Re-published with permission by the author KEVIN URBATSCH.

A plaintiff who is disabled and re­ceiving needs-based public benefits re­quires special planning when he or she receives a settlement or judgment. Fail­ing to plan can lead to great hardship for the client and may lead to a malpractice claim against the plaintiff ’s attorney. Pri­marily, this planning is done by transfer­ring the litigation recovery to a first party Special Needs Trust (SNT). 10This type of trust allows a person with a dis­ ability to use the litigation recovery for his or her future needs while preserving eligibility for needs-based public bene­fits.

First-party SNTs are statutorily cre­ated “safe harbor” trusts. Therefore, every first-party SNT must strictly comply with a myriad of federal, state, administrative and judicial rules and regulations defining them. Even small changes in a plaintiff ’s fact pattern (e.g., plaintiff ’s age, legal capacity or amount of recovery) can lead to a very different planning solution. Thus, it is imperative for the practitioner to understand the law in this area and how different factual situations will change the appropriate plan.

This article will discuss which clients with a disability must be planned for, the planning issues that arise for these clients, and the steps that need to be taken to assure that the client receives the full benefits of the litigation recovery.

Which client with a disability requires special planning?
Not every person with a disability requires an extensive plan. It is impor­tant to know that only certain public benefits require a plan to preserve bene­fits. Public benefits are divided into two main categories, (1) needs-based and (2) entitlement. It is easy to confuse what type of benefits a plaintiff may be re­ceiving as they both are similarly named and are administered by the same agencies. Oftentimes, even the plaintiff will not know which benefits he or she is receiving.

Needs-based public benefits include Supplemental Security Income (SSI) and Medi-Cal (Medicaid in other states), while entitlement benefits include Social Security Disability Insurance (SSDI) and Medicare. Only recipients of SSI and Medi-Cal require planning. This is because for these programs an individual may only have a very limited income and $2,000 in his or her own name to be eli­gible. Assets held in a special needs trust are not counted as the public benefit recipient’s assets for eligibility purposes and thus preserve eligibility.

If the person with a disability receives only SSDI or Medicare, an SNT is not needed to preserve these benefits. These benefits are based on payment into the federal system by an employee. Anyone who becomes disabled under the program’s definition qualifies for SSDI and Medicare; the amount of assets held by the individual is immaterial.
However, even when preservation of public benefits is not of primary impor­tance, it may still be prudent to prepare and fund an SNT. Medicare does not pay for all types of medical care. Some­times, Medi-Cal will be needed right away or is expected in the future, so planning with an SNT should still be considered. Moreover, an SNT is a fully discretionary spendthrift trust. This means that assets are placed in other people’s hands to be managed. This can be of great comfort to the family of a person with a disability who may be sus­ceptible to influence by others or may not be able to manage his or her own litigation recovery.

Planning to prevent the loss of needs-based public benefits
It is important that a litigation re­covery not be received directly by a needs-based public benefits recipient; otherwise eligibility for SSI and Medi-Cal is lost. This can be devastating for the plaintiff. These programs are essential for the well being of most persons with disabilities because private health insur­ance is generally unavailable either because of their inability to work or because of preexisting conditions resulting from the disability. This leaves Medi-Cal as the only source of medical coverage for many persons with a disabil­ity. As a result of the lost SSI or Medi-Cal, all future medical payments for the plaintiff are paid from the litigation recovery. This generally means that the recovery is quickly spent on food, shelter and medical care until spent down below $2,000. The benefits recipient then returns to a welfare existence with no real opportunity to use the litigation recovery to improve his or her quality of life.
There are several planning opportu­nities available to a person with a disability in this situation. When planning for a per­ son with a disability’s litigation recovery, there is often no one right answer. Some­ times two clients will have identical fact patterns and one will, for example, opt to purchase an exempt asset or opt to estab­lish a first-party SNT. It is up to the practi­tioner to provide the available options and allow the decision-maker to decide which option best meets his or her needs.

