Here at Beam Legal Team, many of our clients receive SSI (Supplemental Security Income) benefits to aid in the care of their disabled loved ones. 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, thankfully, no. Below, 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?

Many disabled persons receive 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, an SNT 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, SNT funds:

  • are protected from creditors and bankruptcy.
  • can also provide professional management and investment of assets without the formal court supervision required in a property guardianship.
  • are tax exempt.

What Can an SNT Pay For?

The trust may pay for and provide:

  • Supplemental medical care
  • Health care
  • Nursing care
  • Dental care
  • Rehabilitation and therapy costs
  • Educational, recreational, and other social opportunity program costs
  • Assistive device costs
  • Legal services and advocacy
  • Respite care
  • Transportation costs
  • Personal attendant care
  • Consultant services
  • Other related expenses

It’s important to note that an SNT for an SSI beneficiary should never give the beneficiary cash or a cash equivalent, nor should it 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 they lose their SSI benefits entirely.

What Does a Trustee for an SNT Do?

A trustee is the individual or entity responsible for managing the special needs trust and making distributions in a manner that doesn’t disqualify the beneficiary from public benefits. The trustee’s responsibilities include investing trust funds, providing financial accountings, making appropriate tax filings, and understanding the complex regulations governing SNTs.

Several options exist for who can serve as trustee:

  1. Family Members: While many families initially consider naming a family member (like a parent or sibling) as trustee, this option comes with challenges. Family trustees often lack specialized knowledge of benefit rules and may need to hire attorneys to help them comply with their legal responsibilities.
  2. Professional Trustees: Corporate trustees with significant experience administering SNTs are often recommended. Financial institutions, trust companies, or attorneys specializing in special needs planning can serve in this capacity. Professional trustees typically have the expertise necessary to navigate complex benefit regulations and ensure the beneficiary remains eligible for government assistance.
  3. Co-Trustees: Many families opt for a combination approach, naming both a family member and a professional as co-trustees. This arrangement combines the personal knowledge of the beneficiary’s needs with professional expertise in trust administration and benefit regulations.

When selecting a trustee, consider factors such as the trustee’s knowledge of public benefit programs, investment experience, ability to serve for the beneficiary’s lifetime, and understanding of the beneficiary’s unique needs and desired lifestyle.

How Do I Set Up an SNT?

Setting up an SNT requires experience and precision to be confident that it meets all legal requirements and preserves the beneficiary’s eligibility for government benefits. Here are the recommended steps:

  1. Consult with Specialized Professionals: Work with attorneys who have specific experience in special needs planning. These specialists understand the complex interplay between trust law and government benefit regulations.
  2. Consider Financial Planning First: Before drafting legal documents, engage with a financial planner familiar with special needs planning. They can help develop a comprehensive financial strategy for families of special needs individuals that considers the lifetime needs of the beneficiary while balancing other family financial goals such as retirement and education for other children.
  3. Life Care Planning: For families with young children who have special needs, consulting a life care planner can provide valuable insights into what supports will be needed throughout the beneficiary’s lifetime and when those needs might arise.
  4. Government Benefits Specialist: If available in your area, consulting with a benefits specialist can help ensure your trust is structured to preserve all relevant government benefits.
  5. Choose the Right Type of Trust: Depending on your circumstances, you may need a standalone trust that takes effect during your lifetime or a testamentary trust that activates upon your passing.
  6. Select Appropriate Trustees: Consider who will manage the trust, both initially and in the future after parents or other family members have passed away.

Remember that special needs planning is not a one-time event but an ongoing process. As laws change and your family member’s needs evolve, the trust may need to be reviewed and updated.

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, 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 their lifetime.

More Questions? Beam Legal Team Can Help

If your disabled loved one was injured due to someone else’s negligence, Beam Legal Team can fight for their future. Our expertise extends beyond legal representation to include comprehensive care planning for individuals with special needs.

We specialize in:

  • Long-term care planning with medical experts to forecast lifetime needs
  • Coordinating medical resources with specialists and life care planners
  • Comprehensive damage assessment including medical expenses, adaptive equipment, and home modifications
  • Special needs trust establishment to protect government benefits while enhancing quality of life

When you work with us, you gain advocates who understand both the legal complexities of your case and the unique challenges facing individuals with disabilities. For more information or to set up a free consultation, contact Beam Legal Team today.

Originally published April 12, 2016.

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