By Thomas D. Begley, Jr., CELA
When a personal injury victim settles a case and the plaintiff is receiving certain public benefits such as SSL Medicaid, Medicaid Waiver programs, SNAP (Food Stamps), Section 8 Housing, or any other means-tested program, a Special Needs Trust is required. To qualify for a Special Needs Trust, the plaintiff must be disabled. How Lonn Should the Trust Last? Once the trust is established, the next issue is.
How long should the trust last?
The answer to that question depends, in part on how large the settlement is. If the settlement is small, the trust will not last very long. However, if the settlement is large consideration should be given to making an effort for the trust to last the lifetime of the plaintiff. By definition, the plaintiff funding the Special Needs Trust is disabled. That means it is unlikely that he or she will ever be able to work and produce income. Unless the plaintiff comes from a family with the means and an intention to fund a separate Third Party Special Needs Trust for the benefit of the disabled plaintiff, then the First Party Trust being established as a result of a personal injury settlement may be all the disabled plaintiff will have to live on for the rest of his or her life. Although I have never been able to verify the veracity of this statement, it is often held that a typical personal injury settlement only lasts three to five years. If it is important and realistic that the trust last the lifetime of the disabled plaintiff, there are steps that should be taken.
The first step is to make a realistic determination as to the life expectancy of the plaintiff. In larger cases, it is common to have a life care plan, but these plans tend to be optimistic as to how long the plaintiff will actually live. It is better to have another life care planner or medical professional take a look after the settlement to determine a more realistic life expectancy. Second, a counseling session can be held with the disabled plaintiff and his or her family, if appropriate, to determine what funds will be needed immediately upon receipt of the settlement. Typically, these funds include monies for a home, a vehicle, repayment of debt, a vacation, furniture, handicap modifications to a home. etc. Those interested individuals must be made to understand that the more money they spend up front, the less will be available to be invested. The interested parties should then begin the process of preparing a monthly budget. How much will be necessary for shelter expense, including such items as rent, mortgage payments, real estate taxes, homeowner’s insurance or renter’s insurance, utilities, repairs and maintenance, telephone, cable TV, trash and garbage removal, condominium or coop fees, equipment and furniture. Next the budget should contain an estimate of transportation expenses. These will include the following items: auto insurance, registration, license, auto maintenance, fuel and oil. Finally, personal expenses should be estimated. Personal expenses include the following: food at home, restaurants, household supplies, prescription drugs, non-prescription drugs, cosmetics, toiletries, sundries, clothing, dry cleaning, commercial laundry, hair care, unreimbursed medical, unreimbursed psychiatric/psychological counseling, unreimbursed dental, unreimbursed orthodontic, unreimbursed medical insurance, vacations, entertainment, alcohol, tobacco, newspapers, periodicals, life insurance, professional expenses, pet care and estimated trustee’s fee.
Rate of Withdrawal
The professional trustee, who should attend the counseling session, can then make an analysis based on current investment performance. Generally, 4% to 5% of the trust can be withdrawn annually without fear of totally depleting the trust. Recently I was told by a respected professional trustee that in the current investment environment 3% to 3.5% is more appropriate. The three factors affecting this withdrawal rate are: (1) the life expectancy of the trust beneficiary, (2) the current investment: environment, and (3) the rate at which the plaintiff is withdrawing funds from the trust.
The process of depletion analysis begins by examining the initial trust funding and then subtracting immediate expenditures such as a house, vehicle, vacation, debt, etc .. and preparing a monthly budget for the balance of the funds. At that point, a Monte Carlo analysis should be prepared showing how long the trust assets will last given various rates of return and levels of expenditure.
Notice of the depletion analysis and expenditures from the trust must be given to interested parties. This can be as simple as monthly statements of the trust account. The statements should be sent to the beneficiary and/or interested family members. Statements may be sent by mail or on line, depending on the preference of the recipients. At least once a year, a Letter of Depletion should be sent for depleting accounts. This letter essentially indicates the amount of funds disbursed from the trust over the last year. The letter also indicates the market value of the trust and makes a projection as to the date the trust will be exhausted based on projected principal distributions for the coming year.
Conversations should be had with the beneficiary or appropriate family members to determine if expenditures can be reduced. It may be possible to reduce some expenditures immediately while others may have to be reduced over time. A discussion should be held as to whether the trustee should employ a different investment allocation strategy. Should this strategy be more aggressive to grow assets or more conservative to protect the current assets? An inquiry can be made as to whether other assets may be added to the trust from either a structured settlement annuity or additions from family members to a Third-Party Special Needs Trust.
The conversation should include a discussion of any non-liquid assets such as real estate, closely-held securities. etc. At some point, real estate may need to be liquidated because the trust may not have enough liquid assets to pay real estate related expenses. The conversation should also include a discussion of what will happen when the trust depletes. Will the beneficiary rely solely on government benefits? Will family and friends contribute to care? Will family and friends fund a Third-Party Special Needs Trust? If the beneficiary is in a facility on a private pay basis, will that facility accept Medicaid when funds are exhausted.
It is important for the trustee to document monthly statements, annual depletion letters and other communications. When the trust is finally exhausted., a court accounting will be required. Strategies to stretch out trust assets might include seeking additional public benefits. changing living arrangements, and selling off assets.
If a trust beneficiary wants to move to another state, it is important to first analyze what public benefits are available in that state and how that will affect the longevity of the trust.
Depletion management is extremely important for the long-range welfare of the disabled plaintiff. It makes little sense to establish a high standard of living that cannot be sustained. Once the trust is out of money, the trust beneficiary must rely on public benefits, which are generally limited to Social Security Income and/or contributions from family members. Frequently, family members are not in a position to make significant contributions.