ELDER
LAW
Published by the NCBA’s Elder Law Section
The Chair’s Comments
Change You
Can Believe In!
Change is in the air,
and with that “some-
thing in the air” comes
uncertainty. I can say
with confidence that
we’re going to get
some “Change We Bob Mason
Can Believe In.” And by “Believe In,” I
mean something that will be felt.
The problem is that no one can say with
any certainty what the change will be.
To think that the Democrat-controlled
Congress and an Obama administration will
be more “friendly” to senior concerns is
mighty tempting. For example, we all wit-
nessed the ham-fisted, budget-slashing
approaches the Republicans took without
bothering to fix any of the underlying prob-
lems associated with financing long term
care.
See COMMENTS page 2
Inside This Issue:
7 Special Needs Trusts –
Power Tools for Planners
8 The Use of Qualified Settlements
Funds, Qualified Assignments and
Special Needs Trusts in Physical
Injury Settlements
15 Tips and Tales – Pay Back Special
Needs Trusts Not Always the Only
Solution
16 Board Certification in Elder Law –
Coming Soon to your State Bar
Section Vol. 13, No. 2
Special Needs Trusts –
Including Special Needs
What are they? When are they needed, or not?
B Y A. F RANK J OHNS
This article was first presented at the North
Carolina Academy of Trial Lawyers:
Structured Settlements and More, May 11,
2007 at the Academy Headquarters in
Raleigh.1
SNTS – What Are They?
Conventional Standards of
Trust Law – Triangular Legal
Protective Shelter
Standard Trust Protections
A trust…a fiduciary relationship with
respect to property, arising from a manifesta-
tion of intention to create that relationship
and subjecting the person who holds title to
the property to duties to deal with it for the
benefit of charity or one or more other per-
sons, at least one of whom is not the sole
trustee.2
A trust may also be described as a fiduci-
ary relationship in which one person is the
holder of the title to property, subject to an
equitable obligation to keep or use the prop-
erty for the benefit of another.3
Third Party and Others
As Fiduciary – Trustee
A trustee is a person, persons or legal enti-
ty or entities with legal capacity to receive,
hold and manage property in trust. In cer-
tain instances, the settler and/or the benefici-
ary of the trust may be a co-trustee.4
Spend Thrift Protection
A spend thrift trust is a trust that restrains
voluntary and involuntary alienation of all or
any of the beneficiary’s interests.5 The spend-
November 2008 www.ncbar.org
thrift [provision] trust protects the income
and principal interests of its beneficiary from
the claims of creditors as long as the income
and or principal in question is properly held
in the trust.6
Shield Against Undue Influence
A trust generally protects the beneficiary
from those attempting to gain access to the
income or principal of the trust by exacting
undue influence on the beneficiary.
However, the protections of the trust usually
do not extend to distributions made from
the trust corpus to the beneficiary.
An Expanded Shelter for
Gaining Governmental
Benefits Eligibility Under
State and Federal Laws.
What Is a Special Needs Trust?
Historically the special needs trust
(“SNT”) is a hybrid of the irrevocable discre-
tionary trust. In the 1970s, parents of chil-
dren with severe, chronic disabilities (prima-
rily mental retardation) worked with trust
and estates counsel to develop legal vehicles
that would not only provide for the transfer
of funds for the benefit of their children with
severe disabilities, but more importantly
mandate to the trustees detailed instructions
that addressed the quality of care and the
quality of life of the children to be served by
the trustee.
SNT History
With more than twenty years of SNT
See SNT page 3
ELDER
LAW Comments from page 1
VOL. 13, NO. 2 NOVEMBER 2008 Time for a Pop Quiz! I’ll set the scene: A Professionalism
major bill eventually passes both houses of At its first meeting of the current year,
Published by the NCBA’s Congress (mostly along party lines), mandat- held in Asheboro in August, your section
Elder Law Section ing (among many items) tough new restric- council created a Professionalism Task Force
tions on certain eligibility standards and to explore various approaches to President
more robust estate recovery efforts. Charles Becton’s call for an emphasis on pro-
Editor Ultimately the measure passed the House by fessionalism. As a result, we are going to
Aaron Terry a handful of votes, and in the Senate the vice- begin an outreach effort to other sections. As
president had to step in and vote a tie-break- part of that effort we’ll be advising our col-
Editorial Address er in favor of the bill. league sections of our interest in responding
P.O. Box 3688 to elder-oriented inquiries from other sec-
Cary, NC 27519 Your choices are: tions (particularly in the area of ethics and
(A) Deficit Reduction Act of 2005 professionalism), of our desire to appear and
(B) Omnibus Reconciliation Act speak at their CLE programs, and to make
SECTION OFFICERS of 1993
Chair available to them elder law articles that might
(C) Both (A) and (B) be of interest to attorneys practicing in other
Bob Mason
substantive areas of the law.
Immediate Past Chair Answers appear at the bottom. If you would like to be part of this effort,
Dennis Toman let us know.
My point is this: Democrats are not at all Nikki Melby, a relative newcomer to
Vice Chair adverse to belt tightening when pressed. North Carolina from Florida, has been
Brent Stephens And let’s face it, we’re “pressed.” President- named CLE Committee Chair. While Nicole
Elect Obama is sending every signal that “fix- Bryan is planning the program for the
Secretary ing the economy” will take precedence, at February symposium, Melby is focusing her
Margaret A. Lorenz least for a time, over sweeping changes. efforts on July 2009 - June 2010 program
My guess is that there will be continuing planning. She needs and wants volunteers.
Treasurer
efforts by program administrators to “tighten If you would like to be part of this effort,
Nicole Bryan
up” and to explore new and novel ways of let Nikki Melby know.
Board Liaison interpreting eligibility rules and enforcing There are plenty of ways to get involved in
L. Neal Ellis Jr. estate recovery. the section. We need interesting speakers and
I cannot envy the new president, and authors. We need people who are willing to
SECTION COUNCIL Congress, for the tasks they face. So who help plan programs and activities. We need
Andrew Atherton knows what will happen? Anything from people who understand that getting involved
Nicole Bryan more budget cuts to Universal Healthcare. is a great way to strengthen ties with col-
Elizabeth Caviness We all, each of us, owe it to ourselves and
Anne Duvoisin leagues and be “in the loop” if conditions
our clients to “stay on top of developments” change (as predicted).
Patricia Gibbons
Lawrence S. Graham (we’ll help you with that) and to think out-
Richard Hall Jr. side the box (you’ll have to do that yourself ). ~ Bob Mason
Larry Rocamora Answer key: Both A & B!!
Carole Spainhour
Brent Stephens
Kimberly Whitley
J. Gregory Wallace
Look
no further.
©North Carolina Bar Association 2008
No portion of this publication may be reprinted without per-
mission.

Views and opinions expressed in articles published herein are

the authors’ only and are not to be attributed to Elder Law, the
Elder Law Section or the NCBA unless expressly stated. Authors
are responsible for the accuracy of all citations and quotations.
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SNT from page 1
development, consumer driven organiza-
tions, including the ARC of America, and all
affiliated organizations in every state, the
National Alliance for the Mentally Ill and the
National Autistic Society, and its affiliates
across the states, just to mention a few, have
been advising their members, numbering in
the millions, to utilize the SNT for estate
planning purposes.
SNT Politics
In the early nineties, Congress became
concerned with escalating Medicaid costs.
With the shift in control to the Republicans
in 1992, a concerted effort was made to stiff-
en the regulations by which persons become
Medicaid eligible.
As various committees rewrote legislation
focused on so-called “Medicaid planning
loop-holes,” repeal of the Medicaid
Qualifying Trust became a primary target.
However, the consumer groups identified
above teamed with the AARP and other
organizations in the aging network, including
the National Academy of Elder Law
Attorneys, to negotiate the exemption of sev-
eral trusts that if designed to allow for a “pay-
back” or reimbursement of the state for
Medicaid expenditures on behalf of the trust
beneficiary at the end of the trust beneficia-
ry’s life would be exempt and not counted
under Medicaid eligibility requirements.
New Life for SNTs
New life was breathed into SNTs and in
addition, testamentary SNTs were continued
as exempt under the statutory and regulatory
revisions to Medicaid that became law in
1993.
(1) Primary SNTs. There are several statu-
torily exempt SNTs. However, the three cre-
ated under the Revenue Reconciliation Act of
1993, better known as OBRA ‘937,
require a “pay-back” provision.
(2) The d4A Individual SNT. The d4A,
individual SNT is created by court order, a
guardian, parents or grandparents of the trust
beneficiary, irrevocable, and for the sole ben-
efit of the trust beneficiary if under the age of
65 and disabled as defined under federal law.
(3) The d4B Individual Income Only
SNT. The d4B individual SNT, is the so-
called “Miller” or “income only” trust with
the same criteria as the d4A. Income is divert-
ed to the trust, with a mandatory amount just
under the income cap calculated for distribu-
tion by the trustee to pay the patient month-
ly liability. Funds remaining in the trust must
be used for the sole benefit of the beneficiary
to supplement his or her quality of life. At the
end of the beneficiary’s life, if there is remain-
ing corpus, then it must be used to pay back
the state.
(4) The d4C Pooled SNT. During the early
‘90s, the federal government and many states,
including North Carolina, created statutory
initiatives to privately fund organized non-
profit organizations to care for Medicaid
recipients through the use of pooled trusts.8
Pooled trusts are special needs trusts com-
prised of the assets of elder citizens and peo-
ple with disabilities and consolidated under
an umbrella nonprofit organization, serving
as trustee and responsible for the care of the
trust beneficiaries. The concept originated in
a more narrow focus where families wanting
to leave portions of their estates to care for
their family members with developmental
disabilities would leave funds in special needs
trusts. The focus has expanded to include
vulnerable elderly persons who either need
asset preservation of their estates to sustain
the quality of their lives, or need individual-
ized care giving because they have out-lived
their families or never had a family. Since
pooled trusts are exempt under Medicaid,
each beneficiary of the pooled trust would be
an eligible Medicaid recipient.
The assets of the special needs trusts are
pooled for management and cost efficiency,
with accumulating interest credited to each
individual. The supplemental or special needs
of each individual are funded with the assets
ascribed categorically to the individual dur-
ing the individual’s lifetime, or until the indi-
vidual’s funds are exhausted.
A nonprofit organization providing direct
care and advocacy for the individual must be
the trustee of the pooled trust. Rather than
repaying Medicaid for all of the expenses that
the client accumulated in long term care, the
nonprofit organization would retain the
assets remaining in the trust in order to serve
other Medicaid recipients of similar need.
The importance of the concept deserves
restatement. If Medicaid recipients have no
one to care for them, and no families avail-
able to advocate their interests, then the non-
profit organization, as trustee of the pooled
trust for the benefit of the Medicaid recipi-
ents, would supplement the Medicaid needs
of the beneficiaries of the pooled trust in
order to sustain the quality of their lives. Any
assets remaining in the pooled trust beyond
the lives of the beneficiaries would be
retained by the nonprofit organization to be
used for its purposes and mission in serving
similarly situated vulnerable elder citizens or
persons with disabilities.
It is important to note that the d4C
pooled trust is available for persons over the
age of 65.
(5) Non-pay back SNTs.9 Non-pay back
SNTs under these statutory provisions allow
parents and grandparents to transfer their
assets to a trust without penalty if established
solely for the benefit of the transferor’s child
with disability. Neither the parent, grandpar-
ent transferor, nor the child beneficiary are
disqualified if certain conditions are met. The
conditions10 require that the child beneficiary
be blind or disabled as defined under federal
law.11 For those states eligible under different
criteria, the child must be blind or perma-
nently and totally disabled, without reference
to any additional definition.12 There is no
statutory requirement that the trust pay back
Medicaid after the death of the trust benefici-
ary if all qualifications are met.
(6) Management and Distribution of SNT.
Insurance and other security products should
be creatively merged to provide the cash
needed by the trustee to supplement the
needs of the trust beneficiary while at the
same time addressing the declining balance
nature of the trust and building as much
growth as possible under the circumstances.
