenue Code (I.R.C.)

104(a)(2) provides that the proceeds (exceptfor punitive damages) from the settlement ofa claim involving physical injury or sicknessare not included in the taxable income of theplaintiff who receives these proceeds.1

However, if the settlement of the claim ispaid in the form of a lump sum2, anyincome

earned by the recipient on the lump sum set-tlement is taxable.3 In addition to income taxconcerns, there is an inherent risk that a lumpsum settlement designed to provide for theplaintiffs lifetime medical and support needsmay be dissipated prematurely. Unwiseinvestments, poor money management oreven the volatility of the economy can resultin the exhaustion of the plaintiffs settlementfunds, leaving the plaintiff with no means toprovide for his or her care and support.4

Periodic Payment Act of 1982In 1982, Congress passed the Periodic

Payment Act (PPA)5, amending the InternalRevenue Code to grant statutory certainty tothe tax-favored use of periodic payments inphysical injury (PI) settlements.6 The PPAamended I.R.C. 104(a)(2) to add paren-thetical language which indicated thatamounts received would be excluded fromgross income whether received as lump sumsor as periodic payments.7 Most notably the

Act created I.R.C. 130, which provides ameans whereby a defendant can fulfill a set-tlement obligation to make periodic pay-ments of settlement proceeds through a qual-ified assignment of his or her liability to athird-party assignee.8 The defendant pays theassignee a lump sum, and the assignee pur-chases an annuity contract that will fund pay-ment of the defendants obligation to theplaintiff in the form of periodic payments.9

Under I.R.C. 130, the amount received bythe assignee is not included in that assigneesgross income unless that amount exceeds thecost of the annuity.10

As a result, it is now common practice to

structure all or part of a PI settlement with a

qualified annuity and a qualified assignmentunder I.R.C. 130. The advantages to thesettling plaintiff are clear: proceeds receivedas annuity payments are not subject toincome tax and the plaintiff has the securityof a future stream of income to provide nec-essary funds for the plaintiffs lifetime.

I.R.C. 130 requires that a qualifiedassignment be made by a party to the suit oragreement having liability to the plaintiff.11

In addition, if the plaintiff has actual or con-structive receipt of the settlement funds, theability to take advantage of the tax savings

under I.R.C. 130 is lost. Therefore, struc-tured settlements under I.R.C. 130 havetraditionally been funded directly by thedefendant or the defendants insurance carri-er.

Increasingly, settling plaintiffs and theirattorneys have expressed serious dissatisfac-tion with the traditional arrangement in

which the defendant has complete controlover the purchase of the annuity that willfund the qualified assignment. Plaintiffs areforced to agree to a specified income stream
http://www.specialeneedsplanners.com/http://www.specialeneedsplanners.com/http://www.specialeneedsplanners.com/http://www.theresafoun-dation.org/http://www.theresafoun-dation.org/http://www.theresafoun-dation.org/http://www.theresafoun-dation.org/http://www.specialeneedsplanners.com/


9/20ELDER LAW

rather than the lump sum amount with which the annuity will be funded.Defendants insurance carriers often use pre-ferred brokers who may be under an agree-ment to split commissions with the carrier.Fees, commissions and the actual commutedvalue of the annuity are seldom fully dis-closed. Many times, the future payments the

plaintiff will receive are less than what theplaintiff might have been able to obtain fromanother annuity issuer for the same premiumpayment. Plaintiffs may thus be deprived ofthe ability to enjoy the fullest benefit of thesettlement and may even feel that they havebeen duped into settling for less than theagreed-upon amount. Further, there is at leasta perceived conflict of interest involved wherethe plaintiff s financial settlement planning isin the hands of the opposing party.12

Finally, in the context of PI settlementsinvolving seriously or catastrophically injuredplaintiffs, a primary goal is to provide fundsfor the support and care of the plaintiff whilepreserving eligibility for all available andappropriate governmental benefit programs,including Supplemental Security Income(SSI) and Medicaid. Typically, Medicaid eli-gibility is the first consideration because theneed to ensure adequate medical care is para-mount. However, SSI is also an importantbenefit program that can provide much need-ed additional income, and sometimes more,to those who qualify.

For many years, Special Needs Trusts havebeen commonly used to preserve Medicaideligibility for a settling plaintiff and have alsobeen employed to preserve SSI eligibilitysince January 2000. Settling plaintiffs mayrequire that the distribution of settlementproceeds be delayed to allow time to com-plete planning for SSI or Medicaid eligibility.

At the same time, both the plaintiffs anddefendants may wish to avoid delay in theexecution and completion of the settlementitself. Plaintiffs in this situation will need avehicle by which their settlements can be

finalized without the proceeds being treatedas available resources during the time neces-sary to create and fund an exempt SpecialNeeds Trust.

As a result, many plaintiffs who are inter-ested in receiving their settlements in theform of a structure are insisting on a differentprocedure that will allow them more control.Qualified Settlement Funds under I.R.C. 468B and the corresponding IRS regulationsprovide an alternative to the traditional,defendant-directed structured settlement

arrangement.

Qualified Settlement Fundsunder I.R.C. 468BIn 1986, Congress enacted the Tax

Reform Act, which added I.R.C. 468B toallow a defendant to extinguish his or her lia-

bility by paying settlement proceeds into adesignated settlement fund (DSF).14Initially, DSFs were used in the settlement oflarge class action PI15 suits in which the indi-vidual shares of the settlement to the variousclass members had not yet been determined.However, I.R.C. 468B contains no lan-guage that restricts the use of DSFs to the set-tlement of suits or claims involving multipleplaintiffs.