First-Party Special Needs Trusts are “safe harbors”
A common planning mistake is transferring the litigation recovery to a non-qualifying first-party trust. Both the Medi-Cal and SSI programs disregard most first-party trusts, i.e., trusts that a
public benefits recipient creates with his or her own assets. These welfare programs do not want their recipients to give away their own assets to remain qualified for public benefits, in trust or otherwise. Accordingly, an attempt by a benefits recipient to preserve his or her benefits by putting the assets into any first-party trust will not work. Either the transfer to the trust will be treated as a disqualifying gift transfer, or the assets, once transferred will still be counted as available – and disqualifying (See 42 U.S.C., §1396p(d)).

The primary way to preserve public benefits for a litigation recovery is to transfer it into a qualifying first party SNT. There are two federal statutes that carve out these “safe harbor” trusts in use in California. The Medi-Cal program al­lows such trusts under the Omnibus Budget Reconciliation Act of 1993 (OBRA 1993) (42 U.S.C., §1396p(d)(4)). The SSI program allows the same trusts under the Foster Care Independence Act of 1999 (FCIA) (42 U.S.C., §1382b), which incorporates the Medi-Cal safe harbor provisions of OBRA 1993 into SSI law.
The requirements for the two trusts are:
• A trust that contains the assets of an individual with a disability under age 65, established for his or her benefit by a parent, a grandparent, a legal guardian, or the court, if Medi-Cal will receive all amounts remaining in the trust on the beneficiary’s death up to the amount of Medi-Cal benefits paid (42 U.S.C., §1396p(d)(4)(A)). This trust is commonly called a (d)(4)(A) SNT, a litigation SNT (LSNT), or a payback trust.
• A trust that contains the assets of an individual with a disability if (a) the trust is established and managed by a non­ profit association and maintains separate accounts of pooled assets; (b) the ac­counts are established by a parent, a grandparent, a legal guardian, the indi­vidual beneficiary, or the court; and (c) the state will, on the beneficiary’s death, receive all amounts remaining in the beneficiary’s account (not retained by the trust) up to the amount of Medi-Cal ben­efits paid (42 U.S.C. §1396p(d)(4)(C)). These trusts are commonly known as pooled trusts or (d)(4)(C) SNTs.

Consider Special Needs Trust alternatives
A first-party SNT is not the only op­tion available to a public benefits recipient who receives a litigation recovery. Other planning options to a benefits recipient in this situation are: • Spending the litigation recovery on exempt assets (e.g., primary residence, one automobile) or other qualified expendi­tures (e.g., paying off existing debt) until assets are below $2,000. This makes sense when the litigation recovery is for a small amount. • Gifting or transferring which results in the loss of needs-based public benefits for a period of time. This is generally an unacceptable option. • Some combination of the above. This can include the purchase of an exempt asset and the establishment of a first party SNT.
Generally, alternatives to first party SNTs are considered only when the liti­gation recovery is for a modest amount of money. For example, if the recovery is $10,000, it may be prudent to use the money to buy an exempt asset that is not counted by SSI or Medi-Cal, such as an automobile. If the goal, however, is to preserve public benefits and allow for the future use of the litigation recovery, then the proceeds must be funded to a quali­fying first party SNT.

Using structured settlement as planning option
In physical personal injury cases involving substantial monetary damages, many cases settle with a structured settle­ment, i.e., annuity-funded, income-tax­ favored periodic payments for the life of the plaintiff or for a period of years. The combination of a structured settle­ment and a first party SNT can be part of an effective strategy to protect a person with a disability’s future needs. This type of settlement usually consists of an initial payment to the plaintiff that covers the attorney fees and costs. In the context of SNTs, it may also include any preexisting Medi-Cal litigation lien held by the state against the plaintiff. The set­tlement agreement then provides for a lump-sum payment for the plaintiff and a separate structured settlement annuity for payments, continuing over an agreed-on period of time or contingent on a predetermined factor: e.g., the plaintiff ’s continued survival. The lump sum amount and ongoing payments are irrevocably assigned to the plaintiff ’s SNT.