(7) Benefit to Clients. The benefit to the
client being served by the development and
administration of the SNT is that it makes
Medicaid immediately available to the elder-
ly or disabled beneficiary, while at the same
time stretching the assets in the trust in such
a way as to provide additional years of
increased quality of life through the trustee’s
purchase of supplemental quality services for
the trust beneficiary. Additionally, the SNT is
the vehicle often incorporated into personal
injury awards or settlements in order to
stretch funds to cover the life of the disabled
plaintiff.13
Standard Discretionary Trust Language
Versus Support Trust Language
(1.) Discretionary Trust Language
A discretionary trust is a trust wherein the
See SNT page 4
ELDER LAW 3
SNT from page 3
trustee is given the discretion to determine
whether and to what extent to pay or apply
trust income or principal to or for the bene-
fit of a beneficiary. [N.C. Gen. Stat. § 36C-
5-504]. Under a true discretionary trust, the
trustee may withhold the trust income and
principal altogether from the beneficiary and
the beneficiary, as well as the creditors and
assignees of the beneficiary, cannot compel
the trustee to pay over any part of the trust
funds. A trust wherein the trustee has discre-
tion only as to the time or method of making
payments to or for the benefit of the benefi-
ciary is not a true discretionary trust.14
(Reference to NCUTC Chp. 36C by author)
(2.) Support Trust Language
A trust that has mandatory provisions for
the trustee to provide for the health, welfare,
maintenance, food, clothing, shelter and edu-
cation of the beneficiary that may not be
ignored by the trustee in an exercise of discre-
tion.
Supplemental Security Income (“SSI”)
Supplemental Security Income and
Medicaid have merged for determining eligi-
bility for benefits.
Special Assistance
Medicaid
Other Means Tested Federal or State
Programs or Services
SNTs – WHEN NEEDED
AND WHEN NOT
When Needed
How is the SNT Attorney Engaged?
(1) Through the Personal Injury Lawyer
(2) Through the Plaintiff, or Plaintiff
GAL or Guardian.
(a) Guardian of the Person. Actually,
the guardian of the person carries
the power for hiring an attorney for
the ward, not the guardian of the
estate.
The guardian of the person may
give any consent or approval that
may be necessary to enable the ward
to receive medical, legal, psycholog-
ical, or other professional care,
counsel, treatment, or service.15
4 NOVEMBER 2008
(b) Guardian of the Estate.
However, for the purpose of assur-
ing that any settlement is acceptable
within the jurisdiction of 35A
guardians, the guardian of the estate
should be involved in all aspects of
the settlement process, including
the timing of the SNT setup and
the distributions into the SNT
rather than into the guardianship
estate.
(14) To employ persons, including
attorneys, auditors, investment
advisors, appraisers, or agents to
advise or assist him in the perform
ance of his duties as guardian…16
(3) Through the Defendant
(4) Through Insurance Defense.
Disabled
(1) Defined by Social Security Act
(“SSA”). If a beneficiary has been deter-
mined to be disabled under the SSA, then
the beneficiary is considered disabled for
Medicaid qualification and eligibility.17
(2) Per Se Disabled. The federal govern-
ment has also identified in its rules those
disabilities and medical impairments that
are considered per se disabling.18
(3) Defined by OBRA ‘93. The enabling
federal legislation that created special
needs trusts acknowledges other govern-
mental designations of disability.19
The Need for Supplemental Support
Generally, there are more funds available
than would ordinarily be spent down with
purchases for the benefit of the plaintiff/vic-
tim, but insufficient funds to meet the total
life plan needs of the plaintiff/victim.See fur-
ther analysis below.
Standard Shelter Protections
(1) Circumvent Probate
(2) Spendthrift Protection
(3) Undue Influence
When Not
No Disability to Qualify for Benefits
(1) Special Assistance, but not skilled level
of care
(2) SSD denial of disability claim
(3) TBI person regaining ability and cog-
nitive function
No Need for Standard Trust Shelter
Too Little Money Funding SNT
(Net Proceeds Going into the SNT)
(1) Is there a number under which the cre-
ation of the SNT is not cost efficient or
beneficial?
(2) Under $10, 20, 30, 50 or 80,000 ?
(3) Is it just the number, or do other ele-
ments and qualifiers come into
play?
Too Much Money Funding SNT (Net
Proceeds Going into the SNT)
(1) Is there a number over which the
creation of the SNT of not real value?
(2) Over $10, 20 30,000,000 ?
(3) Is it just the number, or do other
elements and qualifiers come into play?
Primary Components of
Special Needs Trusts Related to
Structured Settlements and
Personal Injury Litigation
Grantor Funded
Statutory Limitations
Depending upon the kind of SNT being
developed, the federal law limits who may
create the SNT if the assets are the assets of
the beneficiary and therefore a grantor trust:
a. (d)(4)(A). A (d)(4)(A) trust may only
be created by a parent, grandparent, legal
guardian or a court. Note that the individ-
ual may not create the trust.
b. (d)(4)(C). A (d)(4)(C) trust may be cre-
ated by a parent, grandparent, legal
guardian, the individual or a court. Note
that the individual may create the trust.
However, the individual must be over the
age of 65.
Grantor Trusts Require pay back or
Retention
also consider:
Irrevocability
Sole Benefit
Supplemental Structure
Controlled Distributions
Amendment
Termination and Governmental
Pay-Back
 Optional Components
of the Special Needs Trust
Corporate Trustee
Corporations, Banks and Trust
Companies whose charters specifically
empower the entities to engage in trust serv-
ices and the entities have all necessary licens-
es and state authorizations.
Nonprofit Trustee
(1) Not for profit corporations, banks and
trust companies whose charters specifically
empowers the entities to engage in trust serv-
ices, and the entities have all necessary licens-
es and state authorizations.
(2) Additional requirement that the non-
profit serve clients with disabilities similar to
that of the beneficiary named in the pooled
trust, or have a formal relationship with such
an entity.
Family Member Trustee
(1) Not favored – often creates problems
with “Sole Benefit” mandate and the way
in which the family member makes distri-
butions; often little or no over-sight.
(2) More difficult when beneficiary in the
home of the family member trustee.
(3) May be required by the Clerk of
Superior Court to file an inventory, do
annual accountings and post a bond.
Trust Advisory Committee
(1) Always a good component of the SNT
(2) Naming members of the TAC
a. Parent(s)
b. Siblings
c. Other Family members
d. Medical, Health care or
Therapeutic Professionals
e. Financial, accounting, securities
or insurance professionals
f. Legal or Advocacy Professionals
3. Duties and Responsibilities of the TAC
Trust Protector
Trust Protector Defined
A trust protector is a person or entity with
a special power over the trust or over the
Trustee. Usually holding no day to day fidu-
ciary responsibilities, the trust protector may
be an individual an entity or even a commit-
tee of several people serving as a kind of
board of directors overseeing fundamental
aspects of the management of the Trust.
Varying Powers
At the recent national conference of the
Academy of Special Needs Planners, nation-
ally recognized expert, Ira Wiesner wrote:
Trust Protectors are given a wide variety of
powers, including but not limited to the
power to remove, add and replace trustees;
to veto or direct trust distributions; to add
or delete beneficiaries; to change the situs
and governing law of the trust; to veto or
direct investment decisions; to consent to
the exercise of a power of appointment; to
determine whether an event of duress has
occurred; to amend the trust as to admin-
istrative provisions as well as to amend the
trust for changes in the law and to bring
the trust into compliance with changing
government rules and practice; to approve
Trustee accounts; and to terminate the
trust. In addition, the Protector may hold
(1) the right to remove the Trustee; (2) to
appoint successor Trustees; (3) to transi-
tion oversight between a Trustee and its
successor; (4) the right and responsibility
to bring matters to the attention of a
judge; and (5) the right to control invest-
ments.20
Applying the NCUTC
If the trust protector has powers of direc-
tion, and if the state in which the SNT is cre-
ated and is the situs of law, then the provi-
sions of the UTC must be taken into consid-
eration. Consider the following sections of
North Carolina’s recent enactment of the
UTC:
(b) If the terms of a trust confer upon a
person other than the settlor of a revoca-
ble trust power to direct certain actions of
the trustee, the trustee must act in accor-
dance with an exercise of the power unless
the attempted exercise is manifestly con-
trary to the terms of the trust, or the
trustee knows the attempted exercise
would constitute a serious breach of a
fiduciary duty that the person holding the
power owes to the beneficiaries of the
trust.
(c) The terms of a trust may confer upon
a trustee or other person a power to direct
the modification or termination of the
trust.
(d) A person, other than a beneficiary,
who holds a power to direct is presump-
tively a fiduciary who, as such, is required
to act in good faith with regard to the pur-
poses of the trust and the interests of the
beneficiaries. The holder of a power to
direct is liable for any loss that results
from breach of a fiduciary duty.21
When to Use or Not
Conventional texts on trusts do not index
the term trust protector for reference or
analysis. However, the consensus of opinion
among the special needs planning bar is that
the greater sophistication in the development
of special needs trusts makes not having a
trust protector the exception rather than the
rule.22 While there are those that do not make
any reference to the inclusion of a trust pro-
tector in the special needs trust23, many oth-
ers provide ample discourse on the use and
import of the trust protector.24
Bond
While the imposition of the expense of a
bond on special needs trusts has often driven
the decision to require a bond, the protection
should be considered necessary in view of the
greater complexity of SNT administration
and distribution. If left to the plaintiff bene-
ficiary or the family member trustee, the
expense is always the primary factor. Of
course, when the initial amount that funds
the SNT is modest ($50,000 to $150,000),
the expense seems unjustified. The larger the
corpus of the trust, the greater the need for
bonding, and also the greater expense.
Accountings Filed with Clerk
of Superior Court
Clerk’s Preference
Clerks of superior court across North
Carolina are becoming increasingly con-
cerned with the way SNTs are set up and
funded when there is also a guardianship
estate in existence ready to receive and to
control the proceeds of personal injury settle-
ments. The powers granted guardians of the
estate make specific reference to exempt
trusts:
(23)To create a trust for the benefit of the
ward pursuant to 42 United States Code
§1396p(d)(4), provided that all amounts
remaining in the trust upon the death of
the ward, other than those amounts which
must be paid to a state government and
those amounts retained by a nonprofit
association as set forth in 42 United States
See SNT page 6
ELDER LAW 5
SNT from page 5
Code § 1396p(d)(4)(C), are to be paid to
the estate of the ward.25
Options to Consider
a. Do Nothing. Proceed on the assump-
tion that the superior court order for set-
tlement and the creation and funding of
the SNT trumps the jurisdiction of the
Clerk over guardianships.
b. Direct Funds to the Guardianship
Estate. Have the Superior Court’s order
direct all funds to the guardianship estate,
relying on the guardian of the estate to
create and fund the SNT under the power
granted under 35A-1251 (23). This is
a quick and easy way out, but the person-
al injury attorney, the plaintiff/ward and
the family lose significant control and are
subjected to probable periods of ineligibil-
ity for Medicaid or other means-tested
benefits because the receipt of funds by
the guardian of the estate has no way to
shelter the estate assets from being count-
able.
Trustee’s Waiver of Liability
Many corporate trustees with ancillary
non-profit entities take a position that a
hybrid like the SNT requires some form of
waiver of liability. Personal injury lawyers and
SNT specialists representing plaintiff/benefi-
ciaries should ask hard questions about the
need for such protection. It raises the assump-
tion that the corporate trustees know so little
of the special needs area that they have greater
expectations of error and therefore greater-
risk.
