The cost of a client losing government benefits can be very high, often in the hundreds of thousands or even millions of dollars. From a risk management standpoint, it is wise to ensure that all possible options for settlement distribution as well as the implications of a plaintiff accepting a cash settlement are examined up front. If your client faces a chronic disability as the result of an accident or injury, by practice standards, it is a trial lawyer’s due diligence to ensure the claimant’s awareness of government-permitted settlement protection solutions that allow the claimant to qualify or retain eligibility for needs-based benefits while preserving the settlement award.
But first: why not just choose the cash option?
If the settlement results in the loss of benefit eligibility, it can have a life or death impact on the claimant. While the lump sum option may seem appealing at first, there are many reasons why your disabled client may want to reconsider, including:
Lifetime Cost of Care: The cost of caring for an individual with a disability can be astronomical, depending on the severity of their injuries. Doctors’ visits, prescription medication, medical equipment, home modifications, and specialized transportation can eat into even a multimillion-dollar settlement quickly. Settlement proceeds must be carefully managed to provide for a lifetime of care.
The Emotional Aspect: For many claimants, a settlement represents the largest amount of money they will ever see at one time. Trying to figure out how to properly manage that money for the long-term while also adjusting to a “new normal” can be overwhelming, if not nearly impossible for many.
Government Benefit Eligibility: If your client is receiving needs-based government benefits and were to accept a cash lump sum settlement, the client may suffer a diminution or loss of those benefits. Although needs-based benefits are modest—Federal Supplemental Security Income (SSI) monthly maximums, for example, are $750 for an individual and $1125 for a couple (slightly more in certain states)—millions of Americans rely on them to pay for basic food, shelter, and medical needs. Preserving access to these benefits frees up the settlement proceeds to pay for expenses above and beyond what the government will cover.
Note: Settlement proceeds will not affect eligibility for entitlement benefits such as Social Security Disability Income (SSDI) and Medicare.
All special needs settlement protection options share the common goal of providing a safe harbor for the money without jeopardizing the claimant’s present and/or future eligibility for needs-based government benefits. However, each has its own set of considerations and restrictions.
Information to Consider Before Choosing a Financial Option
There is not a one-size-fits-all plan; instead, a number of questions must be answered about the claimant’s age, assets, household income, anticipated future medical and financial needs, and whether there are needs-based government benefits that should be preserved. The answers to these questions will help our experts adequately guide the claimant to a solution that best provides for his/her individual needs.
The most common types of trusts to consider for disabled claimants are first-party special needs trusts and pooled trusts. An ABLE account may also be a settlement protection option for claimants who meet certain criteria. A brief overview of each is provided below, but for further details, please contact one of our settlement planners or an elder law attorney.
First-Party Special Needs Trusts
A first-party special needs trust (sometimes referred to as a (d)(4)(A) trust) is funded with assets belonging to the beneficiary; in this case, settlement proceeds. Candidates for a first-party special needs trust (SNT):
- Are under age 65;
- Meet government guidelines that qualify them as disabled; and
- Are currently receiving needs-based government benefits (g., SSI, Medicaid (MediCal), etc.).
The trust must be established by the disabled individual, or if the disabled individual is unable to do so independently, the trust must be established by the beneficiary’s parent, grandparent, guardian, or the court. First-party SNTs must include a Medicaid (MediCal) payback provision, which requires that upon the beneficiary’s death, any remaining funds in the trust must reimburse Medicaid (MediCal) for the amount of medical assistance provided to the beneficiary. If any funds remain after reimbursing Medicaid (MediCal), those funds may be eligible for distribution to beneficiaries and/or heirs.
For disabled individuals who may not meet the age criteria for first-party SNTs or for whom a first-party SNT may be prohibitively expensive, a pooled trust (sometimes referred to as a (d)(4)(C) trust) may be a viable alternative for preserving benefits.
The pooled trust is established and managed by a nonprofit organization, and the assets within the trust are “pooled” for investment, with a sub-account managed by the nonprofit for each beneficiary. The manner in which the remaining funds are handled after the beneficiary’s death depends on the terms of the trust. In some cases, the funds may remain in the pooled trust. In other instances, funds not retained by the pooled trust must be used to reimburse Medicaid (MediCal) before being distributed to any remaining beneficiaries.
An ABLE (Achieving a Better Life Experience) account is a type of tax-advantaged savings account that an eligible individual can use to pay for qualified disability expenses while maintaining needs-based benefits that are critical to their health and well-being. This option is often a good complement to a special needs trust.
ABLE accounts are available to U.S. Citizens and legal residents, regardless of state residency. To qualify for an ABLE account, the “eligible individual” must be a person whose disability developed before the age of 26.
Benefits of an ABLE Account:
- Tax-Advantaged Savings: Participants may make annual contributions up to $15,000 for 2018 and earnings are exempt from federal taxes. In addition, some states may offer state tax incentives.
- Flexible: ABLE accounts are designed to be easy to manage, easy to contribute to, and easy to use. Funds can pay for a range of qualified disability expenses related to maintaining the health, independence, and quality of life for people with disabilities.
- Works with Other Aid: Generally, funds in an ABLE account are disregarded when determining eligibility for certain means-tested benefits programs such as Medicaid (MediCal). An account balance below $100,000 does not impact Supplemental Security Income (SSI).
An eligible individual can open an ABLE account through the ABLE program in any state if the state permits it. Each state has unique criteria.
Before you settle your next case, make sure you contact ALLIANCE-WEST at 800-354-2258 or firstname.lastname@example.org. Our experienced settlement planning team will walk your disabled client through all of their settlement options, helping to ensure that your client is financially secure for years to come.