[This article was originally printed in the Barrister, a publication of the Camden County Bar Association in September, 2014.]
THE IMPORTANCE OF A FINANCIAL ANALYSIS TO DETERMINE IF A SPECIAL NEEDS TRUST IS REQUIRED IN A PERSONAL INJURY CASE
by Thomas D. Begley, Jr., CELA
When a plaintiff receiving public benefits achieves a personal injury settlement, the plaintiff essentially has four choices: (1) use a special needs trust (SNT) only; (2) use the SNT, but also buy ACA private health care; (3) do not use an SNT and buy ACA private insurance; or (4) do not use an SNT and attempt to become eligible for Medicaid-funded insurance through programs such as New Jersey Family Care.
Analysis of the Four Options with Respect to Special Needs Trusts
Let’s examine the advantages of each option.
- Using an SNT only. The advantage is that the plaintiff will continue to receive SSI, Medicaid, and other means-tested public benefits. The disadvantages are that distributions from the trust must be for the sole benefit of the individual and that there is a Medicaid payback on the death of the trust beneficiary.
- Use the SNT but also buy ACA private health care. The advantage here is that the plaintiff’s SSI and Medicaid are protected. The ACA insurance will result in a reduction or elimination of the Medicaid payback. Also, purchase of the ACA insurance may result in better health care and more access to health care providers than Traditional Medicaid. The disadvantage is that the trust must pay the premiums for the ACA insurance, so this is a consideration in smaller trusts but definitely a good strategy for larger trusts.
- Not use an SNT and buy ACA private insurance. The advantage is that there is greater flexibility with respect to accessing the recovery. The disadvantages are that the personal injury victim may squander the money and ACA insurance only covers what typical private medical insurance covers (i.e., hospitals and physicians), but does not cover what Medicaid Waiver programs cover, such as home- and community-based services or placement in group homes, assisted living facilities, or nursing homes.
- Not use an SNT but rely on programs such as New Jersey Family Care. The advantage is that there is greater access to the litigation proceeds. The disadvantage is the money may be squandered, not everyone is eligible for New Jersey Family Care, and New Jersey Family Care does not cover hospital and physician costs.
Importance of SSI
If a personal injury victim is receiving means-tested public benefits such as SSI, Medicaid, Medicaid Waiver benefits, etc., it is often assumed that the plaintiff will require an SNT to preserve those benefits. In the past, that conclusion was almost always true. However, with the passage of the Affordable Care Act effective January 1, 2014, individuals with pre-existing conditions are now able to obtain private medical insurance and may not need to rely on Medicaid as much as prior to the ACA. However, the analysis does not stop there.
Currently in New Jersey an SSI recipient is entitled to approximately $750 per month. SSI comes with a COLA. The value of the SSI payment over a lifetime is usually hundreds of thousands of dollars.
Who Will Hold the Money
In most cases, it makes financial sense to utilize an SNT if the plaintiff also receives SSI, unless the net settlement to the plaintiff exceeds roughly $3,000,000. The SNT preserves SSI, which is often the individual’s only access to income. In addition, if the plaintiff is incapacitated and is receiving means-tested public benefits, the litigation recovery must be placed in some kind of court-supervised entity, typically a guardianship or the Surrogate’s office. It is always less expensive and easier to access funds held in an SNT than those held by a guardianship account or the Surrogate’s Court. Funds held in a guardianship account or Surrogate’s Court are considered to be available for public benefits purposes and would cause a loss of both SSI and Medicaid.
Protecting the Plaintiff from Himself and Predators
Even if the plaintiff has legal capacity, frequently they do not have the sophistication to properly manage wealth. An SNT allows the plaintiff to preserve eligibility for benefits, usually without court supervision in New Jersey, and to have a trustee with a fiduciary obligation to utilize the funds for the plaintiff’s sole benefit under a prudent investment strategy. The trust also offers protection from financial predators including strangers, members of the opposite sex, and even family members looking to take advantage. Under these circumstances, the SNT will provide the best option to safeguard and protect the person with a disability.
According to an analysis by Scott MacDonald, CSNA, Affordable Care Act’s Financial Effect on Settlement Planning, an individual receiving a net settlement of $1,000,000 that is placed into an SNT will receive an attainable annual total budget of $33,484. If instead the plaintiff took the settlement and purchased private health care, even under the ACA, the annual budget would be reduced to $15,494. If you add in the loss of the SSI COLA estimated at 2.5% over time, the plaintiff would be taking a 52% annual pay cut by not utilizing an SNT. Using a similar analysis with a $100,000 net settlement, the SNT could provide $12,610 toward an annual budget, but if the beneficiary took the funds directly and lost SSI, the annual spending amount would be $3,614, a 71% reduction for life. Under MacDonald’s analysis unless the plaintiff is netting at least $3,000,000, he will always be better off with an SNT.