The Special Needs of the
Plaintiff/Beneficiary
Defined Disabled or Qualifying
Disability
Rehabilitation of Disability or
Restoration of Capacity
Cycles of Disability
Life Plan Components
Conclusion
This outline provided a summary of
points to weigh when considering whether or
not an SNT is needed in a personal injury
case. It first set out the basics of standard trust
protection, and then set out the history and
6 NOVEMBER 2008
unique characteristics of SNTs. The outline
moved through when SNTs are needed and
when they are not, what the primary compo-
nents of the SNT are and consideration of
optional provisions that may enhance the
operation of the SNT. The outline ends with
a brief review of the special needs of SNT
plaintiff/beneficiaries. „
End Notes
1. Copyright © 2007 All Rights Reserved
by A. Frank Johns, J.D., Florida State
University College of Law; CELA, certified as
an elder law attorney by the National Elder
Law Foundation; partner in the firm of
Booth Harrington & Johns L.L.P., Charlotte
and Greensboro, North Carolina, concentrat-
ing in Elder Law; Fellow and Past President
of, and current chair of the Council of
Advanced Practitioners of the National
Academy of Elder Law Attorneys; past
Charter Chair, Elder Law Section of the
North Carolina Bar Association; fellow
American College of Trust and Estates
Counsel (ACTEC); Charter Advisory Board
Academy of Special Needs Planners; associate
member, Society of Settlement Planners; fac-
ulty, Stetson College of Law Ninth Annual
National Special Needs Trusts Conference;
Charter Board member National
Guardianship Association, associate visiting
professor dual program Masters in
Gerontology/MBA, University of North
Carolina – Greensboro.
2. See Restatement Third, Trusts § 2, at 17
(Cumm. Supp. 2006); Charles E. Rounds,
Jr., Loring A Trustee’s Handbook, 1 (2007 ed.).
3. See George G. Bogert, Handbook of the
Law of Trusts, 1 (1963); see also Black’s Law
Dictionary, 1047 (abg 6th ed. 1991).
4. See Restatement Third, Trusts, supra
note 2, § 3, at 36; Loring A Trustee’s
Handbook, supra note 2, at 47, North
Carolina Uniform Trust Code 36C-1-103
(22) (Hereafter “NCUTC”).
5. See Restatement Third, Trusts, supra
note 2, § 58, at 355; NCUTC 36C-5-502,
and accompanying general comment.
6. Id.,§ 58, comment d, at 361.
7. See 42 U.S.C. § 1396p(d)(4).
8. See N. C. Gen. Stat. § 36D-1 et seq.
North Carolina Community Trust for
Persons with Severe Chronic Disabilities
(2007).
9. See 42 U.S.C. §1396p(c)(2)(B)(iii).
10. See 42 U.S.C. §1396p(c)(2)(A)(ii)(II).
11. See § 1382c of the same title.
12. See Clifton B. Kruse, Jr., Third-Party
and Self-Created Trusts – Planning for the
Elderly and Disabled Client (3rd ed. ABA
2002).
13. A. Frank Johns, The Civil Litigator’s
Expanded Advocacy: Preserving Disabled Client
Damage Awards with the Supplemental Needs
Trust, Trial Magazine (November, 1998).
14. Lineback by Hutchins v. Stout, 79 N.C.
App. 292; 339 S.E.2d 103; 1986 N.C. App.
LEXIS 1976; Fortune v. First Union, 323
N.C. 146; 371 S.E.2d 483; 1988 N.C.
LEXIS 518. By definition, under a discre-
tionary trust the trustee has discretion
whether, and to what extent, to apply trust
income or principal to, or for the benefit of,
the beneficiaries. Id., 371 S.E.2d at 489 (dis-
sent); NCUTC 36A-5-504, 8-814.
15. See N.C. Gen. Stat. § 35A-1241 (a)(3)
(2007).
16. See N.C. Gen. Stat. § 35A-1251 (14)
(2007).
17. 42 U.S.C. § 1382(c)(a)(3).
18. See Dana Shilling, Legal Issues of
Dependent and Incapacitated People, § 12.5, n.
20, citing 20 C.F.R. pt. 404, subpt. P, appx. 1.
(2007).
19. See 42 U.S.C.§ 1614 (a)(3) (SSI);
OBRA ‘93, HCFA Transmittal 64, § 3259.7
(A) (1994).
20. See Ira S. Wiesner, The Special Needs
Trust: The Trustee, The Beneficiary and Who
are all Those Other Folks? 1 Academy of
Special Needs Planners National Conference,
Section 2 (2007).
21. N. C. Gen. Stat. §§ 36C-8-808 and
809 (2007).
22. See Michael Gilfix, New Developments
in the Evolution of an SNT Practice, 1
Academy of Special Needs Planners National
Conference, Section 5 (2007).
23. See Stephen Elias, Special Needs Trusts:
Protect Your Child’s Financial Future, Chp. 8
(2005).
24. See Michael T. Palermo, AARP Crash
Course in Estate Planning: The Essential Guide
to Wills, Trusts and Your Personal Legacy, Chp.
6 Using a Trust Protector, 125-136 (2005); see
Estate Street Partners LLC, What is a Trust
Protector? Powers of a Trust Protector
Differences from a Trustee,
http://ultratrust.com/trust-protector.html
(author last accessed the Web site on May 1,
2007).
25. See N. C. Gen. Stat.§ 35A-1251 (23)
(2007).
Special Needs Trusts –
Power Tools for Planners
B Y V INCENT J. R USSO
When I met Mrs. Jones at her house, she
seemed anxious. She has been worrying about
how her daughter, Amy, for some time. Who
will take care of Amy if something happens to
her? In the meantime, she wants the best for her
daughter and is very confused about what she
can afford to do and what government benefits
are available for Amy. I was glad to be there,
especially with my tool box in hand!
As caring planners, we want to be pre-
pared and to take advantage of all the avail-
able tools that can improve the quality of life
of a client with special needs. Our objectives
often include providing financial stability,
maximizing government benefits, ensuring
advance directives are in place and coordinat-
ing available resources in the community.
This article will focus on one of the most
powerful tools at our disposal - Special Needs
Trusts.
Trusts can be a wonderful vehicle for asset
management, creditor protection and maxi-
mizing government benefits for the lifetime
of a loved one with special needs. Special
needs most often last a lifetime, and may
require specialized care beyond that available
from a family care giver. Such care may
require the services of physicians, hospitals,
and even long-term care in a nursing home.
In some cases, structured living, such as in a
group home, may be the most appropriate
setting.
We need to be clear about the different
types of trusts that are in our tool box, just as
carpenters can select among various saws to
cut wood. We also need to be mindful of
where we live. State laws can affect what
works and does not work. The carpenter will
use different materials in a bathroom versus a
bedroom.
Third-Party
Supplemental Needs Trusts
Mrs. Jones can set up this trust under a Will
and name Amy’s sister as the Trustee.
Alternatively, Mrs. Jones can set up a
Supplemental Needs Trust immediately that can
be funded now or in the future, by Mrs. Jones or
other family members. The funds in the Trust
can be used to supplement Amy’s government
benefits to pay for her living expenses and to
enhance her quality of life. Amy can continue to
receive monthly payments from SSI to help with
living expenses and Medicaid to pay for her
medical needs.
Care givers are often troubled over how to
leave money for a person with special needs
without interfering with eligibility for
Medicaid or Supplemental Security Income
(SSI). An outright gift or bequest to a person
with special needs will affect his or her ongo-
ing eligibility for such programs, which are
necessary for the person’s maintenance and
health care needs. The solution is a Third-
Party Supplemental Needs Trust (sometimes
referred to as a Third-Party Special Needs
Trust)
First-Party Special Needs Trusts
Amy had received a $50,000 inheritance
from a well-intentioned uncle who unexpected-
ly passed away. Mrs. Jones met with a special
needs attorney to obtain guardianship so she
could manage the money for Amy. Mrs. Jones
can now set up Special Needs Trust for Amy
with the $50,000 and she can be the Trustee.
The funding of the Trust will prevent Amy from
losing SSI and Medicaid.” Like the Third-Party
Supplemental Needs Trust, the funds in this
Trust can be used to supplement her government
benefits to pay for her living expenses and to
enhance her quality of life. Upon Amy’s demise,
any money remaining in the Trust must first be
used to reimburse the State for the amount of
Medicaid provided to Amy during her lifetime.
In the event that the person with special
needs has his or her own assets, planning
must be done to access government benefits.
The person with special needs may have
assets from (i) a lawsuit based on negligence
or medical malpractice, (ii) an inheritance, or
(iii) his or her own labors prior to becoming
disabled. In order to access government ben-
efits, the individual can transfer his or her
assets into a Special Needs Trust, sometimes
referred to a (d)(4)(A) Trust or a Pay Back
Trust. Upon the individual’s demise, the State
has the right to be reimbursed for the
Medicaid paid to the individual to the extent
of the assets in the Trust at that time.
Why Establish a
Supplemental Needs Trust
or Special Needs Trust?
Mrs. Jones wants to make sure that Amy will
be eligible for Medicaid and SSI for life. You
have the answer in your tool kit - the Third-
Party Supplemental Needs Trust for Mrs. Jones
assets and a First-Party Special Needs Trust for
Amy’s assets.
To preserve eligibility for Medicaid.
Medicaid, a joint federal-state program, pro-
vides medical assistance to those who are dis-
abled and can demonstrate financial need.
Children and adults can qualify for Medicaid
only if their monthly income and the value of
their other assets fall below certain limits,
which vary from state to state.
In determining eligibility for Medicaid, a
state may count only the income and assets
that are legally available to the applicant. A
Supplemental or Special Needs Trust restricts
the beneficiary’s own direct access to the
assets in the trust to such an extent that the
assets are not considered legally available to
the beneficiary. Thus, a Supplemental or
Special Needs trust can protect Medicaid eli-
gibility because assets in the trust are
uncountable.
Such trusts can be especially useful to sup-
plement what Medicaid covers or to fill the
gaps not covered by Medicaid. Although
Medicaid pays for a number of medical costs,
including hospital bills, physician services,
and long-term care, it will not subsidize items
and services considered nonessential. These
may include health-related expenses like eye-
glasses, dental care, rehabilitation services,
and home health aide services, as well as per-
sonal expenses such as transportation, com-
puter equipment, and vacations.
See POWER TOOLS page 8
ELDER LAW 7
Power Tools from page 6
To preserve eligibility for Supplemental
Security Income (SSI). Supplemental
Security Income is a monthly income benefit
that children and adults with special needs
who have limited income and resources can
receive. These cash benefits can be used for
basic needs such as housing and food. SSI
benefits are needs-based, so having too many
assets or too high an income can affect eligi-
bility or how much one is entitled to receive
monthly. Naming a Third-Party
Supplemental Needs Trust, instead of a child,
as the beneficiary of your assets allows those
assets to be devoted to the care of a loved one.
To provide financial management. The
Trust approach can be a helpful tool to ensure
that a financial plan is implemented for all of
The Use of Qualified Settlements Funds,
Qualified Assignments and Special Needs
Trusts in Physical Injury Settlements
B Y J OHN J. C AMPBELL , CELA, MSCC
Copyright 2008 National Academy of Elder
Law Attorneys. Reprinted by permission from
NAELA.
Introduction
Internal Revenue Code (I.R.C.) §
104(a)(2) provides that the proceeds (except
for punitive damages) from the settlement of
a claim involving physical injury or sickness
are not included in the taxable income of the
plaintiff who receives these proceeds.1
However, if the settlement of the claim is
paid in the form of a lump sum2, any income
earned by the recipient on the lump sum set-
tlement is taxable.3 In addition to income tax
concerns, there is an inherent risk that a lump
sum settlement designed to provide for the
plaintiff ’s lifetime medical and support needs
may be dissipated prematurely. Unwise
investments, poor money management or
even the volatility of the economy can result
in the exhaustion of the plaintiff ’s settlement
funds, leaving the plaintiff with no means to
provide for his or her care and support.4
8 NOVEMBER 2008
the assets that are available to the person with
special needs. Sound financial management
can make the difference by extending the
assets and income over the lifetime of the per-
son. Life Insurance is another tool that can
also be helpful in creating a fund of assets in
the event a parent predeceases a child with
special needs.
Mrs. Jones said goodbye to me at the front
door of her home. She smiled and thanked me.