A DSF is defined as any fund:(A) which is established pursuant to acourt order and which extinguishes com-pletely the tort liability [of the defendantor the defendants insurance carrier to theplaintiff],(B) with respect to which no amountsmay be transferred other than in the formof qualified payments,(C) which is administered by persons amajority of whom are independent of the[defendant or the defendants insurancecarrier],(D) which is established for the principalpurpose of resolving and satisfying present

and future claims against the [defendant](or any related person or formerly relatedperson) arising out of personal injury,death, or property damage,(E) under the terms of which the [defen-dant] (or any related person) may nothold any beneficial interest in the incomeor corpus of the fund, and(F) with respect to which an election ismade by the defendant.16

In 1992, the Secretary of the Treasuryintroduced regulations governing the treat-

ment of DSFs.17 Under these regulations, theSecretary provided for the creation and use ofqualified settlement funds (QSFs).18

Although QSFs are not specifically men-tioned in I.R.C. 468B, they are clearlyintended to meet the definition of a DSF.

Under 26 C.F.R. 1.468B-1, a fund,account or trust is a QSF if:

(1) It is established pursuant to an orderof, or is approved by, the United States,any state (including the District ofColumbia), territory, possession, or politi-

cal subdivision thereof, or any agency instrumentality (including a court of laof any of the foregoing and is subject the continuing jurisdiction of that govemental authority;(2) It is established to resolve or satisfy oor more contested or uncontested claithat have resulted or may result from

event (or related series of events) that hoccurred and that has given rise to at leone claim asserting liability-

(i) Under the ComprehensEnvironmental ResponCompensation and Liability Act1980 (hereinafter referred to CERCLA), as amended, 42 U.S9601 et seq.; or(ii) Arising out of a tort, breachcontract, or violation of law; or(iii) Designated by tCommissioner in a revenue rulor revenue procedure; and

(3) The fund, account, or trust is a trunder applicable state law, or its assets otherwise segregated from other assetsthe transferor (and related persons).19

Although the regulations define a QSFbroader terms than the statutes definitiona DSF, the regulations have been held to valid.20

The proceeds of a PI settlement used fund a QSF continue to receive favorable

treatment under I.R.C. 104(a)(2), bincome earned on the proceeds are taxablethe QSF for so long as the QSF continueshold the funds.21 Under 26 C.F.R. 1.4682, QSFs are taxed at the maximum rate appcable to trusts, but are otherwise treatedcorporations under the I.R.C.22

Like the governing statute, the regulatiodo not contain any language restricting tuse of QSFs to settlement of suits or claiinvolving multiple plaintiffs. Moreover, regulations state specifically that a QSF cbe used to settle one or more claims. Th

can be little serious doubt that the regulatiopermit QSFs to be used in the settlementsingle-plaintiff PI claims.

Qualified Assignments and QualifiedFunding Assets under I.R.C. 130

As noted above, the PPA amended I.R 104(a)(2), clarifying that the income froan annuity which makes periodic paymeas part of a settlement of a PI claim for phical injury or sickness is not included in

See PHYSICAL INJURYpage


10/2010 NOVEMBER 2008

gross income of the recipient.25 In addition,under I.R.C. 130, amounts received foragreeing to a qualified assignment are notcounted as income.

The assignment of the obligation to make

periodic payments constitutes a qualifiedassignment if the following requirements aremet:

(1) if the assignee assumes such liabilityfrom a person who is a party to the suit oragreement..., and(2) if-

(A) such periodic payments arefixed and determinable as toamount and time of payment,(B) such periodic payments cannotbe accelerated, deferred, increased,or decreased by the recipient of

such payments,(C) the assignees obligation onaccount of the personal injuries orsickness is no greater than the obli-gation of the person who assignedthe liability, and(D) the periodic payments must beexcludable from the gross income ofthe recipient under I.R.C. 104(a)(1) & (2).26

Further, the periodic payments must befunded with a commercial annuity issued by

a life insurance company, and the annuitypayments cannot be more than the periodicpayments under the qualified assignment.Finally, the annuity must be purchased withsettlement proceeds within 60 days before orafter the qualified assignment and must bedesignated specifically to payment of thequalified assignment.27

Once there is a qualified assignment of anannuity funding a structured PI settlement,the plaintiff cannot change the terms of theannuity, including the payment amounts or

the payee. The annuity must be purchaseddirectly by a party to the PI suit with liabilityto the plaintiff to avoid constructive receiptof the settlement funds by the plaintiff.28 Theplaintiff will also be treated as having con-structive receipt of the settlement funds if heor she has the option of receiving a lump sumin lieu of an annuity, or the ability to directthe use of the settlement proceeds to pur-chase an annuity.29

As noted above, qualified assignmentsunder I.R.C. 130 are available in the settle-ment of both PI and workers compensation

claims, but only with regard to settlementproceeds that are exempt from taxation underI.R.C. 104(a)(1) & (2).

QSFs and Qualified Assignments in

Single-Plaintiff PI SettlementsThe question still remains whether a QSFholding funds from a PI settlement involvinga single plaintiff can accomplish a qualifiedassignment under I.R.C. 130. Many defen-dants, liability carriers and structured settle-ment professionals have argued for years thatit cannot, based upon the common law doc-trine of economic benefit, as defined in thelandmark case ofSproull v. Commissioner.30

In a nutshell, the Sproull case held thatwhen a fund is placed irrevocably with a thirdparty for the sole benefit of the taxpayer and

the taxpayer has a vested, unconditional rightto the fund, the taxpayer has received an eco-nomic benefit.31 This, the argument goes, isexactly what happens when a QSF is funded

with the proceeds of a single-plaintiff PI set-tlement, since the amount to which theplaintiffs vested interest applies is immedi-ately determinable.

