By Thomas D. Begley, Jr., CELA
When a personal injury victim receives a settlement, one of the biggest post-settlement problems is making the money last. If the plaintiff is receiving means-tested public benefits, the monies must be put in a Special Needs Trust. How long do the beneficiary and other family members need that money to last? When the size of the settlement is significant, best practices would dictate that a three-step process be followed:
- Counseling Session. Step 1 is a counseling session with the person with disabilities, the family members, if appropriate, the trustee, the attorney drafting the Special Needs Trust, and the Personal Injury attorney, if necessary. At that point, a discussion should be held as to what the immediate needs of the beneficiary are. Typically, these would include a home, a vehicle, a vacation, and repayment of debt. During the counseling session a budget should be prepared for the plaintiff’s living expenses going forward. The budget could be broken into three sections: (1) shelter expenses, (2) transportation expenses, and (3) personal expenses. For each item of expense a determination should be made as to whether the expense will be paid by the plaintiff or by the trust. A professional trustee should always be used. At that point, the trustee should prepare a Monte Carlo analysis to determine how long the trust will last. The Monte Carlo analysis is complex, but essentially it is based on trust rates of return and trust distributions. The analysis will determine how long the trust will last based on various rates of distribution. It is helpful if the beneficiary can determine how long the trust should last. If it should last the beneficiary’s lifetime and the plaintiff is healthy, this will likely be calculated on a life of 90 years. If the plaintiff is unhealthy, the life expectancy will be shorter.
- Basic Principles. The second step in making trust assets last is to understand certain basic principles. Most trustees have a limit on what percentage of trust assets can be spent for the purchase of a home. This generally ranges between 15% and 25%. As a rule of thumb, a trust will last the lifetime of the beneficiary, if distributions are limited to approximately 4.5% of trust assets annually.
The Depleting Trust
In most instances the plaintiff will tend to adopt a budget for lifestyle he or she would like without consideration to how long the trust will last and what will happen when the trust is exhausted. If the professional trustee determines that the trust is beginning to deplete more rapidly than agreed upon, there is a five-step process. These include the following: notification, conversations, planning, documentation, and continuous follow up.
- Notification. It is recommended that monthly statements of trust activity be sent to beneficiaries, guardians, and, generally, all non-contingent remaindermen. If the trust is depleting, a letter should be sent, at least annually, indicating:
- the current market value of the account;
- the amount dispersed over the past 12 months; and
- an estimate as to the time in which the trust will be depleted based on projected principal distributions for the coming year.
The depletion letter should indicate that steps can be taken to extend the lifetime of the trust.
- Conversations. Face-to-face conversations should be held with the beneficiary and interested family members to determine if current budget expenditures can be reduced. If so, what can be reduced immediately and what can be reduced over time? The beneficiary, family, and support system must understand that the trust will deplete and the time horizon over which it will deplete. There should be a discussion as to whether a different investment allocation strategy should be employed—either a more aggressive strategy to grow assets or a less aggressive strategy to protect current assets. Finally, there should be a discussion as to whether additional funds will be added to the trust such as payments from Structured Settlement Annuities or additions from family members. If the trust contains depleting assets such as real estate or non-liquid securities, such as LLCs, LPs, oil/gas mineral interests, etc., then there should be a discussion as to whether these assets should be liquidated.
- Planning. What is the plan when the trust is depleted? Will the beneficiary then rely solely on government benefits? Will family and friends contribute to care? Will family and friends fund a Third-Party Special Needs Trust to take the place of the Special Needs Trust? Will the Third-Party Special Needs Trust be funded with life insurance or retirement plans? Is the beneficiary in a private pay facility? Does this facility accept Medicaid? What will happen to the beneficiary if the current caregiver dies? If the trust is depleted, final accountings must be filed for the trust.
- Documentation. Trustees should retain documentation of trust administration including:
- Monthly statements.
- Annual depletion letter.
- Other communications such as emails or letters. These communications would include discussions regarding a plan for non-liquid trust assets, beneficiary public benefit programs, discussions among interested parties for extending the trust, a final plan for the beneficiary after the trust is depleted, and final administration needs.
- Continuous Follow Up. During the course of administration of the trust, the trustee must ensure that the right benefits are in place, that living arrangements are made, that assets are sold off as required, that the necessary court approvals are obtained, and that all steps related to final administration are taken.