For the first time in a long time, she saw some
daylight in her daughter’s future, and hers as
well. I felt the rays of the sun upon me and it felt
good. „
VINCENT J RUSSO, J.D., LL.M.,
CELA IS THE MANAGING
Periodic Payment Act of 1982
In 1982, Congress passed the Periodic
Payment Act (PPA)5, amending the Internal
Revenue Code to grant statutory certainty to
the tax-favored use of periodic payments in
physical injury (PI) settlements.6 The PPA
amended I.R.C. § 104(a)(2) to add paren-
thetical language which indicated that
amounts received would be excluded from
gross income whether received as “lump sums
or as periodic payments.”7 Most notably the
Act created I.R.C. § 130, which provides a
means whereby a defendant can fulfill a set-
tlement obligation to make periodic pay-
ments of settlement proceeds through a qual-
ified assignment of his or her liability to a
third-party assignee.8 The defendant pays the
assignee a lump sum, and the assignee pur-
chases an annuity contract that will fund pay-
ment of the defendant’s obligation to the
plaintiff in the form of periodic payments.9
Under I.R.C. § 130, the amount received by
the assignee is not included in that assignee’s
gross income unless that amount exceeds the
cost of the annuity.10
As a result, it is now common practice to
SHAREHOLDER OF THE LAW FIRM
OF VINCENT J. RUSSO &
ASSOCIATES, P.C. OF WESTBURY,
LIDO BEACH, WOODBURY AND
ISLANDIA, NEW YORK. VINCENT IS A
CO-FOUNDER OF THE ACADEMY OF
SPECIAL NEEDS PLANNERS
(WWW.SPECIALENEEDSPLANNERS.C
OM) AND CO-FOUNDER OF THE
THERESA ALESSANDRA RUSSO
FOUNDATION WHICH ENHANCES
THE LIVES OF CHILDREN WITH SPE-
CIAL NEEDS (WWW.THERESAFOUN-
DATION.ORG). HE IS A NATIONAL
ADVOCATE FOR THE RIGHTS OF
PEOPLE WITH SPECIAL NEEDS AND
OF SENIORS.
structure all or part of a PI settlement with a
qualified annuity and a qualified assignment
under I.R.C. § 130. The advantages to the
settling plaintiff are clear: proceeds received
as annuity payments are not subject to
income tax and the plaintiff has the security
of a future stream of income to provide nec-
essary funds for the plaintiff ’s lifetime.
I.R.C. § 130 requires that a qualified
assignment be made by a “party to the suit or
agreement” having liability to the plaintiff.11
In addition, if the plaintiff has actual or con-
structive receipt of the settlement funds, the
ability to take advantage of the tax savings
under I.R.C. § 130 is lost. Therefore, struc-
tured settlements under I.R.C. § 130 have
traditionally been funded directly by the
defendant or the defendant’s insurance carri-
er.
Increasingly, settling plaintiffs and their
attorneys have expressed serious dissatisfac-
tion with the traditional arrangement in
which the defendant has complete control
over the purchase of the annuity that will
fund the qualified assignment. Plaintiffs are
forced to agree to a specified income stream
rather than the lump sum amount with
which the annuity will be funded.
Defendants’ insurance carriers often use “pre-
ferred” brokers who may be under an agree-
ment to split commissions with the carrier.
Fees, commissions and the actual commuted
value of the annuity are seldom fully dis-
closed. Many times, the future payments the
plaintiff will receive are less than what the
plaintiff might have been able to obtain from
another annuity issuer for the same premium
payment. Plaintiffs may thus be deprived of
the ability to enjoy the fullest benefit of the
settlement and may even feel that they have
been duped into settling for less than the
agreed-upon amount. Further, there is at least
a perceived conflict of interest involved where
the plaintiff ’s financial settlement planning is
in the hands of the opposing party.12
Finally, in the context of PI settlements
involving seriously or catastrophically injured
plaintiffs, a primary goal is to provide funds
for the support and care of the plaintiff while
preserving eligibility for all available and
appropriate governmental benefit programs,
including Supplemental Security Income
(SSI) and Medicaid. Typically, Medicaid eli-
gibility is the first consideration because the
need to ensure adequate medical care is para-
mount. However, SSI is also an important
benefit program that can provide much need-
ed additional income, and sometimes more,
to those who qualify.
For many years, Special Needs Trusts have
been commonly used to preserve Medicaid
eligibility for a settling plaintiff and have also
been employed to preserve SSI eligibility
since January 2000. Settling plaintiffs may
require that the distribution of settlement
proceeds be delayed to allow time to com-
plete planning for SSI or Medicaid eligibility.
At the same time, both the plaintiffs and
defendants may wish to avoid delay in the
execution and completion of the settlement
itself. Plaintiffs in this situation will need a
vehicle by which their settlements can be
finalized without the proceeds being treated
as available resources during the time neces-
sary to create and fund an exempt Special
Needs Trust.
As a result, many plaintiffs who are inter-
ested in receiving their settlements in the
form of a structure are insisting on a different
procedure that will allow them more control.
Qualified Settlement Funds under I.R.C. §
468B and the corresponding IRS regulations
provide an alternative to the traditional,
defendant-directed structured settlement
arrangement.
Qualified Settlement Funds
under I.R.C. § 468B
In 1986, Congress enacted the Tax
Reform Act, which added I.R.C. § 468B to
allow a defendant to extinguish his or her lia-
bility by paying settlement proceeds into a
“designated settlement fund” (DSF).14
I
nitially, DSFs were used in the settlement of
large class action PI15 suits in which the indi-
vidual shares of the settlement to the various
class members had not yet been determined.
However, I.R.C. § 468B contains no lan-
guage that restricts the use of DSFs to the set-
tlement of suits or claims involving multiple
plaintiffs.
A DSF is defined as any fund:
(A) which is established pursuant to a
court order and which extinguishes com-
pletely the tort liability [of the defendant
or the defendant’s insurance carrier to the
plaintiff ],
(B) with respect to which no amounts
may be transferred other than in the form
of qualified payments,
(C) which is administered by persons a
majority of whom are independent of the
[defendant or the defendant’s insurance
carrier],
(D) which is established for the principal
purpose of resolving and satisfying present
and future claims against the [defendant]
(or any related person or formerly related
person) arising out of personal injury,
death, or property damage,
(E) under the terms of which the [defen-
dant] (or any related person) may not
hold any beneficial interest in the income
or corpus of the fund, and
(F) with respect to which an election is
made by the defendant.16
In 1992, the Secretary of the Treasury
introduced regulations governing the treat-
ment of DSFs.17 Under these regulations, the
Secretary provided for the creation and use of
“qualified settlement funds” (QSFs).18
Although QSFs are not specifically men-
tioned in I.R.C. § 468B, they are clearly
intended to meet the definition of a DSF.
Under 26 C.F.R. § 1.468B-1, a fund,
account or trust is a QSF if:
(1) It is established pursuant to an order
of, or is approved by, the United States,
any state (including the District of
Columbia), territory, possession, or politi-
cal subdivision thereof, or any agency or
instrumentality (including a court of law)
of any of the foregoing and is subject to
the continuing jurisdiction of that govern-
mental authority;
(2) It is established to resolve or satisfy one
or more contested or uncontested claims
that have resulted or may result from an
event (or related series of events) that has
occurred and that has given rise to at least
one claim asserting liability-
(i) Under the Comprehensive
Environmental Response,
Compensation and Liability Act of
1980 (hereinafter referred to as
CERCLA), as amended, 42 U.S.C.
9601 et seq.; or
(ii) Arising out of a tort, breach of
contract, or violation of law; or
(iii) Designated by the
Commissioner in a revenue ruling
or revenue procedure; and
(3) The fund, account, or trust is a trust
under applicable state law, or its assets are
otherwise segregated from other assets of
the transferor (and related persons).19
Although the regulations define a QSF in
broader terms than the statute’s definition of
a DSF, the regulations have been held to be
valid.20
The proceeds of a PI settlement used to
fund a QSF continue to receive favorable tax
treatment under I.R.C. § 104(a)(2), but
income earned on the proceeds are taxable to
the QSF for so long as the QSF continues to
hold the funds.21 Under 26 C.F.R. § 1.468B-
2, QSFs are taxed at the maximum rate appli-
cable to trusts, but are otherwise treated as
corporations under the I.R.C.22
Like the governing statute, the regulations
do not contain any language restricting the
use of QSFs to settlement of suits or claims
involving multiple plaintiffs. Moreover, the
regulations state specifically that a QSF can
be used to settle “one or more” claims. There
can be little serious doubt that the regulations
permit QSFs to be used in the settlement of
single-plaintiff PI claims.
Qualified Assignments and Qualified
Funding Assets under I.R.C. § 130
As noted above, the PPA amended I.R.C.
§ 104(a)(2), clarifying that the income from
an annuity which makes periodic payments
as part of a settlement of a PI claim for phys-
ical injury or sickness is not included in the
See PHYSICAL INJURY page 10
ELDER LAW 9
Physical Injury from page 9
gross income of the recipient.25 In addition,
under I.R.C. § 130, amounts received for
agreeing to a qualified assignment are not
counted as income.
The assignment of the obligation to make
periodic payments constitutes a “qualified
assignment” if the following requirements are
met:
(1) if the assignee assumes such liability
from a person who is a party to the suit or
agreement..., and
(2) if-
(A) such periodic payments are
fixed and determinable as to
amount and time of payment,
(B) such periodic payments cannot
be accelerated, deferred, increased,
or decreased by the recipient of
such payments,
(C) the assignee’s obligation on
account of the personal injuries or
sickness is no greater than the obli-
gation of the person who assigned
the liability, and
(D) the periodic payments must be
excludable from the gross income of
the recipient under I.R.C. §§
104(a)(1) & (2).26
Further, the periodic payments must be
funded with a commercial annuity issued by
a life insurance company, and the annuity
payments cannot be more than the periodic
payments under the qualified assignment.
Finally, the annuity must be purchased with
settlement proceeds within 60 days before or
after the qualified assignment and must be
designated specifically to payment of the
qualified assignment.27
Once there is a qualified assignment of an
annuity funding a structured PI settlement,
the plaintiff cannot change the terms of the
annuity, including the payment amounts or
the payee. The annuity must be purchased
directly by a party to the PI suit with liability
to the plaintiff to avoid constructive receipt
of the settlement funds by the plaintiff.28 The
plaintiff will also be treated as having con-
structive receipt of the settlement funds if he
or she has the option of receiving a lump sum
in lieu of an annuity, or the ability to direct
the use of the settlement proceeds to pur-
chase an annuity.29
As noted above, qualified assignments
under I.R.C. § 130 are available in the settle-
ment of both PI and workers’ compensation
10 NOVEMBER 2008
claims, but only with regard to settlement
proceeds that are exempt from taxation under
I.R.C. §§ 104(a)(1) & (2).
QSFs and Qualified Assignments in
Single-Plaintiff PI Settlements
The question still remains whether a QSF
holding funds from a PI settlement involving
a single plaintiff can accomplish a qualified
assignment under I.R.C. § 130. Many defen-
dants, liability carriers and structured settle-
ment professionals have argued for years that
it cannot, based upon the common law doc-
trine of “economic benefit,” as defined in the
landmark case of Sproull v. Commissioner.30
In a nutshell, the Sproull case held that
when a fund is placed irrevocably with a third
party for the sole benefit of the taxpayer and
the taxpayer has a vested, unconditional right
to the fund, the taxpayer has received an eco-
nomic benefit.31 This, the argument goes, is
exactly what happens when a QSF is funded
with the proceeds of a single-plaintiff PI set-
tlement, since the amount to which the
plaintiff ’s vested interest applies is immedi-
ately determinable.
Under Sproull, if the taxpayer has received
an economic benefit, the fund is immediate-
ly includable in the taxpayer’s gross income.32
Therefore, if the plaintiff has an economic
benefit from PI settlement funds, the princi-
pal settlement amount is excludable under
I.R.C. § 104(a)(2), but any income earned on
the funds is includable in the plaintiff ’s gross
income. This would arguably prevent the
QSF from being able to accomplish a valid
I.R.C. § 130 qualified assignment, since all of
the periodic payments from the qualified
funding asset, including the income portion,
must be excludable from the plaintiff ’s gross
income under I.R.C. § 104(a)(1) or (2).33
Proponents of this argument often cite
IRS Private Letter Ruling (P.L.R.)
