BY: JOHN F. KEARNS III, CELA

Introduction

Congratulations!  You have just obtained a big personal injury settlement for your disabled client.  Don’t celebrate early.  Your joy will quickly turn to despair over a legal malpractice claim if you do not plan for your client’s long-term medical expenses after the settlement.  A post-settlement plan without a review of the 1998 revision to C.G.S. §45a-151, and the recent Connecticut Supreme Court’s decision in Department of Social Services v. Saunders, could result in ruin for both you and your client.  Your client will be unhappy if the client is required to repay the Medicaid lien and spend-down the balance of the settlement.

As a personal injury attorney, you must familiarize yourself with these recent legislative and judicial developments regarding special needs trusts under 42 U.S.C. § 1396p (D)(4)(A).  The purpose of this article is to outline how to protect your client’s settlement and to protect yourself from a potential malpractice claim in light of the Saunders case in which the Connecticut Supreme Court indicated that a fiduciary’s failure to protect the settlement of an incapacitated plaintiff is a dereliction of duties.

“Special needs trusts”, as used in this article, is a trust established under 42 U.S.C. § 1396p(D)(4)(A) and (D)(4)(C).  Under 42 U.S.C. § 1396p(D)(4)(A), a Medicaid recipient may use this unique trust to shield the personal injury settlement proceeds placed into this trust to maintain Medicaid eligibility. 

The D4A and D4C Trusts

Previously in Connecticut, self-settled trusts could not be established with the funds of the disabled beneficiary, which would protect the settlement and allow the recipient to maintain Medicaid eligibility.  See Forsyth v. Rowe, 226 Conn. 818, 629 A.2d 379 (August 3, 1993).  One week after the Forsyth decision, Congress passed OBRA ’93 (Omnibus Budget and Reconciliation Act of 1993) which carved out two major exceptions to the Forsyth rule.  The “D4A” and “D4C” exceptions allow funds of a disabled beneficiary to be used to fund a special needs trust provided that the State receives repayment as a remainder beneficiary upon the Medicaid recipient’s death.

Under 42 U.S.C. § 1396p (D)(4)(A), the assets of a disabled person may be used to fund a special needs trust, while maintaining that person’s eligibility for Medicaid, provided:

• The beneficiary is disabled within the definitions of the Social Security regulations;
• The disabled beneficiary is less than 65 years old when the trust is established;
• The trust is established for the sole benefit of the disabled beneficiary, and is created by the parent, grandparent, legal guardian of the individual or a court;
• Upon the beneficiary’s death, the trust directs re-payment to the state up to the amount of state assistance paid on behalf of the beneficiary.

Under  42 U.S.C. § 1396p (D)(4)(C), or “pooled trusts”, assets of a disabled person may be used to fund a special needs trust, while maintaining assistance benefits eligibility providing:

• The beneficiary is disabled within the definitions of the Social Security regulations;
• The trust is established and managed by a non-profit organization, wherein a separate account is maintained for each beneficiary of the trust, but for purposes of management and investment, the funds are pooled;
• The trust is established for the sole benefit of the disabled beneficiary, and is created by the parent, grandparent, legal guardian of the individual, court or the individual; and
• Upon the beneficiary’s death, the trust directs re-payment to the state up to the amount of state assistance paid on behalf of the beneficiary.

The D4A and D4C trusts permit the disabled plaintiff to retain his or her public assistance programs and place the settlement monies in trust for their use.  Although the trust assets must be paid back to the state upon the beneficiary’s death, without this trust, the settlement proceeds would be spent-down within several years on un-reimbursed, expensive healthcare, thereby leaving the plaintiff impoverished.

The pay-back provision in the D4A and D4C is only necessary when the funds of the individual are used to fund the trust.  If another special needs trust is established by a third party with funds not belonging to the applicant, the “payback” provisions of 42 U.S.C. § 1396p (D)(4)(A) and (D)(4)(C) do not apply. 

The Saunders Case and §45a-151

Jamie Saunders, an incapable, was rendered a quadriplegic due to medical malpractice and he sustained permanent impairment to his upper and lower extremities.  Jamie’s conservator reached a $1.8 million settlement agreement with the defendants. The net settlement of $579,824.02 was available after court costs, attorney’s fees and the Medicaid lien were paid. The Newtown Probate Court approved the creation of a D4A special needs trust for Jamie’s benefit.  The attorney general appealed the probate court’s statutory authority to establish this trust to the Danbury Superior Court.  On appeal, the court held that the probate court did not have statutory authority to approve the creation of the trust.

During the subsequent appeal of the Superior Court decision to the Connecticut Supreme Court, the legislature passed Public Act 98-232, codified at C.G.S. § 45a-151 (effective October 1, 1998), which specifically empowered the probate court to establish special needs trusts upon the petition by fiduciaries or by an application by conservators.

