Special Needs Trusts: The Basics Every Lawyer Should Know

November 9, 2011

Just when you think your work is done, the case resolved, they drag you back in. Something in the back of your mind tells you your client may have to do a trust or something to protect their benefits. Attorneys do not need to become special needs planners in addition to what they already do. Still, they do need to know some simple basics regarding the effect their client’s settlement may have on their eligibility for governmental benefits. Lawyers have been held liable for failing to recognize and advise their clients of the effect the settlement may have on their eligibility.

Is The Person Receiving Means-Tested Benefits? Ask For a Benefits Statement.

Whether a client is receiving funds directly as a result of their own cause of action, as a claimant under a wrongful death cause of action, an inheritance, or any other reason, the first question to be answered is whether the person receiving the funds receives means-tested benefits. Unfortunately, when a client is asked what type of benefits they receive, frequently the answer is “disability.” The client, or their representative, may not know the type of benefits the client receives or be able to find a determination letter. As a practice tip, the client or their legal representative can call 800-772-1213 and request a benefits statement.

Not all disability benefits are means-tested, so determination as to whether the client has benefits that need protection is the first step in the process. Early involvement with a Michigan special needs trust attorney will help the client become comfortable with the planning that will take place to preserve benefits, a process that may seem complex and overwhelming to them. Further, a consultation with the client regarding their benefits and the effect of receiving settlement proceeds or an inheritance limits the liability of the lawyer after the case is resolved, and sets client expectations regarding the handling of funds.

What Is A Means-Tested Benefit?

The most common are Supplemental Security Income (SSI), Section 8 housing, Medicaid, Veteran benefits, and Waiver services. Most of these are federal programs that are administered differently in each state. In addition, the client may also receive state and local benefits that are also means-tested.

Means-tested benefits typically have an income and asset limit to be met in order to become and remain eligible, and the Medicaid Assistance limit of $2,000 in countable assets is probably familiar to you. The best practice is to affiliate with local special needs trust lawyers near you at Michigan Law Center, PLLC, as they will be familiar with various types of benefits, quirks of the local DHS office and probate court where the client resides, and determine if a settlement or structured settlement payments will compromise the client’s continued eligibility.

When Is a (d)(4)(A) Special Needs Trust Required?

After you have determined that your client in fact does receive a variety of governmental benefits and an outright distribution of proceeds or payments will affect their eligibility, when is a (d)(4)(A) special needs trust appropriate? When the following criteria have been met:

  1. The client receives means-tested benefits,
  2. is under age 65, and
  3. The amount received justifies the costs involved.

What Is a (d)(4)(A) Special Needs Trust?

A (d)(4)(A) special needs trust refers to 42 USC 1396(p)(d)(4)(A), which codified one of the exceptions to the general premise that all trusts are countable assets with regard to means-tested governmental programs. By placing funds and/or structured settlement payments into a special needs trust, the assets are held for the sole benefit of the beneficiary while preserving their continued eligibility for assistance. Only a parent, grandparent, guardian, or court can create this type of trust. Notice that the beneficiary cannot create the trust themselves, and often court authority approving the creation of the trust is necessary. Some courts actively maintain supervision of the trust and require the filing of bonds and annual accounts which can be very costly.

Trusts with modest assets or those that are over-structured can be exhausted from these fees, and nothing angers a client more than having all of their funds go to pay lawyers and they receive little or no benefit. Counsel should consider the continued costs of administration when deciding whether this type of special needs trust is the most appropriate. Local counsel should also be consulted as to the common court practice where the trust will be administered. However, if a parent or other layperson is to act as a trustee, supervision may be advisable. With the current economy and job market, a loss of financial security within the family may make dipping into trust assets too great a temptation to resist.

Nominating A Trustee

One of the most difficult decisions can be the nomination of a Trustee. Often a family member, especially the parent of a minor, will want to serve in that capacity. However, most often family members or lay people, in general, are not the best option. The policies regarding allowable distributions change frequently and vary from state to state. You can pay a family member for care services in some states, as you can in Michigan, but not others without penalty. In addition, there are tax considerations and investment issues to consider. Special needs trusts are complex to administer, and professional administration, even in light of the costs involved, is usually for the best.

Potential family members as Trustees usually fall into two categories: the busy professional or the unsophisticated but willing. Neither are good choices. The busy professional is just that. Too busy. The willing but unsophisticated person is not a good choice as the potential for mistakes without professional guidance is too great a risk. In addition, if a bond is required the client may have trouble qualifying. Bond companies are looking at credit scores and if there are blemishes they will decline the application. Corporate or professional fiduciaries often do not have to file bonds so long as proof of liability coverage is offered to the court. If there is no court involvement and no bond, there is no recourse for the disabled beneficiary if a family member makes mistakes or improperly distributes funds.

What Can A Special Needs Trust Pay For?