200138006,34 as authority for the applica-
tion of the economic benefit doctrine to sin-
gle-plaintiff QSFs. While that particular PLR
did involve an analysis of a QSF under the
economic benefit doctrine, the QSF dis-
cussed in P.L.R. 200138006 was not funded
with the proceeds of a PI settlement.35
Therefore, the case discussed in P.L.R.
200138006 did not involve the issue of
whether a QSF holding funds from a single-
plaintiff PI settlement could accomplish a
valid I.R.C. § 130 qualified assignment.
The real issue is whether the economic
benefit doctrine applies to bar a single-plain-
tiff QSF, funded with PI settlement proceeds,
from making a qualified assignment under
I.R.C. § 130. To rely solely upon P.L.R.
200138006 as authority for the application
of the economic benefit doctrine in such
cases is to ignore the content of I.R.C. § 130,
the Congressional intent and legislative histo-
ry behind I.R.C. § 130, and IRS Rev. Proc.
93-34.
When I.R.C. § 130 was originally enacted
in 1982, the statute provided that the party
making a qualified assignment could not
assign payment rights “greater than those of a
general creditor.”36 The legislative history
behind the original 1982 statute states
Congress’ intent at the time that payments of
damages from PI claims be “excludable from
income only if the recipient taxpayer is not in
constructive receipt of or does not have the
current economic benefit of the sum required
to produce the periodic payments.”37
However, Congress amended I.R.C. §
130(c)(2)(C) in 198838 by removing the
“greater than a general creditor” language, so
that “[r]ecipients of periodic payments under
structured settlement arrangements should
not have their rights as creditors limited by
provisions of the tax law.”39 When Congress
repealed I.R.C. § 130(c)(2)(C), it also added
the following language to I.R.C. § 130(c):
The determination for purposes of this
chapter of when the recipient is treated as
having received any payment with respect
to which there has been a qualified assign-
ment shall be made without regard to any
provision of such assignment which grants
the recipient rights as a creditor greater
than those of a general creditor.40
The legislative history behind the 1988
revisions to I.R.C. § 130(c) states that “no
amount is currently includable in the recipi-
ent’s income solely because the recipient is
provided creditor’s rights that are greater than
the rights of a general creditor.”41
A settling plaintiff with vested rights to a
settlement fund has rights “greater than those
of a general creditor” and would normally be
considered to have an “economic benefit”
under Sproull.42 Thus, the effect of the 1988
amendments to I.R.C. § 130(c) was to make
the “economic benefit” doctrine inapplicable
to qualified assignments in PI settlements.
Whenever the parties to a PI case reach an
agreement to settle for a specified amount,
the plaintiff obtains a vested right to the set-
tlement proceeds. When the defendant or the
defendant’s insurance carrier provides the
funds through a qualified assignment for the
purchase of a qualified annuity, the funds are
irrevocably placed with a third party for the
sole benefit of the plaintiff. In spite of this,
qualified assignments are routinely and suc-
cessfully employed in structured PI settle-
ments for individual plaintiffs.43
It seems clear that the economic benefit
doctrine is no longer applicable to bar a qual-
ified assignment under I.R.C. § 130 after the
1988 revisions to that section. Indeed, the
IRS has interpreted the 1988 revisions as
allowing qualified assignments of periodic
payment liabilities without regard to whether
a plaintiff has the current economic benefit of
the settlement proceeds or the qualified fund-
ing assets purchased with those settlement
proceeds.44 Assuming the requirements of
I.R.C. § 130 are met, the plaintiff ’s econom-
ic benefit does not bar a successful qualified
assignment.
Therefore, a party to the suit or agreement
with liability to the plaintiff can accomplish a
valid qualified assignment, regardless of
whether the settlement proceeds are placed
irrevocably with a third party in a separate
fund, account or trust for the sole benefit of
the plaintiff and the plaintiff has an uncondi-
tional, vested right in the fund, account or
trust. So long as the plaintiff is not in con-
structive receipt of the settlement proceeds, a
qualified assignment is still possible.
It is very important to note that I.R.C. §
130 requires only that the assignment be
made by a “party to the suit or agreement”
having liability to the plaintiff.45 That section
does not require that the assignment be made
by the original defendant or its insurance car-
rier. Thus, any party with liability to the
plaintiff can make a valid qualified assign-
ment.
In 1993, the IRS issued Revenue
Procedure (Rev. Proc.) 93-34.46 This proce-
dure “provides rules under which a designat-
ed settlement fund described in section
468B(d)(2) of the Internal Revenue Code or
a qualified settlement fund described in sec-
tion 1.468B-1 of the Income Tax Regulations
will be considered ‘a party to the suit or agree-
ment’ for purposes of section 130.”47
Specifically, Rev. Proc. 93-34 provides
that:
... a qualified settlement fund will be treat-
ed as “a party to the suit or agreement”
within the meaning of section 130(c)(1)
of the Code if each of the following
requirements is satisfied:
(1) the claimant agrees in writing to the
assignee’s assumption of the... qualified
settlement fund’s obligation to make peri-
odic payments to the claimant;
(2) the assignment is made with respect to
a claim on account of personal injury or
sickness (in a case involving physical
injury or physical sickness) that is...:
(b) a claim [under CERCLA ; or arising
out of a tort, breach of contract, or viola-
tion of law; or designated by the
Commissioner in a revenue ruling or rev-
enue procedure];
(3) each qualified funding asset purchased
by the assignee in connection with the
assignment by the designated or qualified
settlement fund relates to a liability to a
single claimant to make periodic pay-
ments for damages;
(4) the assignee is not related to the trans-
feror (or transferors) to the designated or
qualified settlement fund within the
meaning of sections 267(b) or 707(b)(1);
and
(5) the assignee is neither controlled by,
nor controls, directly or indirectly, the
designated or qualified settlement fund...48
Rev. Proc. 93-34 does not contain any
provisions that would restrict its application
to settlements involving multiple plaintiffs.
On the contrary, it speaks in terms of quali-
fied assignments relating to “a claim” and
“liability to a single claimant.”49 This lan-
guage, like the language of I.R.C. § 468B,
itself, is consistent with situations involving
either a single plaintiff or multiple plaintiffs.
The logical conclusion is that the provi-
sions of I.R.C. §§ 130 and 468B, and Treas.
Reg. §§ 1.468B-1 through 1.468B-5, as
interpreted by the I.R.S., itself, permit QSFs
in single-plaintiff PI settlements to make
qualified assignments under I.R.C. § 130, so
long as the QSF is made a “party to the suit
or agreement” in compliance with Rev. Proc.
93-34.
Strategies for Using
Qualified Settlement Funds
How Does a QSF Make a Valid
Qualified Assignment?
It should not be difficult to comply with
all of the applicable requirements of I.R.C.
§§ 130 and 468B, I.R.S. Regulation §§
1.468B-1 through 1.468B-5, and Rev. Proc.
93-34 when settling a PI claim. The parties
could first petition the court with jurisdiction
over the claim to create a QSF trust and
appoint an independent trustee, with the
court having continuing jurisdiction over the
QSF trust until it terminates. The plaintiff
would not have any rights to revoke or mod-
ify the terms of the QSF trust, or to compel
any distributions from the QSF trust other
than to fund a qualified assignment.
The parties could then enter into a “nova-
tion,”50 in which the plaintiff, defendant, the
defendant’s insurance carrier and the QSF
trustee would all agree that the defendant’s
liabilities to the plaintiff be assigned to and
fully assumed by the QSF. As consideration,
the defendant and/or the defendant’s insur-
ance carrier would agree to pay the QSF an
agreed upon lump sum, to be used only to
fund a qualified assignment.
The QSF could then be substituted for
the original defendant as a party to the case;
the QSF could be funded by the defendant or
the defendant’s insurance carrier; and the
defendant and/or its carrier could be granted
a full release by all parties. The QSF trustee,
now a party standing in the shoes of the orig-
inal defendant, could then enter into a full
and final, court-approved settlement agree-
ment with the plaintiff. The settlement
would extinguish all liabilities assumed from
the original defendant and require payment
of the settlement proceeds through a quali-
fied assignment. The plaintiff would not have
the option of receiving any portion of the set-
tlement in a lump sum and the obligation to
make and fund the qualified assignment
would fall solely to the QSF.
The QSF, as a “party to the suit or agree-
ment,” should then be able to accomplish an
I.R.C. § 130 qualified assignment, giving the
plaintiff favorable income tax treatment of all
income earned on the qualified annuity.
Since the QSF would be funded with an
agreed lump sum, representing the commut-
ed value of the qualified annuity, the plaintiff
would be assured of receiving the full value of
the settlement.
The plaintiff would also have the ability to
choose the structured settlement broker, to
request that the trustee purchase a qualified
See PHYSICAL INJURY page 12
ELDER LAW 11
Physical Injury from page 11
annuity which would provide the most valu-
able income stream, and to ensure that all fees
and commissions are fully disclosed. At the
same time, the settlement would be protect-
ed from premature depletion and the plaintiff
would be assured a secure, future stream of
income for life to meet his or her needs for
support and medical care. In short, the plain-
tiff would be able to enjoy all of the advan-
tages of a tax-free structured settlement with-
out the negative aspects of the traditional,
defendant-directed structured settlement
arrangement.
QSFs and Special Needs Trusts
Use of a QSF may be particularly useful in
situations in which the distribution of settle-
ment proceeds needs to be delayed to allow
planning for the plaintiff ’s SSI or Medicaid
eligibility. The QSF’s prohibition on distribu-
tions other than to fund a qualified assign-
ment and its restrictions on the plaintiff ’s
authority to compel distributions of principal
or income prevent the assets in the QSF from
being treated as available resources or income
to the plaintiff for purposes of SSI and
Medicaid. The qualified assignment may be
drafted to name an SSI/Medicaid exempt
Special Needs Trust as the payee (so long as
all payments are made before the plaintiff
reaches age 65).51
The Omnibus Budget Reconciliation Act
of 1993 (OBRA ‘93)52 established new
Medicaid criteria for treatment of both revo-
cable and irrevocable trusts created after
August 10, 1993. Specifically, OBRA ‘93 per-
mits the use of a Special Needs Trust, funded
with the assets of a Medicaid beneficiary, if
the trust meets the following criteria set forth
in the statute:
(A) A trust containing the assets of an
individual under age 65 who is disabled
(as defined in § 1382c(a)(3) of the Social
Security Act) and which is established for
the benefit of such individual by a parent,
grandparent, legal guardian of the individ-
ual, or a court if the State will receive all
amounts remaining in the trust upon the
death of such individual up to an amount
equal to the total medical assistance paid
on behalf of the individual by the
state;.... 53
In December 1999, Congress passed the
Foster Care Independence Act (FCIA),54
12 NOVEMBER 2008
which contained new anti-fraud provisions
applicable to the SSI program. The FCIA
specifically exempts OBRA ‘93 Special Needs
Trusts from being considered available
resources and provides that transfers to fund
such trusts by individuals under age 65 will
not incur a penalty period.55 Thus, the FCIA
provides that a trust will be exempt from the
general rules regarding self-settled trusts if it
complies with all of the criteria in 42
U.S.C.A. § 1396p(d)(4)(A) applicable to
OBRA ‘93 Special Needs Trusts for
Medicaid.
Even a trust that complies with all of the
requirements of 42 U.S.C.A. § Special Needs Trust.