Sensible planning for a litigation re­covery requires a realistic overview of the person with a disability’s future needs, but all too often, plaintiff ’s trial attor­neys are convinced to use too much of the settlement’s cash to fund the struc­ture and to not leave enough cash out­ side the structure to properly care for the SNT beneficiary’s future needs. This is typically done with little or no thought as to the consequences to the person with a disability. For example, oftentimes a per­son with a disability will wish to purchase a home or car with settlement proceeds. However, the plaintiff is unable to do this because too much of the cash is being used to fund the structure and not enough is left outside the structure. Prudent planning would take into account the inflexibility of over structuring a settlement.

Establishing a First-Party Special Needs Trust
Because a person with a disability is not allowed to establish his or her own (d)(4)(A) SNT, determining the correct procedure to establish the trust is often a very difficult task. The choice of the proper procedure depends on a number of variables, the most critical of which are whether: • There is a parent, grandparent or legal guardian willing to assist, or, if not, whether a court order can be obtained; • The person has capacity; and • The person is a minor, age 18 or over but under age 65, or age 65 or over. For a plaintiff who is 65 years of age or older, it is not possible to establish a (d)(4)(A) SNT due to its age requirement. For these plaintiffs, it is required that SNT alternatives be considered or they join a Pooled SNT.
Establishing a (d)(4)(A) SNT through court for plaintiff who is a minor or incapacitated adult under the age of 65
There is only one situation in which a first-party SNT must be established by the court; i.e., if a minor or incapacitated adult with a disability receives a litigation recovery and is also the recipient of needs-based public benefits (Prob. Code, §§3600–3613). When there is a compro­mise, covenant, or judgment for a minor or adult with a disability, an SNT is but one of several options available for dis­tributing the funds by court order. The SNT however, is the only method of dis­tribution for preserving eligibility for needs based public benefits. This is the most expensive and time consuming way to establish an SNT.
The SNT is established by a court petition, either as an attachment to a minor or incompetent’s compromise or as part of a separate petition in Probate Court. The petition must seek an order of the court that makes the following findings (Prob. Code, §3604(b)): • The minor or person with a disability has a disability that substantially impairs the individual’s ability to provide for his or her own care or custody and consti­tutes a substantial handicap. For practical purposes, a person who qualifies for SSI or Medi-Cal on the basis of disability is likely to satisfy the substantial impair­ment requirement.
• The minor or person with a disability is likely to have unmet special needs without the trust. Depending on the amount at issue, many personal injury at­torneys have a “life care plan” prepared for the plaintiff. The life care plan can be used as an exhibit to the petition to establish the SNT that the amount paid is not only reasonable, but in all likeli­hood insufficient to meet all of the future “special needs” of the person with a disability. • The amount paid to the trust appears reasonably necessary to meet those spe­cial needs. The term “special needs” suggests a category of needs that is narrow or somehow limited in scope. However, just the opposite is true. The term “spe­cial needs” is distinguished from “basic needs,” that is, the needs for food, shel­ter and medical care, which public bene­fits like SSI and Medi-Cal are intended to provide for minimally. “Special needs” then encompasses the very broad range of anything and everything else a human being needs in order to live, thrive, and realize his or her potential in life. The practitioner may satisfy this requirement by describing the prospective “spe­cial needs” of the SNT beneficiary such as accessible housing; supplemental medical, dental, vision, and mental health care; supplemental nursing and custodial care; supplemental therapy, rehabilitation, training, and education; special equipment; and medically di­rected dietary supplements; furnishings and household goods and supplies; access and repair services for telephone, television, internet, cable, and computer; household and yard cleaning, maintenance, and repair services; clothing; transportation needs, including gasoline, auto expenses, insurance, public trans­portation costs and travel fares; personal care, including hair, skin and nail care; athletic, artistic, outdoor and other recreational programs; instruction, supplies, and equipment, including televi­sions, cameras, computers, software, compact disks, DVDs, books, magazines, and newspapers; musical, artistic, writing and printing instruments; and admission to movies, concerts and other perform­ances and activities that enhance quality of life or self esteem; memberships to clubs and associations; and pre-need funeral and burial expenses.
