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Settling Personal Injury, Divorce & Other Claims and Estate Plan to Safeguard Disability Aid

[This article was published in New Jersey Lawyer August 9, 2004 Whether settling a disabled client's personal injury, divorce, probate, or worker compensation claim or planning an estate, two considerations should be paramount: preserving eligibility for government programs and resolving public benefit liens. Counsel's hard work to achieve even a large recovery will be for nought if the client loses public assistance as a byproduct, for disabled people realize little or no benefit when a recovery supplants rather than supplements government aid. In addition, attorneys who don't address public assistance liens upon settlement may become personally liable to satisfy them.

Because program rules are complex and arcane, it can prove difficult for the uninitiated to determine whether a particular claim may impact government benefits and liens. Lawyers can't safely rely on even the most sophisticated clients to recognize when it is important to protect government benefits. Programs like Medicaid/Medicare and Supplemental Security Income/Social Security Disability have similar names but very different eligibility requirements. Nevertheless, courts have imposed malpractice liability and even sanctions when lawyers ignored government aid issues while resolving claims or planning estates that affect disabled people. Consequently, many trial and general attorneys routinely consult an elder-disabilities lawyer whenever a client or member of a client's family or household has serious disabilities.

Eligibility for Disability Aid

Even a disabled person who doesn't currently receive any at-risk aid should seek to preserve potential future eligibility because benefit considerations may change over time. For instance, a disabled individual receiving health insurance through a parent or spouse could eventually need Medicaid if health or private insurance coverage worsens. By the same token, who will care for your autistic or retarded client once her parents no longer can if you negotiate a settlement that disqualifies her for a publicly funded group home? Finally, even though most settlements don't affect Medicare qualification, a Medicare participant may later seek housing subsidies or Medicaid to fund long term care.

Disqualification is almost inevitable unless a settlement or estate plan is deliberately drawn to satisfy government program requirements, especially because recovery by anyone in a disabled individual's household or family may impact eligibility. Fortunately, elder-disabilities lawyers usually can suggest protocols that benefit a disabled person without jeopardizing eligibility for key government programs like Supplemental Security Income, Medicaid, housing subsidies, group home placements, developmental disabilities and mental health services, and food stamps.

A recovery, gift, or inheritance disqualifies an individual for many essential disability programs whenever she has a right to control the funds or access them for support. Obviously, payments outright to a disabled person (or guardian) are problematical, but so are most trusts because ordinary trusts commonly mandate distributions at set intervals or for support. Thus, tying trust distributions to the typical tax planning “ascertainable standard” of health, maintenance, and support is a prescription for loss of benefits. Even trusts that may seem ok at first blush often are construed as support trusts either due to ambiguities or because they don't clearly indicate otherwise. For instance, the following language can readily result in a support trust even if the draftsman intends otherwise: “This trust shall distribute as the trustee in her sole discretion considers appropriate for the disabled beneficiary's welfare.” After all, most settlors probably would expect the trust to provide for the beneficiary rather than force him to do without. Consequently, counsel normally should arrange for personal injury awards, alimony, child support, and other litigation recoveries as well as gifts and devises to be paid into a special needs trust whenever disability benefits may be at issue.

Special Needs Trusts

Special needs trusts avoid jeopardizing public benefits because they are drawn to satisfy government program requirements and foreclose construction as a support trust by granting trustees discretion over distributions while refuting potential support obligations and avoiding ambiguities. Although meticulous drafting is essential, a thorough understanding of the many disability aid programs and their disparate eligibility requirements is even more important.

Effective special needs trusts are written to meet a client's individual circumstances. Clients nearly always suffer when inexperienced attorneys or canned computer programs produce “one size fits all” special needs trusts. No matter how much less a client may pay for such a trust, it can cost him dearly in the end if the trust doesn't provide for the client's less typical needs (e.g. installing an indoor pool for year round aquatic cerebral palsy therapy) or includes limitations mandated by regulations that an experienced elder-disabilities lawyer would realize don't even apply.

Various factors including when, how, and by whom a special needs trust is created and funded and the particular government benefits at issue determine how the trust should be drawn. For instance, New Jersey's Medicaid trust regulations, Division of Developmental Disabilities “fee for service” rules, and little known “trigger trust” and “trust buster” public policy strictures can prove traps for unwary scriveners. Although they set forth burdensome reporting and operating requirements and limit flexibility in drafting and administering special needs trusts, each provision applies to only a limited class of special needs trust, and a trust subject to one rule is not necessarily subject to the others. Nevertheless, inadvertently running afoul of any of these rules when it applies can prove disastrous.

