Special Needs Trusts: Frequently Asked Questions

Here at Beam Legal Team, most of our clients receive SSI (Supplemental Security Income) benefits to aid in the care of their disabled loved ones. For those clients who do not, our office will work diligently to help them get those benefits. But clients will often ask if they will lose SSI benefits if a settlement or jury verdict is reached in their favor. Thanks to what is called a special needs trust (SNT), the short answer is no. Herein we will address some questions our clients frequently ask about SNTs:

What is a Special Needs Trust?

The statutory special needs trust (SNT) - sometimes called a supplemental care trust or qualified disability trust - has become the preferred method of settling personal injury cases for plaintiffs on Medicaid. An SNT is an irrevocable trust established for the sole benefit of a disabled person. It is funded with the proceeds of a personal injury tort, medical malpractice claim, or a workers' compensation claim. There are two requirements, however: 1) that the person be under 65 years of age, and 2) the person be physically or mentally disabled.

What are the Benefits of an SNT?

Typically, disabled persons are receiving local, state, and/or federal government benefits for daily living needs and medical care, such as Medicaid, SSI, subsidized housing, vocational rehabilitation, and others. If properly drafted, the trust will preserve actual or potential public or private benefits for the beneficiary because SNTs are specifically protected from the current attribution rules that apply to trusts created with the assets of an applicant/recipient of public benefits. Thus, the purpose of a Special Needs Trust is to provide a source of funds, such as those that are received in a settlement or jury verdict, without disqualifying the beneficiary from receiving further benefits from the government. SNT funds are meant to be used for supplemental care in addition to the care made possible by government benefits.

In addition, the SNT funds are protected from creditors and bankruptcy. The SNT can also provide professional management and investment of assets without the formal court supervision required in a property guardianship. Lastly, an SNT is tax exempt which will be later discussed herein.

What Can an SNT Pay For?

The trust may pay for and provide supplemental medical, health, nursing care, dental care, developmental, support, maintenance, education, rehabilitation, therapy, device, recreation, social opportunity, assistive device, advocacy, legal, respite care, transportation, and related expenses, personal attendant care and consultant services.

It is important to note that an SNT for an SSI beneficiary should usually never give the beneficiary cash or a cash equivalent nor pay for shelter or food without first consulting a special needs planner. If an SSI beneficiary does receive cash from the trust (or a cash equivalent like a gift card), his or her benefit will be reduced by one dollar for each dollar received, up until he or she loses their SSI benefits entirely.

Is An SNT Exempt from Income Taxation?

In short: yes! Generally, the amount of any damages received on account of personal injury or sickness is not included as income under the provisions of Internal Revenue Code Section 104(a)(2). The income earned by a lump-sum settlement, whether through interest, dividends, or capital gain, is not exempt from income taxation. However, the imputed income earned within a structured settlement is exempt from income taxation under Internal Revenue Code Section 130. A structured settlement allows a settling plaintiff and those claiming through the plaintiff to enjoy the benefit of this income tax exclusion.

Compared to a lump-sum cash settlement, the structured settlement provides financial security in the form of a lifetime income, and it matches benefits with the plaintiff’s needs. In addition, it provides management of the benefits, a guaranteed payment, and favorable income tax treatment.

The structured settlement periodic payment, however, does not eliminate the need for an SNT. Just like a lump-sum payment, the monthly payment to the plaintiff will be counted as an available resource to the applicant for Medicaid and other public benefits; thus, an individual could be disqualified from receiving public benefits. This is where an SNT comes into play – an SNT will preserve the plaintiff’s eligibility.

What Happens When the Beneficiary Dies?

The trust terminates when the beneficiary dies. Any remaining funds will be used to reimburse the government for the medical assistance provided to the beneficiary after the trust was established. The trustee must work with Medicaid to verify the amount of its "pay-back" interest for medical assistance paid for the Beneficiary during his lifetime.

For more information, please contact Beam Legal Team to set up a free consultation: (866) 766-3806.

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