In addition to the requirements de­scribed above, SNTs established under Probate Code sections 3600–3613 must also comply with the requirements for court-funded trusts set forth in Califor­nia Rules of Court, rule 7.903(c).4 Thus, the trust document must contain certain provisions regarding bond, court supervised accountings, and restrictions on trustee changes and trust modifica­tions, investment standards, and pay­ment of trustee and attorney fees, among others, unless good cause is shown.
Some practitioners mistakenly be­lieve a (d)(4)(A) SNT must be established for all litigation recoveries using the Pro­bate Code section 3600 procedure. However, the court cannot make an order or give a judgment under Probate Code sections 3600, 3601, 3602, 3610, or 3611 without the express consent of a person who has capacity. In other words, the adult with capacity may elect to use other means to establish an SNT. Not consenting to the Probate Code section 3600 procedure is generally in the best interest of the SNT beneficiary who has capacity because the trust will not have to comply with the requirements of California Rules of Court, rule 7.903, which mandates expensive ongoing court supervision, a trustee bond, court supervised accountings, and court authorization for payment of trustee and attorney fees.
Establishing a (d)(4)(A) SNT through a parent or grandparent for a plaintiff who is an adult with capacity under the age of 65
It is possible for a disabled adult with capacity and with a parent or grandparent willing and able to assist to establish a qualifying (d)(4)(A) SNT for a benefit recipient’s litigation recovery. This type of SNT is called a “seed trust.” It is so called because a parent or grand­ parent establishes a (d)(4)(A) SNT for the benefit of a child or grandchild with a disability by funding the trust with a nominal amount of his or her own funds (e.g., $10 on a Schedule A), thereby “creating” the trust under Probate Code sec­tions 15200 and 15202. The parent or grandparent who signs the (d)(4)(A) SNT document is taking physical action re­quired by POMS SI 01120.203(B)(1)(e) to “establish” the trust. Once the seed trust is established, the adult person with a disability who has capacity can transfer (or fund) his or her own assets to the trustee of the trust.7 This procedure satis­fies the legal requirement that a parent or grandparent must establish the SNT. This type of trust is generally preferable to the expensive Probate Code sections 3600-3613 procedure described above and is generally the most efficient way to establish an SNT.
Establishing a (d)(4)(A) SNT through court for a plaintiff who is an adult with capacity under the age of 65
Many practitioners have successfully used an attorney-in-fact petition under Probate Code section 4541 to obtain a court order establishing a (d)(4)(A) SNT for a person with a disability who is age 18 or over, under age 65, has capacity, but has no parent or grandparent able or willing to assist. For an adult with a dis­ability who has capacity but no parent or grandparent able and willing to assist, a Probate Code section 4541 petition is nearly always preferable to consenting to the Probate Code sections 3600–3612 procedure. The Probate Code section 3600 procedure is generally more bur­densome because of the additional findings of fact required in the petition and the express requirement that the expensive court supervision requirements of Rule 7.903 requirements must be applied to a trust funded through that pro­cedure. There are some courts however which will not authorize this petition so it is important to know the jurisdiction in which the trust is being established.
Selecting the appropriate trustee
The biggest decision with a (d)(4)(A) SNT is choosing an appropriate trustee. Putting the wrong person in charge can defeat the entire purpose of the trust. Inexperienced or conflicted trustees can mismanage funds, spend on inappropri­ate items and violate the rules of vital public benefits programs. A family mem­ber may be less resistant than an independent trustee to the entreaties of the beneficiary for distributions, even if those distributions will too quickly deplete the trust corpus.
It is often preferable to have a pro­fessional trustee serve as trustee of an SNT, whether a private professional fidu­ciary or a bank, that is experienced in this role. SNTs require professional in­ vestment management, accounting, record keeping and compliance with other fiduciary duties to the beneficiary. Professional trustees solve the problem of potential conflicts of interest and undue influence from beneficiaries and family members. They can also act as a buffer between family members and ben­eficiaries. The drawbacks of using a pro­fessional trustee include their cost, a potential for unresponsiveness, and their lack of availability for smaller trusts. However, this cost is generally offset by a professionally managed SNT that will generally not fail in its intended pur­pose.

