Special Needs Trust Settlements as published in New Jersey Law Journal 3-15-2010
by Lawrence A. Friedman
“Settlements of Severely Injured Clients: Draft with Government Benefit Rules in Mind”
Victims of debilitating injuries usually can count on government disability aid to ensure a decent quality of life. However, poorly designed settlements can jeopardize eligibility for programs that limit participation based on finances (i.e. means-tested) as shown by the Appellate Division’s recent consolidated decision in J.C. v. Division of Medical Assistance and Health Services et. al. and J.C. v. New Jersey Department of Human Services (A-5632-07 and A-6297-07) (hereinafter “J.C. v. D.M.A.H.S.”).
Gratitude will quickly turn to anger if counsel’s failure to consider government program requirements when settling forces clients to dissipate recoveries on basic needs and struggle to make ends meet. Because proper planning may permit even a large settlement to supplement rather than supplant disability aid, counsel always should consider government benefits when resolving worker compensation, divorce, personal injury, and other claims where a client or family member has substantial disabilities. Even if a client with serious disabilities doesn’t receive means-tested government aid while negotiating settlement, she may seek it later.
Medicaid, pharmaceutical assistance, housing subsidies, food and heat aide, cash programs, and many other government benefits limit eligibility based on finances. Nearly everything available to an individual for support counts against qualification limits- – including receipts not subject to income tax. Thus, personal injury settlements, worker compensation payments, alimony, and even gifts usually are problematic when paid outright whereas amounts in a qualifying special (a.k.a. supplemental) needs trust are not. The distinction is simple. Outright payments normally are available for support because an individual can spend her money as she wishes, but the trustee decides whether, when, why, and how to distribute a properly drawn special needs trust.
Special needs settlements can shelter government aid that an outright recovery would forfeit, but only if both settlement terms and special needs trust instrument satisfy government program requirements. Monikers alone aren’t enough. A so-called special needs trust may prove disqualifying because poor drafting obligates the trust to support the beneficiary or an ill conceived settlement may trigger obscure legal doctrines such as Worthier Title and Merger of Trusts permitting recapture of a purportedly irrevocable trust. Special needs trusts sometimes also must satisfy additional detailed requirements of Medicaid or other programs, and even statutes as far removed as the Social Security Act and state worker compensation laws may come into play.
To qualify for special needs trust exemption, Medicaid and some other programs require the beneficiary to be considered disabled as defined in the Social Security Act (“SS Act”). Under 42 U.S.C. §1382c(a)(3), an adult is “disabled for purposes of this subchapter if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months.” Medicaid recipients must be determined disabled by either the Social Security Administration (“SS Admin”) or New Jersey Medicaid disability review staff. N.J.A.C.§10:71-3.10 et. seq. Consequently, clients who don’t already receive benefits per SS Admin or Medicaid disability finding must obtain disability determination to ensure special needs trust exemption is available.
In scuttling a special needs settlement that likely would appear fine to the uninitiated, J.C. v. DMAHS illustrates twin pitfalls lawyers can avoid with careful planning. Traps for the unwary involved processes of determining disability and paying into trust. A worker compensation judge found JC totally and permanently disabled due to a workplace fall, and JC’s compensation award funded a special needs trust designed to meet requirements for Medicaid and other means-tested programs.
Apparently, JC’s attorney didn’t realize that a worker compensation determination has little bearing on Medicaid eligibility because SS Act and worker compensation law define disability differently. Where an individual is disabled per the SS Act only if unable to do any work reasonably suited to her age and circumstances, an employee can seek worker compensation for total and permanent disability when work injuries keep her from duplicating earnings at the time of the accident. N.J.S. §34:15-12. For instance, a high paid violinist forced from his orchestra job by a work injury that may leave him able to teach for much lower wages arguably could qualify for worker compensation as totally and permanently disabled without being SS Act disabled.