Under Sproull, if the taxpayer has receivedan economic benefit, the fund is immediate-ly includable in the taxpayers gross income.32

Therefore, if the plaintiff has an economicbenefit from PI settlement funds, the princi-

pal settlement amount is excludable underI.R.C. 104(a)(2), but anyincomeearned onthe funds is includable in the plaintiffs grossincome. This would arguably prevent theQSF from being able to accomplish a validI.R.C. 130 qualified assignment, since all ofthe periodic payments from the qualifiedfunding asset, including the income portion,must be excludable from the plaintiffs grossincome under I.R.C. 104(a)(1) or (2).33

Proponents of this argument often citeIRS Private Letter Ruling (P.L.R.)

200138006,

34

as authority for the applica-tion of the economic benefit doctrine to sin-gle-plaintiff QSFs. While that particular PLRdid involve an analysis of a QSF under theeconomic benefit doctrine, the QSF dis-cussed in P.L.R. 200138006 was not funded

with the proceeds of a PI settlement.35

Therefore, the case discussed in P.L.R.200138006 did not involve the issue of

whether a QSF holding funds from a single-plaintiff PI settlement could accomplish avalid I.R.C. 130 qualified assignment.

The real issue is whether the economic

benefit doctrine applies to bar a single-plain-tiff QSF, funded with PI settlement proceeds,from making a qualified assignment underI.R.C. 130. To rely solely upon P.L.R.200138006 as authority for the application

of the economic benefit doctrine in suchcases is to ignore the content of I.R.C. 130,the Congressional intent and legislative histo-ry behind I.R.C. 130, and IRS Rev. Proc.93-34.

When I.R.C. 130 was originally enactedin 1982, the statute provided that the partymaking a qualified assignment could notassign payment rights greater than those of ageneral creditor.36 The legislative historybehind the original 1982 statute statesCongress intent at the time that payments ofdamages from PI claims be excludable from

income only if the recipient taxpayer is not inconstructive receipt of or does not have thecurrent economic benefit of the sum requiredto produce the periodic payments.37

However, Congress amended I.R.C. 130(c)(2)(C) in 198838 by removing thegreater than a general creditor language, sothat [r]ecipients of periodic payments understructured settlement arrangements shouldnot have their rights as creditors limited byprovisions of the tax law.39 When Congressrepealed I.R.C. 130(c)(2)(C), it also addedthe following language to I.R.C. 130(c):

The determination for purposes of thischapter of when the recipient is treated ashaving received any payment with respectto which there has been a qualified assign-ment shall be made without regard to anyprovision of such assignment which grantsthe recipient rights as a creditor greaterthan those of a general creditor.40

The legislative history behind the 1988revisions to I.R.C. 130(c) states that noamount is currently includable in the recipi-

ents income solely because the recipient isprovided creditors rights that are greater thanthe rights of a general creditor.41

A settling plaintiff with vested rights to asettlement fund has rights greater than thoseof a general creditor and would normally beconsidered to have an economic benefitunder Sproull.42 Thus, the effect of the 1988amendments to I.R.C. 130(c) was to makethe economic benefit doctrine inapplicableto qualified assignments in PI settlements.

Whenever the parties to a PI case reach anagreement to settle for a specified amount,

Physical Injuryfrom page 9


11/20ELDER LAW

the plaintiff obtains a vested right to the set-tlement proceeds. When the defendant or thedefendants insurance carrier provides thefunds through a qualified assignment for thepurchase of a qualified annuity, the funds areirrevocably placed with a third party for thesole benefit of the plaintiff. In spite of this,qualified assignments are routinely and suc-

cessfully employed in structured PI settle-ments for individual plaintiffs.43

It seems clear that the economic benefitdoctrine is no longer applicable to bar a qual-ified assignment under I.R.C. 130 after the1988 revisions to that section. Indeed, theIRS has interpreted the 1988 revisions asallowing qualified assignments of periodicpayment liabilities without regard to whethera plaintiff has the current economic benefit ofthe settlement proceeds or the qualified fund-ing assets purchased with those settlementproceeds.44 Assuming the requirements ofI.R.C. 130 are met, the plaintiffs econom-ic benefit does not bar a successful qualifiedassignment.

Therefore, a party to the suit or agreementwith liability to the plaintiff can accomplish avalid qualified assignment, regardless of

whether the settlement proceeds are placedirrevocably with a third party in a separatefund, account or trust for the sole benefit ofthe plaintiff and the plaintiff has an uncondi-tional, vested right in the fund, account ortrust. So long as the plaintiff is not in con-

structive receipt of the settlement proceeds, aqualified assignment is still possible.It is very important to note that I.R.C.

130 requires only that the assignment bemade by a party to the suit or agreementhaving liability to the plaintiff.45 That sectiondoes notrequire that the assignment be madeby the original defendant or its insurance car-rier. Thus, any party with liability to theplaintiff can make a valid qualified assign-ment.