The most common question a client has is, “What can the trust pay for?” Policies regarding distributions change frequently and differ from state to state. The Trust itself is designed to supplement governmental benefits, so needs that can be met through outside entities should be exhausted first before seeking payment from the Trust.

Generally, distributions from the trust must meet several criteria:

  1. For the sole benefit of the beneficiary,
  2. In the best interests of the beneficiary,
  3. Otherwise unavailable from other resources and/or no other responsible party, and
  4. (4) Fiscally prudent

Often clients will inquire about the purchase of a home and transportation. Can they be purchased by the Trust? Yes. However, it must be done in light of the considerations outlined above and the purchase of any home should not be done without professional guidance, and prior court approval, if applicable. If the beneficiary is a minor, the trust does not relieve a parent of their obligation to provide for the basic needs of their minor child. Most importantly, do not overpromise the client. Setting reasonable expectations from the start is important for the client’s future relations with the Trustee and/or special needs trust attorney and ultimately benefits the disabled beneficiary.

Speak With Michele Special Needs Trust Lawyers Near You

Knowing when a special needs trust may need to be implemented, what it is, and how it works in the best interests of your client are essential special needs trust basics all attorneys should know in order to avoid a client’s benefit disqualification and a potential claim for failing to provide this information. Working with an experienced special needs planning attorney early in the litigation, settlement, or probate process can assist counsel in meeting their due diligence obligation to their client, relieve a client’s anxiety about the process and their benefits, and set reasonable expectations after the matter is resolved. Michele P. Fuller is a partner with Fuller & Stubbs, PLLC based in Shelby Twp., Michigan. A busy mother of four, she is a council member for the Elder Law and Disability Rights section of the State Bar of Michigan, serves as Treasurer of the Macomb County Probate Bar Association, and is an active member of ASNP and NAEL.

Related Posts:
Medicare: Top 10 Tips

1. Enroll in Medicare at the right time.

  • For most individuals, enroll (through Social Security) the later of:
  • The three months before you turn 65 or
  • At you or your spouse’s retirement if you receive group health insurance coverage through you or your spouse’s employer.

Note: You actually have the seven months surrounding your 65th birthday to enroll in Medicare. For example, if your birthday is April 15th, you can enroll starting January 1st until July 31st, but you should enroll before April 1st if you want Medicare coverage in April. Retirees technically have eight months to enroll after retirement.

  • If you do not enroll at the earliest opportunity, you may:
  • Receive lifetime financial penalties on your Part B and Prescription Drug Plan (Part D) premiums;
  • Only be able to enroll in Medicare in certain months; and
  • Be subject to underwriting for Medicare Supplemental Plans (a.k.a. Medigap Plans). (In Michigan, the Blue Cross / Blue Shield’s Legacy plan is an exception to this underwriting rule.)

2. There are two distinct Medicare options: Original Medicare or Medicare Advantage.

  • Original Medicare (a.k.a. Traditional Medicare): Part A + Part B + Prescription Drug Plan (Part D) + a Medicare Supplemental (a.k.a. Medigap) plan to cover Parts A and B copays / deductibles. Approximately three-fourths of Medicare beneficiaries have some form of Original Medicare.
  • Original Medicare with a supplemental plan (particularly policies C or F) is about the most comprehensive medical coverage currently available in the United States.
  • Medicare Advantage (a.k.a. Medicare Health Plan or Part C): These plans are similar to employer sponsored health plans and every plan is different. The plans typically include prescription drug coverage and most have a network (or preferred providers). Approximately one-fourth of Medicare beneficiaries have a Medicare Advantage plan, but this number is growing.
  • These plans are generally cheaper if you are healthy, but can cost more or prove to be overly restrictive if you need more than routine medical care.

3. For Michigan residents, always remember that Blue Cross / Blue Shield’s Legacy Medicare Supplemental (a.k.a. Medigap) Plans are options.

  • As a nonprofit, Blue Cross / Blue Shield offers two affordable supplemental plans: Plan A at $39.88/month and Plan C at $121.22/month regardless of age or health status.
  • There is no underwriting to qualify for these plans.
  • Note: You may not qualify for these plans if your previous employer contributes to your premiums or contributes to a health retirement account. Also, premiums will go up if you move out of Michigan.

4. The ten standard Medicare Supplemental (a.k.a. Medigap) policies are the same from state to state and from insurer to insurer. Shop price!

  • What policies A, B, C, D, F, G, K, L, M, and N cover is the same across states and insurers. Most policies are priced based upon your age.
  • You typically have little interaction with these plans other than paying your premium. Generally: if Medicare pays, the policy pays.
  • These plans are basically commodities and you should shop for the cheapest plan. For example, in Michigan, the price for Policy C for a 65 year old ranges from $107 to $301 according to Medicare.gov for essentially the same policy. A person paying $301 is likely paying almost $200 a month more than he or she should be paying.