Applicable law exempts a special needs trust only if SS Admin or state disability staff find the beneficiary SS Act disabled. Because JC had only a worker compensation disability finding that didn’t satisfy the Medicaid regulations and was based on a different standard, she wasn’t eligible to use a special needs trust. To easily avoid JC’s issue, worker compensation attorneys (and indeed all lawyers) can advise clients to seek a disability determination by applying for SS Admin benefits or Medicaid whenever settlement may include a special needs trust.
JC’s second failing is a little less obvious. JC’s lawyers maintained worker compensation deposited directly into special needs trust shouldn’t constitute Medicaid income. After all, JC couldn’t access a special needs trust unilaterally, and personal injury structured settlements, divorce payments, and inheritances often are paid directly into special needs trust without incident. Although appealing at first blush, the argument failed. Because N.J.S. §34:15-29 prohibits assignment of worker compensation, the Appellate Division treated JC as if she received the worker compensation payments and deposited them into trust. Had the worker compensation been paid to JC directly, JC could have spent it for her support. Because anti-assignment law led the Appellate Division to treat JC’s worker compensation as if each installment were paid to JC and then she chose to deposit it into trust, the worker compensation payments disqualified JC for means-tested disability aid like Medicaid even though the worker compensation installments were paid directly into trust. Similarly, an individual is considered to receive Social Security deposited directly into his special needs trust because Social Security also can’t be assigned. Reames v. Oklahoma, 411 F.3d 1164 (10th Cir. 2005) and Wong v. Doar. 571 F.3d. 247 (2d Cir. 2009).
Deeming of payment may raise more vexing concerns than determining disability, but these too can be resolved. Fortunately, J.C. v. DMAHS shouldn’t hamper direct deposit of structured and outright personal injury settlements, divorce payments, and inheritances because they can be assigned into trust. With careful forethought, worker compensation awards can be sheltered as well.
J.C. v. DMAHS holds that a worker realizes Medicaid income when worker compensation is paid, but it shouldn’t preclude a special needs trust from sheltering worker compensation after payment. Consequently, reducing the number of worker compensation payments lessens any resulting disqualification for means-tested aid. Worker compensation awards normally are paid periodically in similar manner to wages, but N.J.S. §34:15-25 permits compensation to be commuted to meet the best interests of the employee or satisfy other narrowly enumerated criteria. It would seem that avoiding loss of key means-tested benefits certainly should be in an injured employee’s best interest. While a commuted worker compensation award still is disqualifying income on receipt, experienced special needs counsel should be able to coordinate settlement and trust terms to limit disqualification to a month or two.
Finally, when resolving worker compensation and personal injury claims, attorneys also must consider government benefit liens and Medicare coordination of benefit requirements. Lawyers generally have personal liability to ensure that government aid liens are fully paid before funds go to client or special needs trust. In addition, worker compensation (and possibly personal injury) claimants may be shut off from future Medicare treatments unless counsel satisfy Medicare coordination of benefit requirements through Medicare approved set-aside trust or other arrangement. However, to prevent Medicaid disqualification, a Medicare set-aside trust must be coordinated with special needs planning.
In conclusion, severely injured clients can benefit greatly from government disability aid so long as settlements are drawn with government benefit rules in mind. J.C. v. DMAHS illustrates how worker compensation recoveries can disqualify clients when counsel misunderstand program requirements. Fortunately, careful settlement design can avoid JC’s fate.
Lawrence A. Friedman maintains his law office in Bridgewater, and is a former chair of the New Jersey State Bar Association Elder & Disabilities Law Section and a consultor to its Real Property, Trusts and Estates Law Section. He received the NJSBA’s Distinguished Legislative Service Award for writing legislation to further special needs trusts. Friedman has been Certified as an Elder Law Attorney by the A.B.A. approved National Elder Law Foundation and frequently lectures for ICLE and other continuing legal education providers. He received his LL.M. in Taxation and J.D. from New York University School of Law. Attorney Friedman’s other articles on special needs planning are available free at SpecialNeeds-NJ.com.