In 1993, the IRS issued RevenueProcedure (Rev. Proc.) 93-34.46 This proce-

dure provides rules under which a designat-ed settlement fund described in section468B(d)(2) of the Internal Revenue Code ora qualified settlement fund described in sec-tion 1.468B-1 of the Income Tax Regulations

will be considered a party to the suit or agree-ment for purposes of section 130.47

Specifically, Rev. Proc. 93-34 providesthat:

... a qualified settlement fund will be treat-ed as a party to the suit or agreement

within the meaning of section 130(c)(1)of the Code if each of the followingrequirements is satisfied:

(1) the claimant agrees in writing to theassignees assumption of the... qualifiedsettlement funds obligation to make peri-odic payments to the claimant;

(2) the assignment is made with respect toa claim on account of personal injury orsickness (in a case involving physicalinjury or physical sickness) that is...:

(b) a claim [under CERCLA ; or arisingout of a tort, breach of contract, or viola-tion of law; or designated by theCommissioner in a revenue ruling or rev-enue procedure];

(3) each qualified funding asset purchasedby the assignee in connection with theassignment by the designated or qualifiedsettlement fund relates to a liability to asingle claimant to make periodic pay-ments for damages;

(4) the assignee is not related to the trans-feror (or transferors) to the designated or

qualified settlement fund within themeaning of sections 267(b) or 707(b)(1);and

(5) the assignee is neither controlled by,nor controls, directly or indirectly, thedesignated or qualified settlement fund...48

Rev. Proc. 93-34 does not contain anyprovisions that would restrict its applicationto settlements involving multiple plaintiffs.On the contrary, it speaks in terms of quali-fied assignments relating to a claim andliability to a single claimant.49 This lan-guage, like the language of I.R.C. 468B,itself, is consistent with situations involvingeither a single plaintiff or multiple plaintiffs.

The logical conclusion is that the provi-sions of I.R.C. 130 and 468B, and Treas.Reg. 1.468B-1 through 1.468B-5, asinterpreted by the I.R.S., itself, permit QSFsin single-plaintiff PI settlements to makequalified assignments under I.R.C. 130, solong as the QSF is made a party to the suitor agreement in compliance with Rev. Proc.93-34.

Strategies for UsingQualified Settlement Funds

How Does a QSF Make a ValidQualified Assignment?It should not be difficult to comply w

all of the applicable requirements of I.R 130 and 468B, I.R.S. Regulation 1.468B-1 through 1.468B-5, and Rev. Pr93-34 when settling a PI claim. The partcould first petition the court with jurisdicti

over the claim to create a QSF trust aappoint an independent trustee, with court having continuing jurisdiction over QSF trust until it terminates. The plain

would not have any rights to revoke or moify the terms of the QSF trust, or to comany distributions from the QSF trust otthan to fund a qualified assignment.

The parties could then enter into a notion,50 in which the plaintiff, defendant, defendants insurance carrier and the Qtrustee would all agree that the defendanliabilities to the plaintiff be assigned to afully assumed by the QSF. As consideratithe defendant and/or the defendants insance carrier would agree to pay the QSF agreed upon lump sum, to be used onlyfund a qualified assignment.

The QSF could then be substituted the original defendant as a party to the cathe QSF could be funded by the defendantthe defendants insurance carrier; and defendant and/or its carrier could be grana full release by all parties. The QSF trustnow a party standing in the shoes of the or

inal defendant, could then enter into a fand final, court-approved settlement agrment with the plaintiff. The settlem

would extinguish all liabilities assumed frothe original defendant and require paymeof the settlement proceeds through a quafied assignment. The plaintiff would not hthe option of receiving any portion of the stlement in a lump sum and the obligationmake and fund the qualified assignme

would fall solely to the QSF.The QSF, as a party to the suit or agr

ment, should then be able to accomplish

I.R.C. 130 qualified assignment, giving plaintiff favorable income tax treatment ofincome earned on the qualified annuiSince the QSF would be funded with agreed lump sum, representing the commed value of the qualified annuity, the plain

would be assured of receiving the full valuethe settlement.

The plaintiff would also have the abilitychoose the structured settlement broker, request that the trustee purchase a qualif



12/20


annuity which would provide the most valu-able income stream, and to ensure that all feesand commissions are fully disclosed. At thesame time, the settlement would be protect-ed from premature depletion and the plaintiff

would be assured a secure, future stream ofincome for life to meet his or her needs forsupport and medical care. In short, the plain-tiff would be able to enjoy all of the advan-tages of a tax-free structured settlement with-out the negative aspects of the traditional,defendant-directed structured settlementarrangement.

QSFs and Special Needs TrustsUse of a QSF may be particularly useful in

situations in which the distribution of settle-ment proceeds needs to be delayed to allow

planning for the plaintiffs SSI or Medicaideligibility. The QSFs prohibition on distribu-tions other than to fund a qualified assign-ment and its restrictions on the plaintiffsauthority to compel distributions of principalor income prevent the assets in the QSF frombeing treated as available resources or incometo the plaintiff for purposes of SSI andMedicaid. The qualified assignment may bedrafted to name an SSI/Medicaid exemptSpecial Needs Trust as the payee (so long asall payments are made before the plaintiffreaches age 65).51

The Omnibus Budget Reconciliation Actof 1993 (OBRA 93)52 established newMedicaid criteria for treatment of both revo-cable and irrevocable trusts created after

August 10, 1993. Specifically, OBRA 93 per-mits the use of a Special Needs Trust, funded

with the assets of a Medicaid beneficiary, ifthe trust meets the following criteria set forthin the statute:

(A) A trust containing the assets of anindividual under age 65 who is disabled(as defined in 1382c(a)(3) of the Social

Security Act) and which is established forthe benefit of such individual by a parent,grandparent, legal guardian of the individ-ual, or a court if the State will receive allamounts remaining in the trust upon thedeath of such individual up to an amountequal to the total medical assistance paidon behalf of the individual by thestate;.... 53

In December 1999, Congress passed theFoster Care Independence Act (FCIA),54

which contained new anti-fraud provisionsapplicable to the SSI program. The FCIAspecifically exempts OBRA 93 Special NeedsTrusts from being considered availableresources and provides that transfers to fund

such trusts by individuals under age 65 willnot incur a penalty period.55 Thus, the FCIAprovides that a trust will be exempt from thegeneral rules regarding self-settled trusts if itcomplies with all of the criteria in 42U.S.C.A. 1396p(d)(4)(A) applicable toOBRA 93 Special Needs Trusts forMedicaid.

