By Evan Krame
When an individual with disabilities is anticipating a personal injury award, spreading guaranteed payments over time through a “structured settlement” is a popular option. The attractive features of annuitizing a recovery don’t always work well, however, for people with special needs.
The best reason to support structured settlements is to have payouts of income to last throughout the beneficiary’s lifetime. With guaranteed payments, there is less chance of losing principal to poor investments, spendthrift habits or the undue influence of family and friends. Another advantage of structured settlements is that the payments are free of income tax.
In some cases, the payout may be tailored to meet anticipated needs. For example, a minor who obtains a large recovery might be better served by having the annuity payments delayed or increased after attaining their 18th birthday, to correspond with higher education costs, or at their 21st birthday, to correspond with emancipation from their parents.
Whether a lump sum or structured settlement is involved, the first consideration is whether or not the person with disabilities is a recipient of public benefits. If so, then any recovery should be designed so as not to disqualify them from Medicaid and SSI. This will mean establishing a first party special needs trust (SNT) with payback provisions, giving Medicaid a lien on the trust at the death of the beneficiary. Absent the SNT, the person will likely be disqualified for such public benefits.
The next step should be a review the beneficiary’s life care plan to determine how best to meet their short-term and long-term needs. Depending upon the situation, a structured settlement may not be the optimal approach. If their disabilities are significant, they are likely to need an accessible home and vehicle, among other large-ticket purchases. In such a case an income stream from a structured settlement will not suffice, unless a large cash sum has been set aside in a trust, likely an SNT, to purchase a home and a van.
The SNT cannot purchase a home using a mortgage, as that would disqualify the beneficiary from public benefits. The search for an appropriate residence to purchase will be limited by cost and design. Given the scarcity of handicap-accessible residences, the trustee will likely be spending very large sums to build ramps, roll-in showers and widened doorways. An elevator, if needed, can easily add $25,000 to project costs. Even with enough cash to make those purchases, the trustee will need available resources to pay for upkeep, repairs, emergencies and other supplemental needs. In addition, a used, handicap-accessible van only a few years old will cost $30,000 or more, and a new van with an electronic lift will exceed $60,000 in cost. Moreover, vehicles don’t last forever, and substantial repair costs are common with large handicap- accessible vans.
There are other financial considerations, as well. Currently, interest rates are at historic lows and financial markets are unsteady. A structured settlement purchased currently locks the beneficiary into a lifetime of investment at these lower rates. Moreover, the advantage of tax-free income is wasted on a beneficiary who has substantial, ongoing deductible medical costs and little or no other income.
When a structured settlement remains outside of a trust, there is another risk. If suddenly faced with unexpected expenses, some families may be tempted to “reverse” the annuity process in order to obtain the rest of the settlement as a lump sum. In 2002, Congress passed the Structured Settlement Protection Act to prevent unscrupulous organizations from buying, at deep discounts, the right to future structured payments intended for people with disabilities. If the money is being channeled into an SNT, the annuity can’t be sold. In addition, a court must review such proposed sales in order to determine whether or not they’re in the best interests of the individual.
Families that anticipate receiving a personal injury settlement for a loved one should give careful thought to whether or not a structured settlement makes sense for them. In some cases, it will not, unless the recovery is large compared to the needs of the person with disabilities. Accordingly it is critically important for the family, personal injury attorney and a special needs attorney to confer as soon as possible in order to identify the best approach to structured settlements in the context of a large recovery.