Planning strategies for small settlements

MYTH: Where a settlement is small (less than $50,000.00), the client should not use a Special Needs Trust or other planning technique, but should simply allow himself (herself) to become disqualified until the settlement money is gone.

This perspective is incorrect.  First, it may be possible to undertake an immediate (i.e., within the month of receipt of the settlement monies) “spend-down” whereby the disabled beneficiary expends all of the settlement monies for goods or services at fair market value (it is never advisable to give the money away).  If the disabled beneficiary can spend all of the settlement monies for fair market value during the month of receipt of the settlement, there should be no disqualification for public benefits beyond the month of receipt, and public agencies usually do not disqualify even for that month.  For example, if the disabled beneficiary can spend the settlement proceeds on the purchase of a home, car, furniture, electronic equipment, clothing, prepaid funeral expense, prepaid taxes, utility bills, or any other purchase for fair market value, no penalty is imposed by the Social Security Administration.  Moreover, for valid, documented debts, these agencies will generally permit repayment of these debts which validly existed prior to the receipt of the settlement monies without penalty.  However, careful planning is required.

Moreover, if a rapid “spend-down” is not feasible due to the circumstances of the disabled plaintiff, a Special Needs Trust still can be used, as many drafters of such Trusts will draft such Trusts at reduced fees for smaller settlements; I have even created Special Needs Trusts for a small fee in unique circumstances for settlements under $30,000.00 where no reasonable alternative existed.

Finally, some local disability organizations maintain “Pooled” Trusts which will accept smaller settlements; the only disadvantages to such Pooled Trusts are (1) the “one-size-fits-all” Master Trust Agreements which are used by such organizations and (2) the inability to identify a contingent beneficiary for any residuary left after the death of the beneficiary, as Pooled Trusts generally require any remaining proceeds to remain in the Trust for the benefit of other disabled beneficiaries.

We never recommend to individuals to allow themselves to be disqualified for public benefits and to simply reapply in the future.  Such individuals almost never are able to purchase health insurance in the open market, and therefore would be left without health insurance until they spent the money down below the $2,000.00 limit for public benefits. The requalification process can be burdensome and time-consuming.  It is simply never necessary to disqualify disabled individuals for the public benefits of Medical Assistance and SSI.

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