Even a trust that complies with all of therequirements of 42 U.S.C.A. 1396p(d)(4)(A) might not be recognized as avalid exempt trust if it does not also comply

with Social Security Administration policies,

as set forth in the Program OperationsManual System (POMS) at POMS SI01120.203. In particular, the trust mustcomply with all of the following key require-ments:56

1. The trust will be established withthe assets of the beneficiary, who is underage 65;2. The beneficiary is disabled as that termis defined in the Social Security Act;3. The beneficiary is the sole beneficiary ofthe trust and the trust must not allow anyProhibited Expenses or Payments underPOMS SI 01120.203.B.3);57

4. The trust was established by the benefi-ciarys parent, grandparent, legal guardianor a court, if the beneficiary is a minor. Ifthe beneficiary is not a minor, the trust

was established by someone who has legalauthority to act with regard to the benefi-ciarys assets,58which would mean that thetrust must have been established by thebeneficiarys legal guardian or a Court, orby the individual in the case of a pooledtrust account;

5. The trust provides specific languageproviding that, upon the death of the ben-eficiary, the trust must first reimburse theState for medical assistance paid for thebeneficiary;6. The trust will be fully funded before thebeneficiary reaches age 65;7. The trust is irrevocable. (The trust mustcontain a specific provision making thetrust irrevocable; and, in states which stillfollow the common law doctrine of wor-thier title, the trust must name specific

individuals as contingent beneficiariesupon the beneficiarys death, after repayment to the State for medical assistancebenefits paid).

Failure of the trust to comply both withOBRA 93 and the requirements in thePOMS will result in trust assets being consid-ered an available resource for SSI purposes orin transfers to fund the trust being consideredtransfers without fair consideration, resultingin an SSI penalty period. The question arises,then, as to when the more restrictive SSIrequirements will apply to the creation of aSpecial Needs Trust.

In 1999, the United States District Courtin Colorado was presented with the issues of:1) whether, in an SSI state59, a trust approved

under the federal SSI eligibility criteria couldnonetheless be considered invalid under stateMedicaid law; and 2) whether a Medicaidbeneficiary in an SSI state can be deniedMedicaid benefits under state Medicaid regu-lations if the individual continues to qualifyfor SSI.60 The court held that, in SSI states,Medicaid agencies cannot employ methodol-ogy or criteria more restrictive than that ofSSI when evaluating trusts, because an SSIrecipient automatically qualifies forMedicaid.61

The courts holding in Rameygoverns anysituation in which state Medicaid regulationsin an SSI state might impose more restrictivecriteria for eligibility than those imposed byfederal regulations governing SSI. In an SSIstate, an individual who is eligible for SSIunder the federal Social Security regulationscannot be denied Medicaid benefits by theapplication of a more restrictive stateMedicaid law or regulation.

In SSI states, a trust that is approved bythe Social Security Administration for an SSIbeneficiary cannot also be required to comply

with any additional requirements under stateMedicaid law; and an individual who quali-fies for SSI cannot be denied Medicaid underany state Medicaid law that might impose eli-gibility requirements stricter than thoseimposed by SSI. Thus, for a person whoseMedicaid eligibility is due to eligibility forSSI, that persons Special Needs Trust mustcomply with SSI criteria, regardless of whatcriteria may exist under state Medicaid law.Further, if such an individual qualifies forSSI, even after consideration of all cash

12 NOVEMBER 2008


13/20ELDER LAW

income and in-kind support and mainte-nance, that individual cannot be deniedMedicaid benefits, even if a calculation of theindividuals cash income and in-kind supportand maintenance under state Medicaid regu-lations might otherwise result in ineligibility.

Special Funding IssuesMedicaid Annuities under theDeficit Reduction Act of 2005In many PI settlements, the plaintiffs

future medical expenses may be expected tospike in later years. For example, a plaintiffmay anticipate the need for surgery orreplacement of certain durable medicalequipment many years after the settlement.In these instances, it is not unusual for thestructured settlement to include an annuitythat might pay out large payments in fixedamounts at 5 or 10 year intervals, specifically

to provide extra funds in those years whenunusually large medical costs are expected. Bydeferring payment for large and infrequentcosts until needed, the defendant can reducethe costs of funding the settlement while stillproviding the plaintiff with sufficient settle-ment funds to meet his or her needs forfuture care.

