By Joanne Marcus, MSW, and Karen Dunivan Konvicka, Esq., Commonwealth Community Trust
This article was originally published in "NAELA News." The opinions expressed in this article are those of the authors and are not to be construed as an endorsement by NAELA or InterActive Legal.
When the call comes from the plaintiff’s attorney asking what should be done about the client’s public benefits, be prepared to answer. The case is about to settle, or the verdict is in, and now the client wants to know how will it affect his or her benefits. First, you will likely have to help the personal injury (PI) attorney assess the type or types of benefits the client is receiving and determine if the settlement puts the benefits in jeopardy. How did the client receive these benefits — through means-testing or due to work history? Perhaps the PI attorney has not considered benefits, but understands that the client is incapacitated and will need the assets managed; or perhaps public benefits may be necessary in the future.
Medicaid, the means-tested public benefit for people with disabilities who are also impoverished, will need to be protected. More than $2,000 in resources and the client will lose this valuable benefit; personal injury proceeds are plainly resources. Medicare, the benefit received by workers with disabilities who have earned enough quarters to qualify for disability benefits, may also need to be protected as well. In addition, Supplemental Security Income (SSI) and Social Security Disability Income (SSDI) need to be considered. Both of these benefits provide a monthly income to people with disabilities. SSI is means-tested, just as Medicaid is, but SSDI, like Medicare, is not; therefore, SSI income will need to be considered when planning.
Moreover, Centers for Medicare and Medicaid Services (CMS) has recently indicated that it will begin enforcing the Secondary Payor Act for liability cases, meaning these clients may need in the near future a Medicare Set-Aside (MSA) account. Some clients are eligible for both Medicare and Medicaid. Can both be protected? The answer is yes, but not without some planning on the PI attorney’s part, and hopefully with your help. Adding additional complexity, many plaintiffs are choosing a Structured Settlement as a part of their proceeds. While providing important benefits to the client, these also have pitfalls to be avoided.
Special Needs Trusts to Protect Public Benefits
The courts have held that not considering and planning for the client’s means-tested government benefits can result in a legal malpractice claim, Grillo v. Pettiette et al., 96-145090-92 (96th Dist. Ct., Tarrant Cty., Texas); and Grillo v. Henry Cause, 96-167943-96, (96th Dist. Ct., Tarrant Cty, Texas), or a breach of fiduciary duty or dereliction of duty if not considered by a fiduciary or denied by a court, Department of Social Services v. Saunders, 247 Conn. 686, 724 A.2d 1093 (1999).
Clients receiving Medicaid, which can come in the form of health insurance benefits, long-term care, and waiver programs for those with intellectual disabilities, family support, technology assistance, home and community-based care, etc., must be advised that receiving the settlement proceeds will endanger these benefits. In the case of waiver benefits, there are often long waiting periods before the individual can receive these waivered benefits again if the client loses eligibility. The timing of the payout and the planning is especially important for them. Creating and funding a special needs trust pursuant to 42 U.S.C. 1396p(d)(4)1 will preserve these benefits.
Both stand-alone special needs trusts (SNTs) created under (d)(4)(A) and pooled special needs trusts (PSNTs) created under(d)(4)(C) are options to consider. When considering the stand-alone SNT, one must look at the choice of trustee. Banks and trust companies will agree to serve, but consider the cost benefit of these services given the size and value of the trust created. Family members can serve as trustee, but while the family members usually have good intentions, they may not be equipped to monitor the disbursements to ensure that they comply with the complex federal regulations and do not cause a period of ineligibility for Medicaid or a reduction in SSI benefits.
In contrast, PSNTs are administered by a non-profit organization, which works solely for the benefit of disabled individuals, and usually has great expertise in the administration of SNTs and the intricacies of Medicaid regulations and the Social Security Administration’s Program Operating Manual System (POMS). Assets in a PSNT are pooled for investment purposes, but each beneficiary has an individual sub-account, so investment and management fees are usually less than a stand-alone SNT. SNTs can be created by the individual, a parent, a grandparent, or a court. PSNTs can be created and funded by individuals 65 years and over; whereas stand-alone SNTs cannot. While PSNTs can be funded by those who are 65 and older, depending on the client’s state regulations, there may be a transfer penalty for funding the PSNT.
Finally, a stand-alone SNT must have a repayment provision that requires that the states providing medical services to the beneficiary must be paid back upon the death of the beneficiary. In contrast, a PSNT can either have that provision or the non-profit organization is allowed to retain the remainder after the death of the beneficiary for the benefit of other people with disabilities. Some pooled trusts have a hybrid approach to the remainder. For example, with Commonwealth Community Trust (CCT), if the remainder is less than the repayment amount owed to the states, then CCT retains it; however, if the remainder is more than the repayment, CCT first reimburses the states, and then distributes the remainder to the successor beneficiaries.
Medicare Set-Asides Nested within the Special Needs Trust
In February 2017, and again in April 2017, CMS released transmittals2 requiring Medicare Administrative Contractors (MACs) to deny payment for services related to or associated with an open Liability Medicare Set-Aside (LMSA) or No Fault Medicare Set- Aside (NFMSA). It can be inferred from these transmittals3 that CMS will begin denying payment for items and services that should instead be paid by a primary payor such as an insurance company or third party, just as it does for Workers’ Compensation cases. If this is the case, CMS will require the Medicare claimant to create and use Medicare set-aside funds first until they are exhausted and then Medicare will again cover expenses related to the injury. Because no transmittal has been released mandating these set-asides and a formal process for Liability Medicare Set-Asides has not been dictated, many PI attorneys are still opting not to create MSAs for their clients, but the writing is on the wall.