What good are special needs trusts if they can't have any obligation to cover a disabled beneficiary's support? A special needs trust may fund nearly any purchase other than basic support without affecting government benefits. Thus, special needs trusts commonly pay for furniture, computers, powered wheelchairs, vans, home entertainment systems, household goods, accessibility modifications, education, vacations, transportation, legal and other services, therapies, telephone, and personal items. In addition, with expert legal guidance, trustees may exercise their discretion to fund a disabled person's housing and other support costs beyond government aid.

Nevertheless, a special needs trust may not be the best way to meet every disabled plaintiff's needs. Trust set up and administration costs may be uneconomic for very small settlements, and other factors may make special needs trusts inappropriate in rare situations. In those cases, elder-disabilities law attorneys can suggest other useful planning techniques (e.g. rapid spend down, exempt asset purchase, making gifts).

Even when a special needs trust is clearly the best way to help a disabled person, additional considerations can apply. Perhaps a botched birth malpractice award must be allocated between mother and child in a manner that doesn't jeopardize the child's eligibility for disability aid. It may be important that a settlement order authorize purchase of an expensive home due to accessibility concerns and the desirability of a school district with strong disabilities programs. Similarly, typical structured settlements may require modifications if the plaintiff is to remain qualified for government benefits. Finally, liens may arise whenever a client has received public aid.

Public Aid Liens

Medicaid, Medicare, Department of Human Services benefits, and other public assistance may trigger liens against disability recoveries. Medicare and Medicaid claims generally are limited to personal injury and worker compensation awards and estate recovery, whereas Department of Human Services liens may be satisfied from any kind of receipt. Although some government aid isn't subject to recoupment, participants may be required to give notice of awards because they can affect future eligibility. For example, Supplemental Security Income regulations mandate reporting of personal injury settlements and other receipts even though SSI need not be repaid.

To avoid a nasty surprise when resolving a case, counsel must determine whether any agency is entitled to notice or repayment. Attorneys who disburse a settlement without first resolving public benefit liens can incur personal liability while clients can lose benefits for flouting reporting requirements. In fact, the Medicare Prescription Drug, Improvement and Modernization Act of 2003, Public Law 108-173 (Dec 8, 2003) reverses several Circuit Court rulings that cast doubt on whether attorneys were bound by Medicare liens.

Litigators should carefully scrutinize liens before paying them since expenditures that aren't attributable to a personal injury may be exempt from recovery. Thus, challenging claims for medical care not normally related to an injury (e.g. as treatment of longstanding conditions) may lead to substantial reductions from initial Medicaid and Medicare claims. Liens also may be offset by a share of attorney fees and sometimes can be compromised.

Medicare Set Aside Trusts

Worker compensation settlements must make provision for future medical costs because Medicare will deny claims derived from a work related injury until the entire worker compensation award attributable to treatment costs is fully exhausted. For instance, if Medicare views one third of a $300,000 worker compensation back injury award as compensation for anticipated future medical costs, Medicare will not cover any cost related to back treatment until the employee has paid $100,000 for such care. Unless $100,000 is set aside in a trust to cover the future medicals, there is a risk that the employee may spend the whole settlement leaving no means to fund needed back care. Thus, unless an insurer retains liability for future medicals, part of most worker compensation settlements should be paid into a Medicare set aside trust. To ensure no loss of future Medicare benefits, Medicare must approve the trust terms, funding, and disbursements based on a reasonable allocation between anticipated future medical needs and other damages such as lost wages.

Even exemplary lawyering benefits your disabled client little, if the large settlement that you negotiate disqualifies him for key government programs. To preserve crucial disability aid, attorneys must be sensitive to government benefit rules when resolving personal injury, divorce, and worker compensation claims or planning an estate. Lawyers also must take care to resolve Medicaid, Medicare, and other public benefit liens or personal liability may result. As a primary means to safeguard public benefits, special needs trusts should be part of every lawyer's arsenal when pursuing a claim, dissolving a marriage, or planning an estate that may affect a disabled person.

Lawrence A. Friedman practices disabilities, elder, estate planning, and tax law in Bridgewater, NJ and frequently writes and lectures on these topics. He has been Certified as an Elder Law attorney by the A.B.A. approved National Elder Law Foundation. A former chair of the New Jersey State Bar Association Elder & Disabilities Law Section, Friedman received the NJSBA's Distinguished Legislative Service Award for writing legislation to further special needs trusts in New Jersey. He conducts annual programs for ICLE on sophisticated elder law concepts and special needs trust settlement and estate planning. Friedman received his LL.M. in Taxation and J.D. from New York University School of Law.