Structured Settlements and SNTs

Protecting Public Benefits

By Jay Kearns, West Hartford, Connecticut

When settling a personal injury case, the value that public benefits will bring to the plaintiff’s quality of life should be carefully assessed. Means-tested programs such as Medicaid and SSI will often play a central role in providing healthcare and maintaining financial security. While structured settlements are meant to ensure a steady stream of income throughout the plaintiff’s life, they could jeopardize public benefits if not paid into a special needs trust (SNT). Personal injury counsel, special needs attorneys and structured settlement brokers should partner as early as possible during the settlement process in order to consider the individual’s settlement options to tailor a plan to fit their individual needs.

When Is an SNT Needed?

Funds in an SNT are not considered “countable assets” for the purpose of determining eligibility for means-tested public benefits. So if these benefits have no place in an individual’s care plan, an SNT isn’t needed. This would include younger individuals anticipating full recovery from their injuries or those who, due to the Affordable Care Act, may prefer to use private insurance, beginning in 2014. In some situations, though, Medicaid health coverage will continue to better serve a person’s needs. Clients may also wish to access Medicaid waiver programs covering housing, life skills training, employment coaching, transportation or other services. In such instances, having an SNT will be necessary.

Planning Considerations

The first step is to assess the individual’s short- and long-term budgetary requirements and to ensure that all parties have realistic expectations. There may be immediate needs –such as purchase of a wheelchair-accessible van – requiring that a portion of the settlement funds is not placed in a structured settlement annuity. If this decision is not carefully weighed, the trustee may not have the flexibility to address the beneficiary’s “special needs.”

Next the team must analyze the return available through a structured approach. The broker will contact insurance companies with the goal of acquiring the most favorable payment schedule. This will be based on the plaintiff’s life expectancy and an associated “age rating,” determined through an evaluation of the plaintiff’s medical records. The payments’ internal rate of return should be compared with opportunities offered through other investments. The fact that structured payments are tax-free should also be considered in the analysis. I always recommend that the annuity contain a “term certain” option, which guarantees that if the plaintiff passes away earlier than anticipated, a lump sum is paid to the trust.

Problems to Avoid

The integrating of a structured settlement with an SNT is complex, and it’s important to work with a special needs attorney who’s familiar with state-specific regulations. The timing and sequence of events are critical. Personal injury attorneys should beware of “holding” the settlement in a client’s funds account and then trying to buy a structure on the client’s behalf. The structured settlement must identify the SNT as the beneficiary, with the trustee as payee. Upon the death of the beneficiary, the SNT is obligated to repay the state for any Medicaid disbursements made on the person’s behalf. If the documents are improperly drafted, those reimbursements could be demanded earlier and the beneficiary could become ineligible for public benefits. Naming a family member beneficiary, a common error, could result in a fraudulent conveyance claim by the state.

SNTs are more complex to manage than many other trusts. A special needs attorney can educate the trustee concerning qualified disbursements – which must be carefully monitored to preserve eligibility for government benefits. Here it is wise to employ a professional, rather than rely upon the good intentions of a family member. The trustee must keep detailed records, handle bills, manage assets and help with tax preparation, as well as ensure that trust distributions maintain the beneficiary’s eligibility.

Structured settlements are beneficial in protecting settlement funds from creditors, financial predators or an individual’s lack of money management skills. But failure to properly integrate a structured settlement with an SNT can ruin the individual’s care plan.