On February 16, 1999, the Connecticut Supreme Court in Department of Social Services v. Saunders, 247 Conn. 686, 724 A.2d 1093, held that the Newtown Probate Court could approve a compromise of claim in which a personal injury settlement will be paid to a trustee of a special needs trust instead of the conservator. The decision was based on the broad powers of a conservator to manage the ward’s estate under C.G.S.A. §45a-655(a). 

The Supreme Court Says That Failure to Plan is a Dereliction of Duties

Saunders states that it may be a conservator’s duty to create and fund a D4A trust.  The Connecticut Supreme Court found that the probate court is under a duty to protect a ward’s assets, and the conservator, acting as an agent for the court, is under the same duty.

The Court rejected the attorney general’s argument that the conservator should spend down all of the ward’s assets and then re-apply for assistance.  “By contrast, with the creation of the trust, Jamie [the ward] will retain his Medicaid eligibility and Saunders [the conservatrix] can provide for his supplemental needs from the trust assets, while Medicaid provides for his basic medical care.  Therefore, not only is the latter course of action clearly better for Jamie, it may be fairly stated that by failing to follow it, the probate court, and Saunders potentially could have been deemed to be in dereliction of their duties to Jamie (italics added).” Dept. of Social Services v. Saunders, 247 Conn. 686 (1999).  This duty mandates that you protect your client’s assets after you procure the best possible settlement in her favor. 

Our office has worked with a wide variety of attorneys in the preparation of trust documents for many injured and/or disabled clients.  It has been our experience that the clients and their families have been very grateful and satisfied to have the disabled individual’s future financial needs addressed with the use of the D4A trust.

How do Special Needs Trusts Work?

The special needs trust is designed to maintain the trust beneficiary on public assistance benefits, while receiving trust distributions for “luxuries”.  This paradox is accomplished by the prohibition of trust distributions for the disabled beneficiary’s basic support needs, which are provided by public assistance.  The trustee is prohibited from making any distributions for the beneficiary’s health, maintenance or support.  Public assistance programs provide basic support needs for the individual, while the trust provides other essential extras that are not provided by government programs. 

Although trust distributions are intended for “luxuries”, this term is a misnomer.  For most public aid recipients, “luxuries” are in reality requirements for continued well being, but which are not provided by public assistance programs.  These trust distributions can be made for home health aides, transportation, cultural experiences, experimental medical treatments and computer equipment that public assistance benefits do not provide. 

Coordinating Special Needs Trusts with Public Assistance Benefits.

Two of the most common forms of government assistance programs are Title XIX, or Medicaid, and Social Security Supplemental Income (SSI).  An applicant is guaranteed public assistance benefits providing he or she meets certain eligibility criteria.  Title XIX, codified under 42 U.S.C. § 1396 of the Social Security Act, is a joint sponsored program of the federal government and the fifty states, and a Connecticut applicant can have no greater than $1,600.00 in countable assets to be eligible.  SSI recipients can have no greater than $2,000.00 and the extent of the limitation on income depends on the type of income that the applicant receives.

A settlement award, or even an inheritance, will place the applicant over the asset limit, and the applicant will not qualify or re-qualify until the excess assets have been “spent-down” to $1,600.00.  Without proper post settlement planning, an injury award can quickly evaporate on the high cost of medical care.  Preserving the settlement amount in a special needs trust can help to bring the disabled plaintiff closer to where she was before the disabling injury.

The special needs trust does not jeopardize public assistance benefits because the trust does not, and in fact cannot, make distributions for basic needs – health, maintenance and support.  To achieve its purpose under 42 U.S.C. 1396 (D)(4)(A) and (D)(4)(C) the special needs trust must:

• Be irrevocable;
• The person for whom the trust is established for must be blind or disabled as defined by Social Security.  The standard is “unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than twelve months.”  Those who are receiving SSI or SSD are automatically deemed disabled within this definition;
• The trust is established for the sole benefit of the disabled beneficiary;
• The trustee has sole discretion over distributions and the beneficiary has no right to compel distributions; and
• The discretion of the trustee to distribute is limited.

Conclusion

After the Saunders decision and the revision to § 45a-151 you must be familiar with the strategy of using a special needs trust to preserve the settlement proceeds of a disabled plaintiff in a personal injury case.  Any plan to establish a special needs trust and ensure continued eligibility for public assistance programs should include such steps as (1) identifying the relevant sources of public benefits, (2) structuring the payment of the lien, and the execution and the funding of the trust, (3) taking steps to qualify or re-qualify the client for public assistance, (4) meet reporting obligations for the Department of Social Services regarding eligibility and the Department of Administrative Services regarding liens, (5) anticipate potential denials and plan for appealing such denials, (6) address estate planning issues, with the client’s relatives who wish to provide for the disabled individual in their estate plan. 

Due to the complexity of the planning process, it would benefit the plaintiff’s attorney to team up with an attorney who specializes in Medicaid law and special needs trusts to accomplish these goals.