1396p(d)(4)(A) might not be recognized as a
valid exempt trust if it does not also comply
with Social Security Administration policies,
as set forth in the Program Operations
Manual System (POMS) at POMS SI
01120.203. In particular, the trust must
comply with all of the following key require-
ments:56
1. The trust will be established with
the assets of the beneficiary, who is under
age 65;
2. The beneficiary is disabled as that term
is defined in the Social Security Act;
3. The beneficiary is the sole beneficiary of
the trust and the trust must not allow any
Prohibited Expenses or Payments under
POMS SI 01120.203.B.3);57
4. The trust was established by the benefi-
ciary’s parent, grandparent, legal guardian
or a court, if the beneficiary is a minor. If
the beneficiary is not a minor, the trust
was established by someone who has legal
authority to act with regard to the benefi-
ciary’s assets,58 which would mean that the
trust must have been established by the
beneficiary’s legal guardian or a Court, or
by the individual in the case of a pooled
trust account;
5. The trust provides specific language
providing that, upon the death of the ben-
eficiary, the trust must first reimburse the
State for medical assistance paid for the
beneficiary;
6. The trust will be fully funded before the
beneficiary reaches age 65;
7. The trust is irrevocable. (The trust must
contain a specific provision making the
trust irrevocable; and, in states which still
follow the common law doctrine of wor-
thier title, the trust must name specific
individuals as contingent beneficiaries
upon the beneficiary’s death, after repay
ment to the State for medical assistance
benefits paid).
Failure of the trust to comply both with
OBRA ‘93 and the requirements in the
POMS will result in trust assets being consid-
ered an available resource for SSI purposes or
in transfers to fund the trust being considered
transfers without fair consideration, resulting
in an SSI penalty period. The question arises,
then, as to when the more restrictive SSI
requirements will apply to the creation of a
In 1999, the United States District Court
in Colorado was presented with the issues of:
1) whether, in an SSI state59, a trust approved
under the federal SSI eligibility criteria could
nonetheless be considered invalid under state
Medicaid law; and 2) whether a Medicaid
beneficiary in an SSI state can be denied
Medicaid benefits under state Medicaid regu-
lations if the individual continues to qualify
for SSI.60 The court held that, in SSI states,
Medicaid agencies cannot employ methodol-
ogy or criteria more restrictive than that of
SSI when evaluating trusts, because an SSI
recipient automatically qualifies for
Medicaid.61
The court’s holding in Ramey governs any
situation in which state Medicaid regulations
in an SSI state might impose more restrictive
criteria for eligibility than those imposed by
federal regulations governing SSI. In an SSI
state, an individual who is eligible for SSI
under the federal Social Security regulations
cannot be denied Medicaid benefits by the
application of a more restrictive state
Medicaid law or regulation.
In SSI states, a trust that is approved by
the Social Security Administration for an SSI
beneficiary cannot also be required to comply
with any additional requirements under state
Medicaid law; and an individual who quali-
fies for SSI cannot be denied Medicaid under
any state Medicaid law that might impose eli-
gibility requirements stricter than those
imposed by SSI. Thus, for a person whose
Medicaid eligibility is due to eligibility for
SSI, that person’s Special Needs Trust must
comply with SSI criteria, regardless of what
criteria may exist under state Medicaid law.
Further, if such an individual qualifies for
SSI, even after consideration of all cash
income and in-kind support and mainte-
nance, that individual cannot be denied
Medicaid benefits, even if a calculation of the
individual’s cash income and in-kind support
and maintenance under state Medicaid regu-
lations might otherwise result in ineligibility.
Special Funding Issues
Medicaid Annuities under the
Deficit Reduction Act of 2005
In many PI settlements, the plaintiff ’s
future medical expenses may be expected to
“spike” in later years. For example, a plaintiff
may anticipate the need for surgery or
replacement of certain durable medical
equipment many years after the settlement.
In these instances, it is not unusual for the
structured settlement to include an annuity
that might pay out large payments in fixed
amounts at 5 or 10 year intervals, specifically
to provide extra funds in those years when
unusually large medical costs are expected. By
deferring payment for large and infrequent
costs until needed, the defendant can reduce
the costs of funding the settlement while still
providing the plaintiff with sufficient settle-
ment funds to meet his or her needs for
future care.
The Deficit Reduction Act of 2005
(DRA)62 amended federal Medicaid law to
provide that the purchase of an annuity from
the assets of a Medicaid recipient (or the
recipient’s spouse) is a transfer without fair
consideration, unless the annuity: (1) is irrev-
ocable, non-assignable, actuarially sound,
and provides for substantially equal payments
over the life of the annuity with no deferral or
balloon payments; or (2) names the state as
death beneficiary up to the amount of
Medicaid benefits paid on behalf of the annu-
itant.63 However, the DRA does not provide
for any further consequence in the treatment
of deferred or balloon annuities. Thus, even a
deferred or balloon annuity still should not
be treated as a “resource” if it is annuitized,
but rather, the payments should continue to
be treated as income in the month received.
Under I.R.C. § 130, an annuity that
funds a qualified assignment must be fixed as
to the amount and time of periodic pay-
ments. However, those payments need not be
made monthly or even annually. On the
other hand, the DRA restrictions on annu-
ities require that a Medicaid-exempt annuity
must be actuarially sound and provide for
substantially equal payments. The DRA
specifically provides that the purchase of
deferred annuities and balloon annuities by
the Medicaid recipient or the recipient’s
spouse will result in a transfer penalty. Does
this mean that only I.R.C. § 130 immediate
annuities may be used in a structured settle-
ment when the annuity will be used to fund
a Medicaid Special Needs Trust for the plain-
tiff? Not necessarily.
As discussed above, a qualified annuity
under I.R.C. § 130 must be purchased
directly by a party to the case with liability to
the plaintiff. The plaintiff cannot even have
the option of receiving an annuity or a lump
sum payment without having constructive
receipt of the settlement funds and running
afoul of I.R.C. § 130. In other words, any
annuity that would be used to fund a Special
Needs Trust in the context of a PI settlement
is purchased with assets of the party with lia-
bility to the plaintiff, and not with assets that
could be considered “available” to the plain-
tiff/Medicaid recipient.
The DRA’s restrictions on the purchase of
deferred or balloon annuities only apply to
purchases of annuities with assets of the
Medicaid recipient (or the recipient’s spouse).
Further, the DRA does not apply to SSI.
Therefore, the DRA annuity provisions
should not affect the ability to fund Medicaid
or SSI Special Needs Trusts with I.R.C. § 130
deferred or balloon annuities as part of a PI
settlement. In fact, the DRA annuity provi-
sions arguably would not be applicable to this
situation at all; thus, it should not be neces-
sary for the I.R.C. § 130 annuity funding a
Special Needs Trust to be actuarially sound or
to name the state as remainder beneficiary.
Use of Annuities to Fund SSI and
Medicaid Special Needs Trusts
SSI and Medicaid do not prohibit the use
of either deferred or balloon annuities to
fund exempt Special Needs Trusts if the
annuities comply with I.R.C. § 130. If the
plaintiff expects to incur future medical
expenses on a fairly regular basis, an immedi-
ate annuity can be used to provide the neces-
sary funding over time. If large expenses are
expected periodically in the future, a deferred
or balloon annuity may be appropriate as
well. However, all annuity payments into an
exempt Special Needs Trust must be complet-
ed before the plaintiff reaches age 65.64
Further, the Special Needs Trust should also
be funded initially with a lump sum suffi-
cient to provide immediate liquid funds for
unexpected costs, the annuity payments
should be large enough to ensure that funds
in the trust will not be exhausted before the
next payment date, and payments should be
indexed to keep pace with inflation.
Naming the Trust as the Annuitant
Since both SSI and Medicaid eligibility
are based partly upon the individual’s level of
income, a structured annuity that makes peri-
odic payments directly to the beneficiary
could prevent the individual from qualifying
for those benefits for the lifetime of the annu-
ity. Further, if the annuity is the subject of a
qualified assignment, the individual will not
be able to amend the annuity at a later time
to redirect payments into a Medicaid or SSI
exempt trust.
Since there will virtually always be a qual-
ified assignment of any annuities used to
structure any PI settlement, careful planning
is required to preserve the plaintiff ’s ability to
qualify for Medicaid or SSI. In these cases,
the annuity generally should not be set up
with the individual plaintiff as payee. Rather,
the annuity should pay out to the exempt
Special Needs Trust.
Conclusion
Defendants, liability carriers and their
structured settlement brokers have historical-
ly argued that QSFs cannot be used in single-
plaintiff PI structured settlements involving
qualified assignment. This argument, based
on the theory that the economic benefit doc-
trine somehow bars the plaintiff from taking
advantage of the favorable tax treatment in
I.R.C. § 130, is not persuasive. It is based
solely on a common law doctrine that has
been superseded in this context by federal
statutes and regulations; and upon a private
letter ruling that is not on point.
An in-depth analysis of I.R.C. § 130 and
its legislative history, I.R.C. § 468B and the
corresponding IRS regulations, and Rev.
Proc. 93-34 all support and lead to the oppo-
site conclusion: the economic benefit doc-
trine is not applicable to the use of qualified
assignments in PI settlements. The IRS’ own
interpretation of the law on this issue is in
agreement.
The IRS has not said whether its stated
position in this regard might somehow
depend on the number of plaintiffs involved.
Of course, it is possible that the IRS could
draw a distinction and treat the economic
benefit doctrine as a bar to use of qualified
assignments by QSFs in single-plaintiff settle-
ments only. However, this seems like a
remote possibility at best.
See PHYSICAL INJURY page 14
ELDER LAW 13
Physical Injury from page 13
There is simply no cogent basis in the
Internal Revenue Code, the IRS regulations
and procedures, or in the IRS’ own previous-
ly stated interpretations of the law to support
such a distinction. It is far more likely that
the IRS will remain consistent and adopt the
position that QSFs may successfully make
qualified assignments in PI settlements
regardless of the number of plaintiffs, so long
as there is compliance with the requirements
of I.R.C. § 130, I.R.C. § 468B; Treas. Reg.
§§ 1.468B-1 through 1.468B-5; and Rev.
Proc. 93-34.
Use of a QSF to purchase an I.R.C. § 130
qualified annuity to fund the exempt Special
Needs Trust is a natural fit when a settling
plaintiff seeks the most advantageous tax
treatment of his or her settlement proceeds,
needs to preserve SSI and/or Medicaid eligi-
bility, and requires time to create an exempt
Special Needs Trust without delaying the
finalization of the settlement. This process
provides the necessary flexibility, while allow-
ing the plaintiff to receive the maximum ben-
efit from the settlement. However, the rules
here are complex and the interplay of the var-
ious applicable statutes and regulations
requires special care and knowledge. Finally,
the circumstances in every settlement are
unique. Practitioners are cautioned never to
use a form QSF or Special Needs Trust, but
rather to prepare the necessary documenta-
tion in a manner that is specific to the indi-
vidual needs of each plaintiff in the context of
this or her own settlement. „
JOHN J. CAMPBELL, ESQ., CELA,
OF DENVER, COLORADO, HAS PRAC-
TICED LAW SINCE 1986, SPECIALIZ-
ING IN ELDER LAW SINCE 1996. HE IS
WIDELY CONSIDERED AN EXPERT
ON THE PRESERVATION OF PUBLIC
BENEFITS IN THE CONTEXT OF
PHYSICAL INJURY AND WORKER’S
COMPENSATION SETTLEMENTS;
AND HAS PUBLISHED AND PRE-
SENTED NUMEROUS ARTICLES AND
SEMINARS NATIONALLY IN THIS
AREA OF THE LAW.
End Notes
1. 26 U.S.C. § 104(a)(2) (2008) provides
that gross income does not include “the
amount of any damages (other than punitive
damages) received (whether by suit or agree-
14 NOVEMBER 2008
ment and whether as lump sums or periodic
payments) on account of personal physical
injuries or physical sickness.” 26 U.S.C. §
104(a)(1) (2008) excludes from gross income
amounts received under workers’ compensa-
tion acts “for personal injuries or sickness.”
2. “Tort damages have traditionally been
paid on a lump-sum basis.” Adam F. Scales,
Against Settlement Factoring? The Market in
Tort Claims Has Arrived, 2002 Wisc. Law
Rev. 859, 862 (2002).
3. See Rev. Rul. 65-29, 1965-1 C.B. 59
(1965).