A MSA is a countable resource for public benefits purposes, and will jeopardize benefits such as Medicaid and SSI. Careful planning to nest the MSA in a SNT allows management of the set-aside portion of the funds and the remainder of the settlement proceeds, while protecting eligibility for means tested benefits, and also ensuring that injury-related expenses are covered. PI attorneys will increasingly call upon elder law attorneys to create a SNT with MSA administration to satisfy CMS.
Clients not receiving means-tested benefits may ask if they can self-administer their MSA. While the answer is yes, the recordkeeping and accounting can be complex. The account must be funded either with a lump sum from the settlement or with seed money and subsequent settlement annuity payments. The account must be an entirely separate interest-bearing checking or savings account with no non-MSA funds co-mingled. Interest earned must also be used for medical expenses related to the injury suffered that would otherwise be covered by Medicare.
Meticulous records of the distributions and expenditures must be maintained. For liability MSAs, accounting is required when the account balance reaches zero. (Workers’ compensation cases have annual reporting requirements.) Medicare will use this report to confirm that all MSA funds have been exhausted and spent properly before the client can start to submit bills to Medicare. CMS has recovery rights when it has paid where it should not have and can levy damages and suspend Medicare benefits until the funds are paid back.
All signs indicate that CMS is moving closer to enforcing the MSPA on liability cases. Your clients with special needs who have received a settlement will face bigger obstacles related to maintaining benefit eligibility. The ability to nest a MSA inside a SNT will help manage the issue and implementation will fall to attorneys in the elder law and special needs communities.
Weaving in a Structured Settlement
When incorporating a structured settlement into the already complex planning necessary to maintain public benefits and Medicare coverage, there are several issues to consider. Internal Revenue Code Section 1044 provides that personal injury settlements for physical injuries are not taxable. Income from those proceeds may be tax-deferred as well, if the settlement is structured pursuant to Internal Revenue Code Section 1305. Because of the tax advantages, as well as future financial security in the form of future payments, many cases include these qualified structured settlements as a part of the mix. The structure can be funded by the defendant’s insurance company, but most assign that liability from their books by purchasing annuities to make the payments. Funding with an annuity is allowed pursuant to Internal Revenue Code Section 1306, but the qualified assignment must be done at the time of settlement. The timing and sequence of events are critical. Moreover, the insurance companies selling these annuities must be highly rated by companies such as AM Best and Standard & Poor’s.
The choice of trustee may be complicated by a structured settlement. Many bank and trust companies have minimum deposit requirements. If the SNT is funded with a small amount initially, consider a PSNT, which usually have much smaller initial funding requirements.
While the initial funding may be payable to the SNT, whether by court order or otherwise, careful attention must be paid to the payee designation in the annuity documents. It must name the SNT as the payee. Many times the insurance agents writing these annuities are not aware of the devastating effect of naming the beneficiary as the payee rather than the SNT, and the attorneys are concentrating on the Court Order, which even if correct, does not control the annuity. Once the qualified assignment is made and annuity purchased, it is irrevocable. If the beneficiary is accidentally named to receive annuity payments in the future, his or her public benefits can be lost for the period of the annuity payments. This period is often years or for the life of the beneficiary. At a minimum, benefits such as SSI and Medicaid would be jeopardized in the months in which payments are received.
SNTs must contain a payback pro- vision to reimburse the states that have provided Medicaid benefits to the beneficiary at the time of the beneficiary’s death. Therefore, the contingent or successor payees of the annuity must also be the SNT. Many states have memorialized that requirement in their Medicaid Manuals; however, the prudent course of action, even if in a state that has not, would be to ensure the entire amount of the structured settlement will eventually pass to the SNT. While naming a successor payee at the death of the beneficiary may be an inventive way to avoid the repayment provision, the designation is irrevocable and if your beneficiary moves to a state prohibiting such a structure, you will have advised your client out of means-tested benefits.
Finally, if the annuity payments are for a term certain and not just for the life of the beneficiary, then a commutation clause should be included as a part of the annuity contract. A commutation clause provides for a lump-sum payment at the death of the beneficiary based on several different factors decided at the time of the annuity purchase. Receiving the commuted value of the remainder of the annuity at the time of the beneficiary’s death allows for the orderly administration and winding up of the SNT. The states’ Medicaid departments can be repaid, and any remaining assets in the trust can be distributed to the contingent beneficiaries immediately. Fees and administrative costs necessary to leave the trust open while annuity payments continue to come in are unnecessary. Most insurance companies require a commutation clause to commute the value of the annuity.
2 CMS Manual System, Pub. 100-04 Medicare Claims Processing, Transmittal 3750 (Apr. 19, 2017), https://www.cms.gov/Regulations-and-Guidance/Guidance/Transmittals/2017Downloads/R3750CP.pdf.
3 Dept. of Health and Human Services, CMS, MLN Matters Number MM9893 Revised, (Jun. 9, 2017), https://www.mymedlien.com/wp-content/uploads/2017/06/LMSA-Article-2-CR9893.pdf.
4 Internal Revenue Code § 104-1, Compensation for injuries or sickness, https://www.gpo.gov/fdsys/pkg/CFR-2012-title26-vol2/pdf/CFR-2012-title26-vol2-sec1-104-1.pdf.
5 Internal Revenue Code § 130, Certain personal injury liability assignments, https://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapB-partIII-sec130.pdf.
About the Authors
Joanne Marcus, MSW, is the Executive Director of Commonwealth Community Trust (CCT), a nonprofit organization that has provided pooled special needs trust administration since 1990. CCT currently serves over 1,500 clients nationwide.
Karen Dunivan Konvicka, Esq., is General Counsel for CCT.
For more information, call 804-740-6930 or visit commonwealthcommunitytrust.org