By Martha A. Churchill

Are you settling a lawsuit, which will provide money to an individual with a disability? This essay is intended to explain why I recommend you arrange for the settlement to pay into a special needs trust, especially a pooled trust.

You have two types of special needs trusts to choose from when you are dealing with a "self-settled" trust. A "self-settled" trust means that the money comes from the beneficiary. If someone receives money from a lawsuit, then places that same money into a trust, it is a "self-settled" trust.

The two types of trusts are "A" and "C" trusts. This refers to 42 USC § 1396p (d) (4) (A) and 42 USC § 1396p (d) (4) (C).

In most cases, I would recommend the "C" trust, which is a pooled trust. Call Patti Dudek at (248) 645-9400 if you want to put money into a pooled trust.  Another contact person: Lisa Piercey, (248) 858-1269. 

There are five pooled trusts in Michigan.  Some only accept people in their localities, others accept beneficiaries who live anywhere in Michigan.  For example, Midland has a pooled trust through the Arc of Midland at 220 W. Main St., Midland, MI 48640. There is also one associated with the Arc of Dearborn, and Western Wayne County.

What are some differences between the pooled trust "C" and the "A" trust?

The "A" trust can have a family member or a friend as the trustee.  It can also have a financial institution as the trustee. I prefer having a friend or family member, depending on the amount of money involved, because financial institutions are so expensive.

When you have a pooled trust taking care of the funds, the trustee is a non profit organization with experience dealing with disabilities issues such as Social Security, employment, and housing.

Another difference: what happens to the money if the beneficiary dies before the funds are all spent? With the "A" trust, the state government will probably receive all the money. The state has to be paid back to the extent that it supplied money to the beneficiary for medical care and other services. Anything left over goes to the family of the beneficiary, or whomever is designated as the residual. As a practical matter, the state government will take 100% of the remainder because there will be nothing left over after Medicaid is paid back.

With a "C" trust, or pooled trust, anything left over after the beneficiary dies will stay in the trust to help other persons with disabilities. That is far better than giving the money to the government.

There is another bonus to this arrangement. What if your beneficiary runs out of money before he or she has died? What if the client's own funds in the trust are depleted, and the beneficiary still has needs? With a pooled trust, there may be additional money available for your client due to other people who died and left money in the trust.

Another advantage to the pooled trust: home ownership. Some pooled trusts encourage people to live in their own homes. The pooled trust can purchase the home, and rent it to the beneficiary at an affordable rate.

If you set up an "A" type trust, it can also purchase a home.  It can pay the down payment on a house, trailer, or condo.  It can also pay for home repairs, furniture, and appliances.

An advantage to a pooled trust: the trustee is built-in.  People at a nonprofit agency understand the needs of persons with disabilities, and don’t mind visiting someone who is mentally ill or developmentally disabled to figure out what that person needs. They will listen to what the family says.  But if the family asks for something that will create problems with the beneficiary’s government benefits, the pooled trust will know better than to purchase something impulsive which risks the person's government benefits.  At the same time, the pooled trust employees will have the experience to come up with creative ideas how to spend the money for the person's benefit.

So, if you are in the process of settling a lawsuit and you want to protect the present or future government benefits for your client with a disability, establish a special needs trust. Choose either the "A" or the "C" trust. 

Some attorneys think there is no need for a special needs trust because the settlement amount is so huge, the client will never need government benefits for the rest of his or her life. Okay, if your crystal ball is so clear, can you guarantee that this client will never need some exotic, experimental medical treatment years from now, which might wipe out most of that money? If your client is swimming in money now, there is no harm in stashing away $200,000 with a pooled trust as an "insurance policy." Then your client will never be broke in case he or she ever has to fall back on Medicaid due to circumstances you cannot foresee.

By the way, if you have a client with an "A" trust and you want to help them switch to a "C" trust, this can be done by submitting a petition to the appropriate probate court. However, check out Norwest Bank of North Dakota v. Doth, 159 F.3d 328 (8th Cir. 1998) before filing the petition.

If a client comes to you with an annuity which is not in trust, you can petition the probate court to enter an order to the effect that all future payments under the annuity will be paid to the special needs trust.  In that case, your client will probably come to you without government benefits on account of the annuity. When you complete your work, the client will be eligible for benefits.

The petition and order can provide for your attorney fee to be paid out of the trust. In the case of a pooled trust, the order can provide that the trust pay the fee for setting up the "sub-account" with the pooled trust. First, call the pooled trust and get the papers set up. Then petition the court to give its stamp of approval.

If you are doing legal research on the subject of special needs trusts in Michigan, you should read In re Johannes Trust, 191 Mich. App. 514, 479 NW2d 25 (1991).  In that case, the disabled person inherited money, back in the days before pooled trusts were available, and lost the money to Medicaid.  Pooled trusts were the subject of litigation with FIA (Family Independence Agency) until 1999, when FIA sent a letter to Attorney Patricia Dudek agreeing to accept the validity of pooled trusts.  If Johannes were being decided again today, it would probably have a happy ending, because the money could be placed in a pooled trust and protected.

The other Michigan case you should know about is Miller v. Dept. of Mental Health, 432 Mich 426, 442 NW2d 617 (1989).  In Miller, a quickie special needs trust was not disapproved, even though it wasn't exactly perfect.

What happens if the beneficiary is about to receive the settlement of a lawsuit?  Read In re Barbara Hertsberg Inter Vivos Trust, 457 Mich. 430 (1998).  The plaintiff has to have the money placed in an "A" or "C" trust, otherwise it counts against he plaintiff as an asset for Medicaid and SSI purposes.

If you want to find the Michigan statute related to Medicaid, look at MCLA 400.108.