Using a Special Needs Trust to Protect A Personal Injury Settlement and Public Benefits

HNWElder Law, Special Needs Trusts for Minor Children and Adults

Personal injury attorneys and their clients should avoid receiving payment from a defendant or the defendant’s insurer into the attorney’s trust account for any funds that are intended to be placed into a special needs trust.  Payment of funds to the plaintiff’s personal injury attorney constitutes “constructive receipt” by the person with a disability.  Therefore, checks from the defendant should be made payable directly to the trustee of the special needs trust.  Constructive receipt by the beneficiary can cause a loss of public benefits because the SSI income and resource rules have been violated.

When there is a lump sum settlement and the defendant insists on paying the plaintiff’s attorney quickly, the court may order that the monies be held in the attorney’s trust account subject to conditions, such as satisfaction of Medicare and Medicaid liens.  This should avoid a constructive receipt argument by SSA.  The trial attorney then makes the plaintiff’s check payable to the trustee of the special needs trust at such time as all of the conditions imposed by the court order are satisfied.

There are two unpleasant consequences that can flow from constructive receipt:

• Public benefits eligibility.  If you’re an SSI recipient and receive income during a month, it may result in an overpayment.  However, if the income is from a personal injury, inheritance or equitable distribution, then an argument can be made that the income is infrequent and irregular and should not be counted.  If the funds are still available on the first day of the following month, they become a resource.  Not all assets are resources.  A resource is defined as cash and any other personal property, that an individual owns; has a right, authority, or power to convert to cash (if not already cash); and is not legally restricted from using for his support and maintenance.  If settlement funds are held in a lawyer’s trust account, they are constructively received by the individual, but if there is a restriction on the use of those funds not related to the support and maintenance of the individual, they will not be counted as a resource.  Therefore, legal restrictions to making the funds available for the individual’s support and maintenance will not be considered a countable resource available to the SSI recipient.  Examples of what might constitute a legal restriction include the following:

• Allocation among claimants as yet to be determined.

• Uncertainty of liens, their amounts and their priority.
• Uncertainty of attorneys’ fees and costs of the case to be paid.

• The need to have a guardian of the estate or a conservator appointed, by the Court.

• The settlement agreement is contingent upon court approval, which is typically the case where there is a minor or incompetent adult.

• Taxation.  From a tax standpoint, the concept of constructive receipt analyses the timing of taxable income and preventing taxpayers from manipulating which tax years they will report income.  Generally, gross income is included for the taxable year in which it is received by the taxpayer, unless under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.”  Therefore, if a structured settlement is constructively received, the income generated on the entire value of the settlement will be currently taxed.  Constructive receipt is defined as “income, although not actually reduced to a taxpayer’s possession, is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year, if notice of intention to withdraw had been given.  However, income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions.”

What constitutes a substantial limitation is decided on a case-by-case basis.  Taxable receipt occurs when funds are received by the payee’s agent (i.e., plaintiff’s attorney).

In another case it was held that funds held in escrow pending a court order are subject to substantial limitations.

If you have questions about protecting eligibility for government benefits when filing a personal injury lawsuit or near the end when settlement or verdict is a reality, contact Fredrick P. Niemann at 732-863-9900 or toll-free at 888-800-7442.  He’s happy to be of assistance.

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