5. Review Prescription Drug Plans and/or Medicare Advantage Plans each year between October 15th and December 7th only at http://www.Medicare.gov.

  • Do not rely on information from insurance companies or private vendors to pick plans. Use the government’s website at http://www.Medicare.gov and click “Compare Drug and Health Plans.”
  • I like to say that Prescriptions Drug Plans and/or Medicare Advantage Plans are one-year marriages – you divorce each other every year and decide whether or not to remarry. The insurance company can change the details of the plan and you can leave the plan each year.
  • Do not automatically pick the cheapest plan without reviewing any plan limitations. For example, does your doctor accept the Medicare Advantage plan? Are there any restrictions on the prescriptions you take?

6. Medicare is not a long-term care plan and most Medicare plans do not cover routine dental, vision, hearing, or foot care.

  • Other than up to a hundred skilled nursing / rehabilitation days after three nights in a hospital, Medicare does not cover assisted-living, general home assistance, or nursing home care.
  • Note: Some Medicare Advantage plans will provide limited dental or vision coverage, but be careful about overvaluing the benefits of these plans.

7. Do not simply rely only a plan’s prescription formulary – make sure there are not additional restrictions on the prescriptions you need.

  • In addition to making sure a prescription is on a plan’s formulary, make sure you know whether or not the plan places further restrictions on your prescriptions by requiring:
  • Prior Authorization: Before the plan covers the prescription, you must get it approved by the plan.
  • Quantity Limits: The plan will only cover a certain number of pills a month. Hint: If you need more pills than the plan will cover, ask your doctor to see if it is possible to increase a pill’s dosage.
  • Step Therapy: Before the plan will cover this prescription, you have to try another prescription first. This can be a particularly difficult restriction for those on mental health medications.

8. If you disagree with a health provider, consider appealing!

  • Hospitals and skilled nursing facilities are paid based on the diagnosis – not the number of days that you have been in the facility. Thus, the hospital/facility makes more money the less time you are there. Your defense: appealing.
  • There are several layers of Medicare administrative appeals. Statistically, beneficiaries win half or more of their appeals at the first level.
  • Appeals can be particularly important if a person needs to be in a hospital for three nights to qualify for skilled nursing / rehabilitation benefits.
  • Key appeal criteria: is the service “reasonable and necessary in the diagnosis or treatment of an illness or injury.”

9. Fight to be “admitted” to a hospital – not placed on “observation status.”

  • Hospitals may place individuals on “observation status” for days instead of formally “admitting” him or her to the hospital. The problem: the three night stay required for skilled nursing coverage does not start. This has cost many families tens of thousands of dollars.

10. There may be financial assistance to help pay for Medicare or for prescription drugs.

  • Medicare Savings Programs: In Michigan, apply at your local Department of Human Services office. Benefits may be available if income is less than $1,226 / individual ($1,655 / married couple) and assets are less than $6,680 / individual ($10,020 married couple) excluding a $1,500 burial account allowance.
  • Extra Help For Prescription Drugs: Apply through Social Security. (Very easy to do online at Social Security’s website.) Benefits may be available if income is less than $16,335 / individual ($22,065 / married couple) and assets are $12,640 / individual ($25,260 / couple).

Questions? Get answers from independent resources.

  • Each state has a SHIP (State Health Insurance Assistance Program), which will counsel individuals on Medicare decisions. Michigan’s SHIP is the Medicare / Medicaid Assistance Program (MMAP), which is run out of the Area Agencies on Aging. Call MMAP at 1-800-803-7174. You may also call 1-800-Medicare.
  • Good websites for Medicare information include: Medicare.gov (http://www.medicare.gov), the Medicare Rights Center (http://www.medicarerights.org), and the Center for Medicare Advocacy, Inc. (http://www.medicareadvocacy.org.)
  • Or call or e-mail me, Christopher W. Smith at (586) 803-8500 or at christopher@michiganlawcenter.com

Comparing Costs of Original Medicare and Medicare Advantage

Original Medicare Medicare Advantage or “Health Plans”
Part A Monthly Premium* $ Part A Monthly Premium* $
Part B Monthly Premium $ Part B Monthly Premium $
Supplemental Insurance (“Medigap”) $ Monthly Health Plan Premiums $
Co-Insurance / Deductibles (if any) $ Est. Health Co-pay / Co-Insurance Costs $
Monthly Prescription Drug Costs $ Monthly Prescription Drug Costs $
Monthly Prescription Drug Premiums $ Monthly Prescription Drug Premiums** $
Total Monthly Costs $ Total Monthly Costs $

* Most people do not pay a Part A Premium because they or a spouse earned 40 credits in Social Security-covered employment.

**If prescription drug premium is not part of the Medicare Advantage plan.

November 16, 2019

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