Supplemental Needs Trusts: A Malpractice Trap for the Unwary Plaintiff Attorney
Supplemental needs trusts can be an excellent planning tool for the receipt of funds from a medical malpractice or personal injury action. By means of the supplemental needs trust, the amount of the award can be multiplied many times through the ability to retain Medicaid and Supplemental Security Income (SSI) benefits. Therefore, the plaintiff's needs may be better met with a supplemental needs trust and the retention of such benefits, than solely upon reliance of the award itself. Another benefit of the supplemental needs trust is that the plaintiff attorney may be able to settle an action, which otherwise the client would be unwilling to settle due to unreasonable settlement expectations. Notwithstanding the benefits of supplemental needs trusts, improper planning related to supplemental needs trusts can expose the plaintiff attorney to the risk of malpractice. This article is intended to highlight some of those risks, discuss the due diligence which the plaintiff attorney may deem necessary to undertake and offer suggestions for avoidance of potential legal malpractice.
Under New York State and federal law, the following are the requisites for the creation of a supplemental needs trusts:
The analysis behind the planning for, and drafting of, the supplemental needs trust, and related issues, often can be complex. 2The issues discussed in this article are the following:
a. Did the plaintiff attorney discuss with the client the advantages and disadvantages of a structured settlement? Are those discussions memorialized for the client and the court?
a. Should there be a supplemental needs trust? Have the plaintiff attorney and client undertaken a sufficient analysis? Was private health insurance considered?
1. Medicaid Lien.
Prior to the settlement of the lawsuit, the plaintiff attorney should ascertain the amount of the Medicaid lien, if any. If there is a settlement on the record, or informally agreed to, it should be contingent upon the settlement of the Medicaid lien. If the Medicaid lien needs to be negotiated, there is a loss of incentive for the Medicaid district to negotiate the lien after a settlement. New York State law is clear that Medicaid has a right to collect its lien against the proceeds of the lawsuit prior to the funding of a supplemental needs trust; however, the local Medicaid district cannot (i.e., should not) seek reimbursement for (i) payments not causally related to the injury or (ii) educationally related payments which are mandated by both the federal and New York State governments to be provided within a free education.
The plaintiff attorney should request a Claims Detail Report ("CDR") from the Medicaid district which identifies every service provided by Medicaid. By analyzing the individual entries, together with the summaries, it should be possible to determine whether the services provided are causally related to the injury. The second level of scrutiny is to determine if, although the services are causally related, the Medicaid services were provided pursuant to federally and state mandated free education.
Under federal and New York State law, New York State is required to give each student a free education. The mandated free education for a disabled person includes services which could be considered "quasi-medical," e.g., physical therapy, occupational therapy, speech therapy, leg braces and wheelchairs. Medicaid cannot collect for the payment of such services as part of its lien against lawsuit proceeds. 3 Under the New York State Education Law §4100ff, a free education must be provided to every child. The free education set forth in the Education Law provides for children as of age three. Under the Individuals with Disability Act (IDEA), 20 USCA § 1400ff and Public Health Law, Article 25, Title II, New York State is required to provide educational and developmental related services to infants and toddlers. Section 1401 provides definitions for those provisions which states are required to provide at no charge and which are not subject to a Medicaid lien against settlement proceeds. These services and provisions include, but are not limited to, assistive technology devices, e.g., leg braces and related services, e.g., speech, audiology, physical and occupational therapy and transportation.
In the absence of a review of the CDR, it is impossible to ascertain whether the lien asserted by the local Medicaid district is accurate. Especially in cases where the plaintiff has received services through Early Intervention, preschool or the board of education, it is an important aspect for closure of the matter to review the CDR in order to determine the accuracy of the asserted Medicaid lien.
As discussed below, it is important to consider both the amount of the Medicaid lien asserted and the total amount of Medicaid services provided during the plaintiff's lifetime. It is possible that the Medicaid district will seek to assert a lien against the supplemental needs trust, upon its termination, for all Medicaid paid during the plaintiff's lifetime, including non-causally related Medicaid, as well as the remainder of any "reduced" or "compromised" Medicaid lien negotiated prior to the establishment of the supplemental needs trust.