The Deficit Reduction Act of 2005(DRA)62 amended federal Medicaid law toprovide that the purchase of an annuity fromthe assets of a Medicaid recipient (or therecipients spouse) is a transfer without fair

consideration, unless the annuity: (1) is irrev-ocable, non-assignable, actuarially sound,and provides for substantially equal paymentsover the life of the annuitywith no deferral orballoon payments; or (2) names the state asdeath beneficiary up to the amount ofMedicaid benefits paid on behalf of the annu-itant.63 However, the DRA does not providefor any further consequence in the treatmentof deferred or balloon annuities. Thus, even adeferred or balloon annuity still should notbe treated as a resource if it is annuitized,but rather, the payments should continue to

be treated as income in the month received.Under I.R.C. 130, an annuity that

funds a qualified assignment must be fixed asto the amount and time of periodic pay-ments. However, those payments need not bemade monthly or even annually. On theother hand, the DRA restrictions on annu-ities require that a Medicaid-exempt annuitymust be actuarially sound and provide forsubstantially equal payments. The DRAspecifically provides that the purchase ofdeferred annuities and balloon annuities by

the Medicaid recipient or the recipientsspouse will result in a transfer penalty. Doesthis mean that only I.R.C. 130 immediateannuities may be used in a structured settle-ment when the annuity will be used to funda Medicaid Special Needs Trust for the plain-tiff? Not necessarily.

As discussed above, a qualified annuity

under I.R.C. 130 must be purchaseddirectly by a party to the case with liability tothe plaintiff. The plaintiff cannot even havethe option of receiving an annuity or a lumpsum payment without having constructivereceipt of the settlement funds and runningafoul of I.R.C. 130. In other words, anyannuity that would be used to fund a SpecialNeeds Trust in the context of a PI settlementis purchased with assets of the party with lia-bility to the plaintiff, and not with assets thatcould be considered available to the plain-tiff/Medicaid recipient.

The DRAs restrictions on the purchase ofdeferred or balloon annuities only apply topurchases of annuities with assets of theMedicaid recipient (or the recipients spouse).Further, the DRA does not apply to SSI.Therefore, the DRA annuity provisionsshould not affect the ability to fund Medicaidor SSI Special Needs Trusts with I.R.C. 130deferred or balloon annuities as part of a PIsettlement. In fact, the DRA annuity provi-sions arguably would not be applicable to thissituation at all; thus, it should not be neces-

sary for the I.R.C. 130 annuity funding aSpecial Needs Trust to be actuarially sound orto name the state as remainder beneficiary.

Use of Annuities to Fund SSI andMedicaid Special Needs TrustsSSI and Medicaid do not prohibit the use

of either deferred or balloon annuities tofund exempt Special Needs Trusts if theannuities comply with I.R.C. 130. If theplaintiff expects to incur future medicalexpenses on a fairly regular basis, an immedi-ate annuity can be used to provide the neces-

sary funding over time. If large expenses areexpected periodically in the future, a deferredor balloon annuity may be appropriate as

well. However, all annuity payments into anexempt Special Needs Trust must be complet-ed before the plaintiff reaches age 65.64

Further, the Special Needs Trust should alsobe funded initially with a lump sum suffi-cient to provide immediate liquid funds forunexpected costs, the annuity paymentsshould be large enough to ensure that fundsin the trust will not be exhausted before the

next payment date, and payments should indexed to keep pace with inflation.

Naming the Trust as the AnnuitantSince both SSI and Medicaid eligibil

are based partly upon the individuals levelincome, a structured annuity that makes peodic payments directly to the benefici

could prevent the individual from qualifyfor those benefits for the lifetime of the annity. Further, if the annuity is the subject oqualified assignment, the individual will nbe able to amend the annuity at a later tito redirect payments into a Medicaid or Sexempt trust.

Since there will virtually always be a quified assignment of any annuities used structure any PI settlement, careful plannis required to preserve the plaintiffs abilityqualify for Medicaid or SSI. In these casthe annuity generally should not be set

with the individual plaintiff as payee. Raththe annuity should pay out to the exemSpecial Needs Trust.

ConclusionDefendants, liability carriers and th

structured settlement brokers have historicly argued that QSFs cannot be used in singplaintiff PI structured settlements involvqualified assignment. This argument, baon the theory that the economic benefit dtrine somehow bars the plaintiff from taki

advantage of the favorable tax treatment I.R.C. 130, is not persuasive. It is basolely on a common law doctrine that been superseded in this context by fedestatutes and regulations; and upon a privletter ruling that is not on point.

An in-depth analysis of I.R.C. 130 aits legislative history, I.R.C. 468B and corresponding IRS regulations, and RProc. 93-34 all support and lead to the oppsite conclusion: the economic benefit dtrine is not applicable to the use of qualifassignments in PI settlements. The IRS o

interpretation of the law on this issue isagreement.

The IRS has not said whether its staposition in this regard might somehdepend on the number of plaintiffs involvOf course, it is possible that the IRS coudraw a distinction and treat the econombenefit doctrine as a bar to use of qualifassignments by QSFs in single-plaintiff settments only. However, this seems likeremote possibility at best.



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There is simply no cogent basis in theInternal Revenue Code, the IRS regulationsand procedures, or in the IRS own previous-ly stated interpretations of the law to supportsuch a distinction. It is far more likely thatthe IRS will remain consistent and adopt theposition that QSFs may successfully makequalified assignments in PI settlementsregardless of the number of plaintiffs, so longas there is compliance with the requirementsof I.R.C. 130, I.R.C. 468B; Treas. Reg. 1.468B-1 through 1.468B-5; and Rev.Proc. 93-34.

Use of a QSF to purchase an I.R.C. 130qualified annuity to fund the exempt SpecialNeeds Trust is a natural fit when a settlingplaintiff seeks the most advantageous tax

treatment of his or her settlement proceeds,needs to preserve SSI and/or Medicaid eligi-bility, and requires time to create an exemptSpecial Needs Trust without delaying thefinalization of the settlement. This processprovides the necessary flexibility, while allow-ing the plaintiff to receive the maximum ben-efit from the settlement. However, the ruleshere are complex and the interplay of the var-ious applicable statutes and regulationsrequires special care and knowledge. Finally,the circumstances in every settlement areunique. Practitioners are cautioned never to

use a form QSF or Special Needs Trust, butrather to prepare the necessary documenta-tion in a manner that is specific to the indi-vidual needs of each plaintiff in the context of

this or her own settlement.