Joining a Pooled SNT
The second type of “safe harbor” first party SNT is a Pooled SNT. This type of trust works well for some individ­uals who do not have a large enough liti­gation recovery to establish a separate (d)(4)(A) SNT or are age 65 or older. Typically, a person with a disability (or one of the other entities authorized in the statute to act on that person’s behalf) will join an existing Pooled SNT run by a charitable organization by executing the Pooled SNT’s joinder agreement and transferring his or her assets to the trust. As long as all rules are strictly followed, such a transfer can be made without caus­ing any public benefits disqualification.

Although each individual has a separate account maintained on his or her behalf, the funds of all beneficiaries are pooled together for investment purposes to provide aggregate investment fee dis­counts, hence the name “Pooled SNT.” By law, the Pooled SNT must be “estab­lished and managed” by a nonprofit as­sociation, though the actual investment and distribution tasks can be, and often are, delegated to specialists. Currently, there are seven Pooled SNTs being run for California residents that have a wide range of cost and services.

Unlike a (d)(4)(A) SNT, a Pooled SNT:
• Does not impose an age limit for the prospective beneficiary (42 USC §1396p(d)(4)(C)). The plain language of the statute seems to indicate that a Pooled SNT may be established for the benefit of an individual 65 years of age or older. However, the transfer of assets to a Pooled SNT by a person 65 years of age or older may trigger a transfer of­ assets disqualification for both SSI and Medi-Cal support for long-term care.
• May be established directly by the person with a disability. A benefits recipient with capacity may establish his or her own account with the Pooled SNT with­ out any third party involvement. It can be a major advantage for an adult indi­vidual with a disability who has capacity to enter into a joinder agreement but does not have a parent or grandparent able or willing to assist with the establish­ment of a (d)(4)(A) SNT or much enthu­siasm for the expense and uncertainty involved in seeking a court order to es­tablish such an SNT.
• Has no mandatory payback provision. The Pooled SNT instead requires pay­ back only “to the extent that amounts remaining in the beneficiary’s account upon death of the beneficiary are not re­tained in the trust.” Under the plain lan­guage of the federal statute, if the trust retains the undistributed trust account assets, there is no requirement to pay back the state. In spite of the broad language of the federal statute, the California De­partment of Health Care Services takes a much narrower view of the purposes for which funds can be “retained in trust.” In effect, it imposes a payback require­ment almost identical to the one required for SNTs created under (d)(4)(A).
• Is usually already in existence and may be joined on short notice to shelter disqualifying property; • Does not require identification and training of an individual trustee.

Ongoing administration of a Special Needs Trust
Once the SNT is established, the assets held in the trust will not disqualify the plaintiff from his or her public bene­fits. However, the plaintiff must understand the limitations of an SNT. The hardest thing about this planning is describing the limitations placed on the funds in an SNT. If distributions from the SNT are made in an inappropriate manner, they can still jeopardize bene­fits. Thus, it is important that the plaintiff understand what types of distri­butions can be made. For example, a first party SNT must only be used for the “sole benefit” of the primary beneficiary during his or her lifetime. It is very dif­ficult to explain to an SNT beneficiary or his or her immediate family that assets in a first party SNT cannot be used to support a minor child or spouse. Even a simple gift of $100 to a child is forbid­den. In addition, another limitation is that the SNT cannot give cash directly to an SNT beneficiary. Under the SSI program, beneficiaries must report all in­ come received each month and lose a dollar of benefit for every dollar of in­ come over $20 a month. This includes distributions from his or her SNT. There are numerous other limitations, so it is prudent that the practitioner understand and guide the plaintiff through these is­ sues before he or she consents to the establishment of a first party SNT.

Kevin Urbatsch is a special needs planning attorney in San Francisco, California. He is a Certified Specialist in Estate Plan­ning, Probate, and Trust law and practices exclu­sively in the estate planning field with an expertise in planning for persons with disabilities. He is a charter member of the national organization, the Academy of Special Needs Planners and the Attorney-Editor and partial author of CEB’s over 1,000-page treatise titled Special Needs Trusts: Planning, Drafting, and Administration. Contact him at Kevin@Urbatsch.com or visit the Web site: www.urbatchlaw.com.     PDF of this article