II. The Medicare Considerations: Retroactive Lien and Prospective Payments.
A. Retroactive Lien.
B. Prospective Needs and Payments.
Plaintiff attorneys must also consider the plaintiff's prospective medical needs which are causally related to the injury. Recovery funds may need to be "Set-Aside" for payment of these future medical needs. Although such medical care ordinarily would be covered by Medicare, because of the plaintiff's personal injury or medical malpractice settlement, prospective causally related medical care may not be paid for by the Medicare program. Pursuant to federal regulations, the plaintiff attorney, and anyone else involved in the lawsuit, can be held liable by Medicare for not having considered Medicare's interests in the lawsuit.
If the recovery is a (i) Worker's Compensation (WC) action, (ii) a commutation case (intended to compensate individuals for future medical expenses), (iii) is in excess of $250,000.00 and (iv) the plaintiff is either a recipient of Medicare or has a “reasonable expectation” of Medicare enrollment within 30 months of the settlement, there must be consideration with Medicare for a "set-aside" of funds for future medical care which otherwise would be paid for by the Medicare program. 5 However, WC cases are not the only instance for set-aside arrangements. In any action, whether WC or not, and no matter what the size of the recovery, there could be a need for a Set-Aside arrangement for future medical needs. If funds are not "set-aside," then Medicare may preclude its payments pursuant to 42 CFR 411.46.
The Centers for Medicare and Medicaid Services (CMS) Regional Office will review a proposed settlement in WC cases, above the thresholds and criteria set forth above, including a Set-Aside arrangement and will give a written opinion on which the potential beneficiary and the attorney can rely, regarding whether the WC settlement has adequately considered Medicare’s interests per 42 CFR 411.46. If requested, CMS might be willing to review other matters which are not WC and/or do not come within the above thresholds.
III. The Structured Settlement.
A. The structured settlement can be a great tax planning tool, increasing the over-all benefit of the lawsuit proceeds. Pursuant to Internal Revenue Code Section 104(a)(2), all payments from a structured settlement are income tax free, effectively increasing the value of the award. Additionally, the structure may provide additional protection to the plaintiff in a bankruptcy proceeding. 6 The failure to consider a structure can impose upon the plaintiff attorney significant legal malpractice liability, as occurred in a matter in Texas. Similarly, not designing the structure consistent with the plaintiff's needs, or not explaining both the positive and negative benefits of a structure, can similarly impose liability upon the plaintiff attorney.
Whenever considering a structured settlement, plaintiff attorneys should consider the requirements, and implications, of Section 5-1700 of the New York State General Obligations Code and Section 5891 of the Internal Revenue Code. Both statutes are developments of anti-factoring legislation, which are intended to protect plaintiffs from being influenced to sell or assign their structured settlement payments. Furthermore, the statutes impose caution on the part of plaintiff attorneys both in the design of the settlement proceeds and in the provisions to be included in the documentation settling the matter, e.g., the settlement agreement and the infant's compromise order.
Section 5-1700 of the General Obligations Law, known as the "Structured Settlement Protection Act," requires that the defendant disclose to the plaintiff, inter alia, the following:
Section 5891 of the Internal Revenue Code is similarly intended to place restrictions on the transfer of structured settlements. Therefore, under the Internal Revenue Code, if the structure is transferred for consideration in the absence of a court order, there is a tax equal to 40% of the factoring discount imposed on the transferee on the transaction. In New York State, the court order would need to be obtained pursuant to GOL 5-1700.
Should the plaintiff decide to take the settlement as a structured settlement and have the settlement proceeds placed into a supplemental needs trust, then it is essential that the financial plan maintains Medicaid and SSI eligibility. If the settlement documents, including the supplemental needs trust, are incorrectly drafted, the structure payments could be countable as income to the beneficiary for purposes of SSI and/or Medicaid eligibility.
IV. The Supplemental Needs Trust.
. Whether to establish a Supplemental Needs Trust.
