Many people rely on government benefit programs, like Medicaid and Supplemental Security Income, to cover their basic day-to-day needs. Of course, these programs are “means-tested,” and only available to people who have very few assets and little income. Securing a personal injury settlement, according to AtlantaAdvocates.com, can threaten those benefits and significantly impact a person’s quality of life.
Handling A Personal Injury Settlement – While Maintaining Government Benefits
Without careful financial planning, a court award, settlement or inheritance can push a recipient over the government’s eligibility limits, depriving them of necessary SSI and Medicaid benefits. Even small settlements, while too low to make an individual completely ineligible for government assistance, can lead to a drastic reduction in monthly benefits. Obviously, finding a balance is crucial. How can we preserve our eligibility for public assistance programs, while benefiting from a sudden windfall, like the compensation secured in a personal injury lawsuit?
Special Needs Trusts
Establishing a “special needs trust” is one option that many people find advantageous. Special needs trusts are explicitly designed to help people with disabilities retain their benefits. Unlike some trusts, special needs trusts are considered “supplemental.” While Medicaid and SSI benefits cover basic living needs and healthcare, the money placed in a special needs trust can be used to pay for expenses that government benefit programs don’t cover. Properly drafted, a special needs trust will be structured so that the trust’s assets can’t apply toward the eligibility limits of programs like Medicaid and SSI.
Most special needs trusts fall into one of three categories:
- First-Party Trusts
These are the most common trusts established for people with disabilities who have secured a personal injury settlement or court award.
First-party trusts are “self-settled,” which means the applicant’s assets fund the trust. The trust itself, however, has to be created by a parent, grandparent, guardian or court to be compliant with federal law. Only people under the age of 65 are eligible to self-settle this kind of trust, and the assets in the trust can only be used for the benefit of the person with disabilities.
There’s an additional requirement with first-party trusts. Upon the individual’s death, the trust’s remaining assets must go back to an applicable state agency, as reimbursement for the Medicaid benefits paid out during the individual’s life.
First-party trusts are also referred to as d4a trusts, in reference to the subsection of Federal law [42 USC 1396p(d)(4)(a)] in which they were established.
- Third-Party Trusts
These trusts are funded with assets from someone other than the beneficiary, in most cases a parent or other family member. With a third-party trust, there’s no requirement to pay the government back after the recipient’s death so that the remaining assets can transfer to other family members or a charity.
- Pooled Trusts
Pooled trusts are run by non-profit organizations, and funded by multiple beneficiaries. As the name suggests, the fund’s assets are “pooled” together for investment purposes. But each recipient is given a personal account, which provides only for their supplemental needs. After a beneficiary’s death, a part of the assets left over will go to reimburse the government, while another portion will be used to sustain the non-profit’s operations.
Pooled trusts may be best for people who have secured smaller settlements or inheritances, or have trouble selecting an appropriate candidate to serve as trustee.
Can I Just Spend The Money?
Another option is to “spend down.” Simply accept the settlement as a lump sum and use it for eligible expenses until you’ve reached the legal resources limits that apply in your case. Be careful, though. The purchases made in a “spend down” should be restricted to “exempt” resources, ones that aren’t counted toward SSI and Medicaid asset limits. Things like medical expenses that Medicaid doesn’t cover and purchasing a home are usually okay. Plus, you’ll have to spend a sufficient amount of the settlement or inheritance in the same calendar month that you accept it, or risk losing out on all or a portion of the benefits for that month.
The spend down approach is probably best for handling smaller settlements, or if you need to purchase a high-value (and “exempt”) item immediately. But for obvious reasons, it’s not the best option for everyone. Spending down correctly can be very tricky, and there are strict reporting deadlines. Medicaid, in particular, has very specific requirements, which vary from state to state.
Bruce R. Millar, Esq. is a personal injury attorney and the founder of Atlanta’s Millar & Mixon Law Firm, LLC. Over more than two decades of legal experience, Mr. Millar has helped numerous injured individuals recover compensation. Find out more about Bruce here.