JOHN J. CAMPBELL, ESQ., CELA,OF DENVER, COLORADO, HAS PRAC-TICED LAW SINCE 1986, SPECIALIZ-ING IN ELDER LAW SINCE 1996. HE IS

WIDELY CONSIDERED AN EXPERTON THE PRESERVATION OF PUBLICBENEFITS IN THE CONTEXT OF

PHYSICAL INJURY AND WORKERSCOMPENSATION SETTLEMENTS;

AND HAS PUBLISHED AND PRE-SENTED NUMEROUS ARTICLES ANDSEMINARS NATIONALLY IN THIS

AREA OF THE LAW.

End Notes1. 26 U.S.C. 104(a)(2) (2008) provides

that gross income does not include theamount of any damages (other than punitivedamages) received (whether by suit or agree-

ment and whether as lump sums or periodicpayments) on account of personal physicalinjuries or physical sickness. 26 U.S.C. 104(a)(1) (2008) excludes from gross incomeamounts received under workers compensa-tion acts for personal injuries or sickness.

2. Tort damages have traditionally beenpaid on a lump-sum basis. Adam F. Scales,

Against Settlement Factoring? The Market inTort Claims Has Arrived, 2002 Wisc. LawRev. 859, 862 (2002).

3. SeeRev. Rul. 65-29, 1965-1 C.B. 59(1965).

4. These concerns are described bySenator Max Baucus, one of the originalsponsors of the Periodic Payment Act, at 144Cong. Rec. S11499-01, (available at 1998

WL 684078).5. Pub. L. No. 97-473, 96 Stat. 2605(1982).

6. Despite several revenue rulings thatindicate that the Internal Revenue Serviceconsiders that periodic payments as personalinjury damages are excludable from the grossincome of the recipient, the committeebelieves it would be helpful to taxpayers toprovide statutory certainty in the area. S.Rep. 97-646, 97th Cong. 2d. Sess. 1982,1982 U.S.C.C.A.N. 4580, 4583.

7. Pub. L. No. 97-473, 101, 96 Stat.

2605 (1982).8. 26 U.S.C. 130 (1997). Typically, the

assignee is an affiliate of an insurance compa-ny, and its only business is to accept for a feequalified assignments of liabilities to makeperiodic payments to tort claimants. Letter

from Skadden Arps lawyers to Pamela Olson, Assistant Secretary (Tax Policy) (requestingI.R.S. clarification on whether an assignmentby a qualified settlement fund is a qualifiedassignment) (June 19, 2003), (available at2003 WL 22662008) (I.R.S. Misc.) (here-inafter Skadden Arps Letter).

9. This annuity is referred to in I.R.C. 130 as the qualified funding asset. 26U.S.C. 130(d) (1997).

10. Id.11. 26 U.S.C. 130(c)(1) (1997).13. Seegenerally Richard B. Risk, Jr., A

Case for the Urgent Need to Clarify TaxTreatment for a Qualified Settlement FundCreated for a Single Claimant, 23 VA Tax Rev.639, 642-44 (2004) (describing these con-cerns in detail).

14. Pub. L. No. 99-514, 100 Stat. 2085

(1986).15. 26 U.S.C. 468B (2008). DSFs may

be used to settle PI claims, but may not beused to settle workers compensation claims.26 U.S.C. 468B(e) (2008).

16. 26 U.S.C. 468B(d)(2) (2008).17. 26 C.F.R. 1.468B-1-1.468B-5

(2008).18. A QSF, like a DSF, may be used to set-

tle a PI claim, but not a workers compensa-tion claim. 26 C.F.R. 1.468B-1(g)(1)(2008).

19. 26 C.F.R. 1.468B-1(c) (2008)(emphasis added).

20. U.S. v. Brown, 348 F.3d 1200, 1217(10th Cir. 2003).

21. 26 U.S.C. 468B(b) (2008) and 26

C.F.R. 1.468B-2(a) (2008).22. 26 C.F.R. 1.468B-2(a) (2008).23. 26 C.F.R. 1.468B-1(c)(2) (2008).24. However, the I.R.C. and the Treasury

Secretary have as yet refused to clarify thevalidity of this use of QSFs. SeeRisk, supra n.11 at 673-82. See also Skadden Arps Letter,supra n. 6.

25. 26 U.S.C. 130 (1997).26. 26 U.S.C. 130(a) (1997).27. 26 U.S.C. 130(d) (1997).28. Rev. Rul. 79-313, 1979-2 C.B. 75

(1979).

29. Rev. Rul. 65-29, 1965-1 C.B. 59(1965); Rev. Rul. 76-133, 1976-1 C.B. 34(1976).

30. Sproull v. Commr., 16 T.C. 244(1950), affd, 194 F.2d 541 (6th Cir. 1952).

31. Id. at 247-248.32. Id.33. 26 U.S.C. 130(c)(2)(D) (1997).34. P.L.R. 200138006 (May 7, 2001).35. The settlement discussed in this

Private Letter Ruling was the settlement of amalpractice lawsuit against a law firm.

36. 26 U.S.C. 130(c)(2)(C) (1982).