Not every case involving a disabled person requires a supplemental needs trust. Every case, however, requires consideration of a supplemental needs trust. The settlement may be large enough whereby the plaintiff's medical needs can be provided for without utilizing the Medicaid program, and without the restrictions the local Medicaid district may impose upon the use of the funds in the supplemental needs trust. It is also possible that private health insurance, to which every resident of New York State is entitled without preexisting conditions 8, will be sufficient for the plaintiff's medical needs. There is also the consideration of the pay-back provision in the supplemental needs trust. Medicaid districts disagree as to the extent of the pay-back provision. In a Medicaid district that requires a pay-back for all Medicaid provided during lifetime, the pay-back can be draconian, especially in the instance of an individual who had significant Medicaid benefits prior to the establishment of the supplemental needs trust, which amounts were neither causally related to the injury nor otherwise needed to be paid as a Medicaid lien from the lawsuit proceeds.
The failure to recommend a supplemental needs trust can be cause for a malpractice claim, as occurred in a matter in Texas. In the Texas case, neither the guardian ad litem, appointed by the court to consider the settlement and the manner in which the settlement should be paid, nor the plaintiff attorney, informed the plaintiff about the possibility of a structured settlement and/or a supplemental needs trust. The legal malpractice claim settled and the insurance carriers for both attorneys paid settlement amounts. The plaintiff attorney should inform the client of the advantages and disadvantages of both a supplemental needs trust and a structured settlement. Such discussion should be memorialized. In a matter in which either or both the structured settlement and/or the supplemental needs trust is not to be used, the fact of such discussion, and the client's decision, may be included in the court transcript, or in the compromise order.
B. Drafting issues with a Supplemental Needs Trust.
A form supplemental needs trust is available in Justice Leone's decision in In re Morales. 9 However, in the more than nine years since the Morales decision, there has been an opportunity to observe supplemental needs trusts administration and the problems that can develop from poor administration. Since trust administration is governed by the provisions of the trust, careful drafting is extraordinarily important.
C. Need for Portability.
Certain New York State Medicaid districts, and Medicaid districts in other states, have developed rules and guidelines for what may, and may not, be included in a supplemental needs trust, as has the Social Security Administration. Unfortunately, many of these guidelines are informal and not available in printed form. In New York State, there is no consistency among the counties for how a supplemental needs trust should be drafted. Therefore, a trust that is drafted to meet the requirements of one New York State county may not be acceptable in another New York State county. As a result, it is necessary to provide for portability among the provisions in a supplemental needs trust, so that the trust can be amended, as necessary, should the trust beneficiary move to another state or another county in New York State.
The issue of "portability" was among the issues litigated in In re Cano. 10 In Cano, the plaintiff submitted a supplemental needs trust which included the opportunity to amend the trust. The Department of Social Services of the City of New York objected, inter alia, to such provision. The court upheld the trust provisions. DSS argued that the only mechanism for amending a trust is the statutory provision found in Estates, Power and Trust Law Section 7-1.9. The Cano court disagreed, stating:
D. Court Control.
In Cano, The Department of Social Services of the City of New York argued that the Court should not be involved in the administration of the trust, should not supervise or over-see the trust administration, but the Court should be involved if and only if The Department of Social Services of the City of New York seeks to sue the trustee. The Court responded:
Supplemental needs trusts and related planning are important aspects in the planning for the placement of the proceeds from medical malpractice and personal injury recoveries. As set forth in this article, such planning requires the same detailed attention by the plaintiff attorney as the litigation itself. The opportunity to plan for the placement of tort proceeds with the use of supplemental needs trusts is only beginning its second decade and the law is still developing. The interaction of the supplemental needs trust, the Medicaid and Medicare liens, and the structured settlement need to be considered in the planning for the settlement proceeds. Inadequate planning can not only hurt the client, but can create the risk for legal malpractice
1. Establishment of First Party Supplemental Needs Trust, N.Y.L.J., Outside Counsel, June 2, 2003, Vol. 229, pg. 1, col. 1.
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