Critical timing with Lawsuit settlements and Special Needs Trusts

A person who receives Medicaid or SSI (Supplemental Security Income) can not have more than $2,000 in countable, available resources while they receive these benefits. There are also limitations on their monthly income, and things that don’t seem like “income” can still be counted as such.  If the person is under 65 and is about to receive a lawsuit settlement, it is well worth considering the concept of establishing a Special Needs Trust to receive that settlement. The purpose of the trust is to safeguard the funds so that they can be used to pay for “special needs” which cannot be met by regular income or by the SSI and Medicaid benefits. A  properly structured trust will be  non-countable, and the payments by the trustee will not be counted as “income.” All Medicaid liens must be paid back before the trust is funded. Timing is critical, though.

The time to start talking with the disabled client about a Special Needs Trust is months before the point that the case may settle. Decisions have to be made as to who will be the trustee and successor trustee. That discussion alone can take months – sometimes the loving parent or guardian isn’t the best choice to manage a trust with significant amounts of money in it or numerous obligations to keep track of. Sometimes a trust protector would be put in place – again, it takes time to discuss these things.

Under federal and state law, NJAC 10:71-4.11(g), a special needs trust can only be established by the disabled person’s parent, grandparent, guardian (with court approval) or court (on petition of the disabled person or another interested party.) See NJSA 3B:11-36 and 11-37. Also, it must be funded before the disabled person’s 65th birthday. If the client has a parent or grandparent, that parent or grandparent can sign the special needs trust and get it set up before the settlement documents are signed. This may not take too long.

However, in other situations, a motion to the trial court needs to be filed accompanied by an Order establishing the special needs trust and the trust itself . A span of weeks may be necessary, because the State of New Jersey has to be notified (Division of Medical Assistance and Human Services – DMAHS, c/o the Attorney General). The order should be entered by the Court before the settlement arrives, so that the client’s net share of the settlement (after attorneys fees and costs) can be paid directly to the trustee. This same procedure would apply to other sorts of lawsuits such as a breach of contract dispute, or receipt of reparations to the victim in a criminal case. If the trust isn’t in place, there is a possible risk that the funds that are sitting in the attorney’s trust account will be treated as countable resources to the applicant. By watching out for the timing, this problem can be avoided.

For legal assistance with establishment of Special Needs Trusts or advice concerning their management, call 732-382-6070

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