37. S. Rep. No. 97-646; H.R. Rep. No.97-832, 97th Cong., 2d Sess. 4 (1982)(emphasis added).

38. Pub. L. 100-647, 102 Stat. 3342, TitleVII, 6079(b)(1).

39. H.R. Rep. No. 100-795, at 541(1988).

40. I.R.C. 130(c) (emphasis added).41. H.R. Conf. Rep. No. 1104, 100th

Cong., 2d Sess. at II-171(1988).42. 16 T.C. 244 (1950), affd, 194 F.2d

541 (6th Cir. 1952).

14 NOVEMBER 2008


15/20

43. To prevent constructive receipt, thesettlement terms will not permit the plaintiffthe option to receive the settlement in a lumpsum, and will provide that the assignment

will be made directly by the defendant or thedefendants insurance carrier.

44. P.L.R. 9703038 (Jan. 17, 1997).45. 26 U.S.C. 130(c) (1997).

46. Rev. Proc. 93-34, 1993-28 C.B. 49(1993).

47. Rev. Proc. 93-34, 1.48. Rev. Proc. 93-34, 4 (emphasis

added).49. Id.50. A novation is a mutual agreement

among all parties concerned for the dischargeof a valid existing obligation by the substitu-tion of a new valid obligation on the part ofthe debtor or another, or a like agreement forthe discharge of a debtor to its creditor by thesubstitution of a new creditor. 58 Am. Jur.2d Novation, 1 (2008).

51. 42 U.S.C. 1396p(d)(4)(A) (2008);42 U.S.C. 1382b(e)(5) (2008).

52. Pub. L. No. 103-66, 107 Stat. 312(1993).

53. 42 U.S.C.A. 1396p(d)(4)(A)(1984).

54. Foster Care Indep. Act of 1999, Pub.

L. 106-169, 113 Stat. 1822.55. 42 U.S.C.A. 1382b(e)(5) (1984).56. Social Security Online, POMS SI

01120.203, see:https://secure.ssa.gov/apps10/poms.nsf/lnx/05

01120203!opendocument (accessed Feb. 18,2008).

57. Examples of Prohibited Expenses and

Payments include: Payments of debts owedto third parties; Funeral expenses; andPayments to residual beneficiaries. SocialSecurity Online, POMS SI01120.203.B.3(b), https://secure.ssa.gov/apps10/poms.nsf/lnx/0501120203!opendocu-ment(accessed April 18, 2008).

58. Id. at POMS SI 01120.203.B.1(e).59. There are 39 SSI states, consisting of

32 1634 states: Alabama, Arizona, Arkansas, California, Colorado, Delaware,Georgia, Florida, Kentucky, Iowa, Louisiana,Maine, Maryland, Massachusetts, Michigan,Mississippi, Montana, New Jersey, NewMexico, New York, North Carolina,Pennsylvania, Rhode Island, South Carolina,South Dakota, Tennessee, Texas, Vermont,

Washington, West Virginia, Wisconsin,Wyoming and Washington D.C.; and 7 SSIcriteria states: Alaska, Idaho, Kansas,Nebraska, Nevada, Oregon and Utah. The

1634 states have entered into an agreemeas authorized by 1634 of the Social Secur

Act, 42 U.S.C. 1383c, that the SoSecurity Administration will determMedicaid eligibility. The SSI criteria statmake their own Medicaid determinatiousing the SSI criteria. Social Security OnliPOMS SI 01120.203.B.3(b), POMS

01715.010, seeh t t p s : / / s e c u r e . s s a . g o

apps10/poms.nsf/lnx/0501715010!opendoment(accessed Feb. 18, 2008). See genera

John J. Campbell, Basic Strategies for Planning, 1 NAELA Q. 311, 321 (F2005).

60. Ramey v. Rizzuto, 72 F. Supp1202 (D.C. Colo. 1999), affd, RameyReinertson, 268 F.3d 955 (10th Cir. 2001

61. 268 F.3d at 962, citing Herwig v. R455 U.S. 265, 268, 102 S.Ct. 1059, 10(1982).

62. Pub. L. No. 109-171, 120 Stat(2005).

63. Pub. L. No. 109-171, 6012(b) (c), amending 42 U.S.C. 1396p(c)(1)(F)(G).

64. 42 U.S.C. 1396p(d)(4)(A) (2008

ELDER LAW

Tips and TalesPay Back Special Needs Trusts Not Always the Only Solution

BY NICOLA J. MELBY

The TaleMom is disabled with 10-year-old severe-

ly disabled child. Child receives SSI (SocialSecurity Supplemental Income) benefits.Because North Carolina is a state which linksSSI and Medicaid (if you receive SSI you areautomatically eligible for Medicaid) childalso receives much needed Medicaid as hermedical expenses are substantial. Momreceives SSD (Social Security Disability ben-efits) benefits and Medicare. Grandmotherdies and leaves $50,000.00 to Mom and$50,000.00 to Grandchild.

The TipThe first step in analyzing the effect of an

inheritance on a disabled individual is todetermine what benefits are means tested and

what benefits are entitlement benefit, i.e., not

dependent upon meeting an income andasset test. SSI and Medicaid are means testedbenefits whereas SSD and Medicare are not.Thus, childs inheritance is a problem andMoms would ordinarily not be an issue atleast initially. You always want to be sensitiveto the fact that a disabled individual may be

receiving SSD and Medicare, an entitlementprogram, but the benefit may be so low thatthey may also qualify for Medicaid now or atsome point in time in the future. If the per-son is receiving Medicaid now or likely to inthe short-term future, then an analysis of theimpact of the inheritance for Mom will alsoneed to be addressed.

As for the child, assuming that the inheri-tance came directly to the child and for what-

Documents

Article Re Special Needs Trusts