Personal injury clients receiving SSI benefits (SSDI benefits aren’t affected at all by a settlement) need to be aware how the settlement money will affect those benefits before receiving any settlement money. The social security administration (SSA) has strict limits on how many “resources” an SSI beneficiary can have and how much monthly income she can earn and still be eligible to collect benefits. Most personal injury settlements will cause an SSI recipient’s benefits to be suspended for exceeding these limits unless the settlement money is directly paid into a special needs trust, which will greatly limit the way the beneficiary can spend those funds. Plaintiffs should know SSA’s eligibility requirements for SSI benefits, as well as how a trust will restrict their ability to spend the settlement money, before deciding how they want to receive their settlement. It’s not simply a matter of “everyone should use a trust”.
Social Security’s Countable Resource and Monthly Income Limits for SSI
The SSA places two financial limits on SSI recipients. The first is the “countable resource” limit, which limits the value of certain types of assets held by an SSI beneficiary to under $2,000 (for individuals — it’s $3,000 for couples). The beneficiary’s primary residence and vehicle, among other things, are excluded from this limit. Germane to this discussion, cash is included. Therefore, any plaintiff settling a personal injury case is likely to run afoul of this limit and have her benefits suspended (at least for the month in which the settlement is received) unless the money is paid into a special needs trust. The benefits will remain suspended in every subsequent month if the countable resources exceed the $2,000 limit on the first day of the month.
The second limit applied by the SSA involves a beneficiary’s monthly income, and it isn’t so much a hard limit as it is a reduction of the recipient’s benefits based on how much money was received that month. If the beneficiary has too much income in a month, it will reduce the SSI benefits to $0. Here’s how it works. First, the SSA looks at whether the income received by the beneficiary was earned or unearned. It will reduce the recipient’s monthly SSI benefit by 1/2 of the amount of any earned income (income from actual work), after reducing the monthly income by $20 first. So, if a person gets an SSI benefit of $710/month and makes $500 in earned income that month, the SSA would reduce the $710 benefit by $240 (because $500 – $20 = $480, and 1/2 of $480 = $240) and pay a benefit of $470. This assumes that the work which generated the income doesn’t constitute “substantial gainful activity”, which would result in a complete loss of benefits, but that’s not important for purposes of this article.
Unearned income receives a similar treatment, except that it isn’t reduced by one half after the $20 is taken off. The SSI benefit is reduced dollar for dollar for every dollar of unearned income received. If the above example involved unearned income of $500, the monthly SSI benefit would be reduced by $480. Guess which type of income personal injury settlement money is: you got it — unearned income. Therefore, even if the countable resource limit didn’t come into play, almost all SSI recipients would lose one month of benefits to the set-off for unearned income received — again, unless a special needs trust is employed. Of course, for situations involving settlements all of the money is typically received at once, so this set-off would only happen during the month of settlement. After that, the countable resource limit is the only matter to contend with.
Special Needs Trusts — The Upside and Downside
The upside of putting your settlement money into a special needs trust (one which conforms with the restrictions placed by SSA) and not receiving any settlement money directly is that your SSI benefits will not be disrupted at all. While this article is about SSI benefits, I would be remiss if I didn’t mention that loss of SSI benefits almost always causes loss of medicaid benefits, which is a huge factor to consider. If you have considerable medical expenses, suddenly having to pay these out of pocket due to even a temporary loss of medicaid may make going the trust route a no-brainer.
One major downside of putting your settlement money directly into a trust is that you lose control of the money. You can’t simply call the trustee and ask for cash at will like he’s an ATM, and when you do ask for disbursements from the trust, it can’t be for many vital necessities, such as food, clothing or shelter. O.K., well, technically it can, but any payments for these items that the trustee agrees to (and there’s no guarantee that he will) will reduce an SSI recipient’s benefits by up to $264.33 per month (as of 2015). If the benefit amount received by the recipient is less than $264.34, this could result in a complete loss of SSI benefits and also cause the loss of medicaid benefits. This article covers these types of “in-kind support and maintenance” payments by a trustee quite well, so I won’t reinvent the wheel and repeat the information here.
Another downside of putting the settlement into a special needs trust is that most of the time in the event of the death of the beneficiary, the money left in the trust goes first to pay back the government assistance received during the beneficiary’s lifetime. If there is any remainder, that goes to the recipient’s heirs. In the case of a substantial settlement and a very infirm recipient, this might not be desirable. Trying to plan out how to exhaust the settlement money from the trust so that only a minimal amount goes to the government upon the recipient’s death involves a lot of guesswork. Estate planning is definitely a consideration when deciding whether to utilize a trust.
The last downside I’ll mention is that special needs trusts aren’t free. The trustee gets paid, so part of your settlement will go to managing the trust. For smaller settlements, this may render a special needs trust out of the question.
Taking the Cash and Spending it Down
An alternative to using a special needs trust is to simply take the settlement cash and spend it down to the point where the claimant once again meets the SSI countable resource requirement. It is important to note that SSI benefits are not eliminated while a claimant has too many countable resources. They are merely suspended. Benefits that are suspended can be reinstated merely by proving that you once again fall under the countable resource limit — you don’t need to re-prove your disability to reinstate suspended benefits. The catch is that benefits can only be suspended for less than 12 months. After that, they are cut off and you must re-apply and re-prove disability.
Because the goal of spending down your settlement is to once again meet the countable resource limit, you can’t buy assets that will themselves count towards that limit. You can, however, pay off your mortgage (or buy a new house if you don’t own one) or buy a new car, because your primary house and car don’t count toward the countable resource limit.
Whether (1) using a trust or (2) taking a suspension of benefits and trying to spend the money down is right for you depends on your individual situation. The temporary loss of medicaid may be too costly for some people, and whether a spend down is wise depends on how long it will take and what you will spend the money on. Your attorney can advise you on the effects of your choices, but he isn’t your financial planner. You may need to consult with another professional to see which route is best for you.
Using Both a Spend Down and a Special Needs Trust
If you want to do a spend down, but you’re concerned that you may not be able to wisely spend all the money within 12 months, you can put the excess money at the end of the 12 month period into a special needs trust and regain your benefits. Know that this is not without it risks, though. While in theory such a practice should not cause problems, the SSA may take its time reviewing whether this maneuver was legitimate and proper, causing several months delay in reinstating your benefits. It shouldn’t happen, but it does sometimes. If you are going to use a special needs trust, it causes far fewer complications to do this up front at the time of settlement.
One Final Caveat
While SSI benefits are managed by the federal government and their standards are uniform in every state, medicaid is a state-run program. Therefore, be sure to confirm your state’s medicaid eligibility requirements before taking a route that will result in the loss of your SSI benefits, even temporarily. While some states automatically reinstate medicaid upon reinstatement of SSI, some may not.