4. These concerns are described by
Senator Max Baucus, one of the original
sponsors of the Periodic Payment Act, at 144
Cong. Rec. S11499-01, (available at 1998
WL 684078).
5. Pub. L. No. 97-473, 96 Stat. 2605
(1982).
6. “Despite several revenue rulings that
indicate that the Internal Revenue Service
considers that periodic payments as personal
injury damages are excludable from the gross
income of the recipient, the committee
believes it would be helpful to taxpayers to
provide statutory certainty in the area.” S.
Rep. 97-646, 97th Cong. 2d. Sess. 1982,
1982 U.S.C.C.A.N. 4580, 4583.
7. Pub. L. No. 97-473, § 101, 96 Stat.
2605 (1982).
8. 26 U.S.C. § 130 (1997). “Typically, the
assignee is an affiliate of an insurance compa-
ny, and its only business is to accept for a fee
qualified assignments of liabilities to make
periodic payments to tort claimants.” Letter
from Skadden Arps lawyers to Pamela Olson,
Assistant Secretary (Tax Policy) (requesting
I.R.S. clarification on whether an assignment
by a qualified settlement fund is a “qualified
assignment”) (June 19, 2003), (available at
2003 WL 22662008) (I.R.S. Misc.) (here-
inafter “Skadden Arps Letter”).
9. This annuity is referred to in I.R.C. §
130 as the “qualified funding asset.” 26
U.S.C. § 130(d) (1997).
10. Id.
11. 26 U.S.C. § 130(c)(1) (1997).
13. See generally Richard B. Risk, Jr., A
Case for the Urgent Need to Clarify Tax
Treatment for a Qualified Settlement Fund
Created for a Single Claimant, 23 VA Tax Rev.
639, 642-44 (2004) (describing these con-
cerns in detail).
14. Pub. L. No. 99-514, 100 Stat. 2085
(1986).
15. 26 U.S.C. § 468B (2008). DSFs may
be used to settle PI claims, but may not be
used to settle workers’ compensation claims.
26 U.S.C. § 468B(e) (2008).
16. 26 U.S.C. § 468B(d)(2) (2008).
17. 26 C.F.R. §§ 1.468B-1-1.468B-5
(2008).
18. A QSF, like a DSF, may be used to set-
tle a PI claim, but not a workers’ compensa-
tion claim. 26 C.F.R. § 1.468B-1(g)(1)
(2008).
19. 26 C.F.R. § 1.468B-1(c) (2008)
(emphasis added).
20. U.S. v. Brown, 348 F.3d 1200, 1217
(10th Cir. 2003).
21. 26 U.S.C. § 468B(b) (2008) and 26
C.F.R. § 1.468B-2(a) (2008).
22. 26 C.F.R. § 1.468B-2(a) (2008).
23. 26 C.F.R. § 1.468B-1(c)(2) (2008).
24. However, the I.R.C. and the Treasury
Secretary have as yet refused to clarify the
validity of this use of QSFs. See Risk, supra n.
11 at 673-82. See also Skadden Arps Letter,
supra n. 6.
25. 26 U.S.C. § 130 (1997).
26. 26 U.S.C. § 130(a) (1997).
27. 26 U.S.C. § 130(d) (1997).
28. Rev. Rul. 79-313, 1979-2 C.B. 75
(1979).
29. Rev. Rul. 65-29, 1965-1 C.B. 59
(1965); Rev. Rul. 76-133, 1976-1 C.B. 34
(1976).
30. Sproull v. Commr., 16 T.C. 244
(1950), aff ’d, 194 F.2d 541 (6th Cir. 1952).
31. Id. at 247-248.
32. Id.
33. 26 U.S.C. § 130(c)(2)(D) (1997).
34. P.L.R. 200138006 (May 7, 2001).
35. The settlement discussed in this
Private Letter Ruling was the settlement of a
malpractice lawsuit against a law firm.
36. 26 U.S.C. § 130(c)(2)(C) (1982).
37. S. Rep. No. 97-646; H.R. Rep. No.
97-832, 97th Cong., 2d Sess. 4 (1982)
(emphasis added).
38. Pub. L. 100-647, 102 Stat. 3342, Title
VII, § 6079(b)(1).
39. H.R. Rep. No. 100-795, at 541
(1988).
40. I.R.C. § 130(c) (emphasis added).
41. H.R. Conf. Rep. No. 1104, 100th
Cong., 2d Sess. at II-171(1988).
42. 16 T.C. 244 (1950), aff ’d, 194 F.2d
541 (6th Cir. 1952).
 43. To prevent constructive receipt, the
settlement terms will not permit the plaintiff
the option to receive the settlement in a lump
sum, and will provide that the assignment
will be made directly by the defendant or the
defendant’s insurance carrier.
44. P.L.R. 9703038 (Jan. 17, 1997).
45. 26 U.S.C. § 130(c) (1997).
46. Rev. Proc. 93-34, 1993-28 C.B. 49
(1993).
47. Rev. Proc. 93-34, § 1.
48. Rev. Proc. 93-34, § 4 (emphasis
added).
49. Id.
50. A “novation” is a “mutual agreement
among all parties concerned for the discharge
of a valid existing obligation by the substitu-
tion of a new valid obligation on the part of
the debtor or another, or a like agreement for
the discharge of a debtor to its creditor by the
substitution of a new creditor.” 58 Am. Jur.
2d Novation, § 1 (2008).
51. 42 U.S.C. § 1396p(d)(4)(A) (2008);
42 U.S.C. § 1382b(e)(5) (2008).
52. Pub. L. No. 103-66, 107 Stat. 312
(1993).
53. 42 U.S.C.A. § 1396p(d)(4)(A)
(1984).
54. Foster Care Indep. Act of 1999, Pub.
Tips and Tales
Pay Back Special Needs Trusts Not Always the Only Solution
B Y N ICOLA J. M ELBY
The Tale
Mom is disabled with 10-year-old severe-
ly disabled child. Child receives SSI (Social
Security Supplemental Income) benefits.
Because North Carolina is a state which links
SSI and Medicaid (if you receive SSI you are
automatically eligible for Medicaid) child
also receives much needed Medicaid as her
medical expenses are substantial. Mom
receives SSD (Social Security Disability ben-
efits) benefits and Medicare. Grandmother
dies and leaves $50,000.00 to Mom and
$50,000.00 to Grandchild.
The Tip
The first step in analyzing the effect of an
inheritance on a disabled individual is to
determine what benefits are means tested and
what benefits are entitlement benefit, i.e., not
L. 106-169, 113 Stat. 1822.
55. 42 U.S.C.A. § 1382b(e)(5) (1984).
56. Social Security Online, POMS SI
01120.203, – see:
https://secure.ssa.gov/apps10/poms.nsf/lnx/05
01120203!opendocument (accessed Feb. 18,
2008).
57. Examples of Prohibited Expenses and
Payments include: “Payments of debts owed
to third parties; Funeral expenses; and
Payments to residual beneficiaries.” Social
Security Online, POMS SI
01120.203.B.3(b), https://secure.ssa.gov/
apps10/poms.nsf/lnx/0501120203!opendocu-
ment (accessed April 18, 2008).
58. Id. at POMS SI 01120.203.B.1(e).
59. There are 39 SSI states, consisting of
32 “§1634 states”: Alabama, Arizona,
Arkansas, California, Colorado, Delaware,
Georgia, Florida, Kentucky, Iowa, Louisiana,
Maine, Maryland, Massachusetts, Michigan,
Mississippi, Montana, New Jersey, New
Mexico, New York, North Carolina,
Pennsylvania, Rhode Island, South Carolina,
South Dakota, Tennessee, Texas, Vermont,
Washington, West Virginia, Wisconsin,
Wyoming and Washington D.C.; and 7 “SSI
criteria states”: Alaska, Idaho, Kansas,
Nebraska, Nevada, Oregon and Utah. The Ҥ
dependent upon meeting an income and
asset test. SSI and Medicaid are means tested
benefits whereas SSD and Medicare are not.
Thus, child’s inheritance is a problem and
Mom’s would ordinarily not be an issue at
least initially. You always want to be sensitive
to the fact that a disabled individual may be
receiving SSD and Medicare, an entitlement
program, but the benefit may be so low that
they may also qualify for Medicaid now or at
some point in time in the future. If the per-
son is receiving Medicaid now or likely to in
the short-term future, then an analysis of the
impact of the inheritance for Mom will also
need to be addressed.
As for the child, assuming that the inheri-
tance came directly to the child and for what-
ever reason there is an inability to establish a
third party trust by reforming grandmother’s
1634 states” have entered into an agreement,
as authorized by §1634 of the Social Security
Act, 42 U.S.C. § 1383c, that the Social
Security Administration will determine
Medicaid eligibility. The “SSI criteria states”
make their own Medicaid determinations,
using the SSI criteria. Social Security Online,
POMS SI 01120.203.B.3(b), POMS SI
01715.010, – see
https://secure.ssa.gov/
apps10/poms.nsf/lnx/0501715010!opendocu-
ment (accessed Feb. 18, 2008). See generally
John J. Campbell, Basic Strategies for SSI
Planning, 1 NAELA Q. 311, 321 (Fall
2005).
60. Ramey v. Rizzuto, 72 F. Supp.2d
1202 (D.C. Colo. 1999), aff ’d, Ramey v.
Reinertson, 268 F.3d 955 (10th Cir. 2001).
61. 268 F.3d at 962, citing Herwig v. Ray,
455 U.S. 265, 268, 102 S.Ct. 1059, 1063
(1982).
62. Pub. L. No. 109-171, 120 Stat. 4
(2005).
63. Pub. L. No. 109-171, § 6012(b) &
(c), amending 42 U.S.C. § 1396p(c)(1)(F) &
(G).
64. 42 U.S.C. § 1396p(d)(4)(A) (2008).
will or otherwise adjusting the mode of the
receipt of this inheritance, the money is
child’s money and therefore a self settled trust
is at issue which will require pay back provi-
sions. See 42 USC 1396(p)(d)(4) see also
POMS (Program Operations Manual for
Social Security) SI 01120.202.
As for Mom’s inheritance, although her
own personal entitlement benefits are not
affected by this inheritance, her child receives
SSI and her income and assets are deemed to
that child for purposes of eligibility. 20 CFR
section 416.1202. Possible solutions for fix-
ing Mom’s resource problem, of course,
include the protected self-settled trusts noted
above and spend down proceedings, but
thanks to the brilliance of Attorney David
Lillesand, many of us who attended Stetson
See TIPS page 16
ELDER LAW 15
Tips from page 15
Law School’s Special Needs Trust seminar
learned that the transfer of asset penalty peri-
od that applies for SSI (20 CFR section
416.1246) does not apply in the deeming
context. SI 01150.110 E. Consequently,
although a special needs trust certainly would
solve Mom’s dilemma and allow child to
maintain her much needed medical benefits,
it is entirely possible that a transfer of assets
may be the appropriate option and is certain-
ly one that could be explored in greater detail.
Board Certification in Elder Law – Coming
Soon to your State Bar
An interview with Kate Mewhinney, Certified Elder Law Attorney
From the September 2008 (Volume 7 Issue
2) edition of The North Carolina State Bar
publication The Specialist.
The Board of Legal Specialization has pro-
posed rule amendments to begin offering a
North Carolina elder law certification as early
as 2009. We hope that specialists who sup-
port this idea will contact their local State Bar
councilor to encourage him/her to vote in
favor of the specialty at the October meeting.
What is NELF and why did
you pursue certification in
Elder Law?
The National Elder Law Foundation
(NELF) is an organization established in
1993, primarily by the members of the
National Academy of Elder Law Attorneys,
known as NAELA. NELF assists the public
in selecting qualified attorneys by providing
the only ABA-approved national certification
in the growing field of elder law. Since many
of the legal issues of older adults involve fed-
eral law, or professional ethics, a national cer-
tification made a lot of sense.
I was in the first group of attorneys to take
the certification exam and I think my writing
hand was cramped up for a week after!
