What is a special needs trust?

Special needs trusts can be established to allow an individual to qualify for federal needs-based public benefits while still receiving the settlement.

It is not uncommon for settlement recipients to have lost their primary source of income due to their injuries and be facing a horizon full of future medical expenses. Settlement proceeds are rarely enough to meet these future needs, especially after reducing the settlement for attorney fees, costs, and liens. As a result, many injured clients must rely on government assistance in the form of Medicaid, Supplemental Security Income (SSI), or other federal/state/community assistance programs to pay for medical and other basic living costs.

Many of these government benefits, such as Medicaid and SSI, are considered “needs-based,” meaning eligibility is based in part on the recipient’s financial need. Each state has specific eligibility requirements, but as a general rule an individual cannot have more than a minimal amount of “countable assets” and cannot receive income in excess of a designated amount. These asset and income limits are usually shockingly low and most personal injury settlements, if disbursed directly to the client, will render the client ineligible for these government benefits. Even avoiding a lump-sum amount by electing to have structured settlement annuity payments can still surpass the income limits.

One of the best ways to allow for a settlement recipient to receive their settlement while still maintaining their needs-based public benefits is to use a special needs trust sometimes also called a supplemental needs trust.

What is a special needs trust?

Special needs trusts, codified under 42 U.S.C. § 1396p(d)(4)(A) and (C), can be established to allow an individual to qualify for federal needs-based public benefits while still receiving the settlement. The net settlement recovery that otherwise would disqualify the injury victim for needs-based public benefits can instead be paid  directly to a special needs trust. The assets in special needs trusts are not considered “countable assets” and the investment income is not counted unless disbursed for anything other than a “supplemental need.” In general, disbursements cannot be made for food and shelter, but can be made for a wide range of goods and services that enhance the injury victim’s quality of life and provide for needs that are not covered by Medicaid. Although Medicaid is paid by the Federal government, it is administered by the states, and each state’s rules are a little different.  

There are two main types of special needs trusts that are generally used by settling injury victims and each has unique requirements and characteristics. The first is typically referred to as a “self-settled” or (d)(4)(A) trust. The second is referred to as a “Pooled Trust” or (d)(4)(C) trust. A self-settled trust requires the client to be under age 65, and the trust must contain a payback provision upon the death of the beneficiary for benefits paid by Medicaid. A pooled trust can be established for clients of any age and does not contain a mandatory payback provision, but must be established and managed by a nonprofit institution. Special needs trust planning is becoming increasingly complex, and deciding which type of special needs trust is best for each client is a decision best left to a qualified special needs or elder law attorney.