(Fortunately, the test can now be taken on a
computer, but it’s a lot like taking a mini-bar
exam.) As a practicing attorney who teaches
law students in a clinical program at Wake
16 NOVEMBER 2008
NOTE: There is an electronic version of the
CFR on the web which can be found at
http://ecfr.gpoaacces.gov and the POMS can be
found at http://www.ssa.gov. „
NICOLA J. (BOONE) MELBY IS
LICENSED IN NORTH CAROLINA
AND FLORIDA, AND IS A FLORIDA
BOARD CERTIFIED ELDER LAW
ATTORNEY, AND FORMER SHARE-
HOLDER WITH MCCARTHY
Forest University, I felt that I should strive to
meet the highest standards of practice in my
field. Plus, it forced me to study up on
aspects of elder law that I really need to know
more about such as estate tax, Medicare, and
trusts.
How has certification
been helpful to your practice
and your legal career?
Since elder law covers a wide range of top-
ics, it was helpful – as I mentioned – for me
to review some of these areas that I hadn’t
really looked at before. Also, I do think that
being board-certified helps me by conveying
to the bar, and to the legal academy, a certain
level of competency. Elder law is very much
of an “interstate” field, because we are often
asked to make referrals to callers who have a
granny in Duluth who needs legal advice. I
open up www.nelf.org and give the caller the
names of the Certified Elder Law Attorneys,
especially those with whom I have worked in
the National Academy of Elder Law
Attorneys (www.naela.com).
How is certification important
in this practice area?
I’m glad you asked, because I can tell you
about the “yodelers!” But first, let me say that
certification is simply because the legal and
ethical issues of older clients require expertise.
SUMMERS BOBKO WOOD SAWYER &
PERRY, IN STUART, FLORIDA. SHE IS
CURRENTLY THE SOLE SHARE-
HOLDER WITH THE LAW OFFICE OF
NICOLA J. MELBY, PPLC, IN
BREVARD, NORTH CAROLINA.
Of course, there are many excellent attorneys
who are not certified specialists and have nei-
ther the time nor the interest in becoming
certified. But I would encourage them to
reconsider, because this is an area of law in
which the demand will only grown along
with the number of attorneys who dabble in
it. Older people face issues that are emotion-
ally difficult and may involve a lot of money.
They might not have seen an attorney for
years, and then suddenly have to figure out
how to pay for expensive nursing home care,
or how to handle a sick relative’s finances.
Frankly, it’s not a good idea to go auto-
matically to that nice lawyer – who years ago
– handled one’s house closing or speeding
ticket. The stakes are too high. A common
example is the older couple who go with their
adult child to see a lawyer. The adult child
asks the lawyer to “just draw up a gift deed”
so that the parents can “avoid probate and
become eligible for nursing home care.” If the
lawyer doesn’t understand the ever-changing
Medicaid laws, this older couple could easily
lose eligibility for Medicaid coverage worth
$70,000 per year. “Avoiding probate” might
not even be necessary. And, if the lawyer isn’t
careful, she might not be mindful of the con-
flicts of interest inherent when families go as
a group for legal advice. As a result, the older
client may not be adequately warned about
the downsides of a transaction. The lawyer,
the older person and the family then face
later conflicts over who the lawyer represent-
ed and whether the older person really under-
stood all the pros and cons of a transaction.
In sum, none of us can keep up with every
field of law, and this field changes more than
most, I’d say. There is technical language and
there are specific laws connected to levels of
housing and health care, with which lawyers
must be familiar to properly handle these
cases. Oh? The yodelers? They are the attor-
neys who call the certified specialists and,
invariably, start with “I have a little old ladeee
who. . . .”
Are there any hot topics in your
specialty area right now?
There are increasing numbers of cases
involving challenges to wills and powers of
attorney based on “undue influence” or a per-
son’s mental capacity. Fortunately, our state
recently enacted a statute to allow for media-
tion of estate and guardianship disputes. I
expect we will see a growth in the use of
mediation, in elder law matters, as this
approach helps to maintain family relation-
ships and it cuts the costs of litigation.
Paying for long term care is “hot” – both
how to become Medicaid eligible before los-
ing everything, and how to choose private
long term care insurance policies. Buying
into a “continuing care retirement communi-
ty” often requires specialized advice, for those
with the means to consider these facilities. I
understand, too, that age discrimination
cases, involving employment, are on the
increase. We are also seeing more cases
involving handicap discrimination.
Many of our best elder law attorneys also
counsel families with special needs children
on how to preserve assets for a lifetime of care
without losing government covered health
care coverage. These attorneys also work with
personal injury lawyers to structure the settle-
ments so that Medicaid and SSI eligibility are
retained for the injured person. Our own
Frank Johns*, for example, who was a presi-
dent of NAELA and also started the Elder
Law Section of the North Carolina Bar
Association, is a CELA who has worked
extensively on the issues of “special needs
trusts.” He is also a litigator called upon in
complex interstate guardianship battles where
“granny snatching” takes place and there are
different states’ courts involved.
How would NELF work with
the NC Bar to offer joint
certification?
Lawyers who are already certified through
NELF would have the option of applying for
the additional NC State Bar certification.
Under a two-year “grandfathering” rule, they
would not have to take an additional exam to
qualify. Lawyers who want to become certi-
fied would have a few options. They could
obtain both certifications by taking only one
exam, or they could obtain only one certifica-
tion. They would then have two years to
apply for the second certification, if they so
desired.
The State Bar hopes to offer this new cer-
tification in 2009. Applications would be due
by June 30, 2009. For more information
about this program contact Denise Mullen at
919-828-4620.
*NC State Bar Elder Law Committee:
Kate Mewhinney, chair; Lawrence Graham,
Frank Johns, Diana Johnston, Bailey Liipfert,
Robert Mason, and Dennis Toman. „

endar–
Your Cal
Mark
Upcoming Events
• 12/4-12/6/08 – 8th Annual National Aging and Law Conference, Arlington, VA

• 12/17/08 – NAELA Telephonic Elder Law Training Program

• 1/12/09 – University of Miami 43rd Annual Heckerling Institute, Orlando, FL

• 1/23-25/09 – NAELA Unprogram

• 1/23/09 – NC Bar: Elder Law: Reverse Mortgages and Long-Term Care insurance,
and Planning for Old Age (Repeat /Teleseminar)

• 2/2/09 – NC Bar: Estate Planning with S Corps – (Repeat/Teleseminar).

• 2/6/09 – NC Bar: Nursing Home Litigation Live – Cary Bar Ctr.

• Remember to check www.ncbar.org/cle/programs/index.aspx

for a full listing of programs and video and telephonic offerings.•

ELDER LAW 17
Recent Developments & Case Law Updates
C OMPILED B Y N ICOLA J. M ELBY
Recent Developments
• DSS has issued new rules applying a
transfer of asset penalty to pooled trusts
funded after the age of the 65. DSS MA-
2230 (X.I.C.(4)).
http://info.dhhs.state.nc.us/olm/manuals/dm
a/abd/chg/MA_CN22-08_2230.pdf
• Oral argument for Andrews v. Haygood
was heard by the NC Supreme Court on Oct.
21, 2008. At issue in Haygood will be the
application of G.S. s. 108A-57(a) and an
apparent conflict between state and U.S.
Court decisions. Under the statute, the state
becomes subrogated to all of the beneficiary’s
rights of recovery, including tort settlements,
in exchange for Medicaid benefits. NC
statute provides that the state cannot take
more than 1/3 of the gross amount obtained
on the beneficiary’s behalf. Citing Ahlborn,
547 U.S. 268 (2006), the trustee of the set-
tlement account argued that the state’s cut
should have been limited to a pro rata share
of the beneficiary’s past medical expenses.
The Court of Appeals rejected that argument
2-1, holding that the case was controlled by
Ezell v. Grace, 175 N.C. App. 56 (2005)
which held that the state’s subrogation rights
could extend to the entirety of a tort settle-
ment, including funds that might have been
attributable to damages such as pain and suf-
fering. The dissent, authored by Judge James
Wynn, essentially argued that the Ezell deci-
sion was pre-Ahlborn.
CaseLaw Update
Elective Share Act
Pope v. Rollins (In re Estate of Pope).
Lawyers Weekly No. 08-07-1058. (The dece-
dent’s assets were in a family trust during his
lifetime, and pursuant to the trust’s terms,
those assets were transferred to the family’s
charitable foundation upon his death, hence,
the petitioner’s widow has no claim for an
elective share under G.S. 20-31.)
18 NOVEMBER 2008
Tort/Negligence –
Breach of Fiduciary Duty
Heinitsh v. Wachovia Bank, N.A.,
Lawyers Weekly No. 08-07-1046. (Despite
trust directive to maximize income, a trustee
did not breach its fiduciary duty when it held
trust assets in a low interest money market
account while the trust beneficiaries litigated
whether such assets were to be characterized
as trust income or principal.)
Long Term Care –
Public Employees Contract –
Third Party Beneficiaries
Carl v. State of North Carolina, Lawyers
Weekly No. 08-07-1054. (Where plaintiffs
were third-party beneficiaries to the state’s
contract for long-term care insurance, sover-
eign immunity does not bar plaintiff ’s claim
that the state breached that contract.)
Real Property –
Consent Judgment –
Civil Practice-Appeals
Turner v. Hammocks Beach Corp,
Lawyers Weekly No. 08-07-1009 (Where a
1987 consent judgment granted the defen-
dant-trustee title to land “free of any claims”
of the reversionary beneficiaries, the plaintiff
reversionary beneficiaries have no interest in
the land and hence cannot state claims for an
accounting, termination of the trust, or
breach of fiduciary duty.)
Revocable Trust –
Estate’s Creditors –
New Statute
Livesay v. Carolina First Bank, Lawyers
Weekly No. 08-07-1004. (Even though (1)
G.S. 36C-5-505(a)(3) did not become effec-
tive until Jan. 1, 2006; (2) decedent died on
July 1, 2005 and (3) plaintiff commenced
this judicial proceeding on Dec. 30, 2005,
since the trial court did not find that applica-
tion of the statute would substantially inter-
fere with the effective conduct of the judicial
proceedings or prejudice the rights of the par-
ties, G.S. 36C-5-505(a)(3) applies to this
case.
Administrative –
Medicaid Plan Post
Eligibility Income
Maryland Department of Health &
Mental Hygiene v. Centers for Medicare and
Medicaid Services. Lawyers Weekly No. 08-
01-1132. (The 4th Circuit Court of Appeals
denies a Maryland State Agency’s petition for
review of the disapproval of a change to
Maryland’s State Medicaid Plan that would
eliminate deductions for uncovered medical
expenses incurred by Medicaid recipients
prior to becoming eligible for benefits.)
Nursing Home Residents
and Personal Injury Causation
Azar v. Presbyterian Hospital, ___ N.C.
App._____, 663 S.E.2nd 450 (2008); A
plaintiff must prove that a defendant’s negli-
gence is the proximate cause of the injury as
opposed to a cause of the injury.
Medicaid – Standard of
Review for Agency Decisions
Meza v. DSS (Lawyer’s Weekly No. 08-07-
1200, published 10-27-2008) In reviewing
an agency decision regarding Medicaid cover-
age for a medical emergency, a superior court
is also authorized to engage in independent
fact-finding to determine whether the
agency’s final decision is consistent with state
and federal law. „
NICOLA J. (BOONE) MELBY IS
LICENSED IN NORTH CAROLINA
AND FLORIDA, AND IS A FLORIDA
BOARD CERTIFIED ELDER LAW
ATTORNEY, AND FORMER SHARE-
HOLDER WITH MCCARTHY
SUMMERS BOBKO WOOD SAWYER &
PERRY, IN STUART, FLORIDA. SHE IS
CURRENTLY THE SOLE SHARE-
HOLDER WITH THE LAW OFFICE OF
NICOLA J. MELBY, PPLC, IN
BREVARD, NORTH CAROLINA.
ELDER LAW 19
NORTH CAROLINA BAR CENTER
PO Box 3688
Cary, NC 27519-3688