Structured Settlements and Disability Planning: Securing Your Financial Future

When someone suffers a serious injury, they may receive a settlement to compensate for their damages. For individuals with disabilities, receiving a settlement can be both a blessing and a challenge. While the money can provide much-needed financial support, it can also jeopardize the eligibility for government benefits like Supplemental Security Income (SSI) and Medicaid. Fortunately, structured settlements and Special Needs Trusts (SNTs) can protect benefits while ensuring a secure financial future.

Understanding Structured Settlements

A structured settlement is an arrangement where a person receives their settlement money in a series of payments over time, rather than in a single lump sum. This approach offers several advantages:

Tax Benefits: Structured settlement payments for physical injury cases are generally tax-free, allowing the recipient to keep more of their money.
Budgeting: Receiving money over time can help with budgeting and prevent the temptation to spend the entire settlement at once.
Customization: The payment schedule can be tailored to meet the recipient’s individual needs and goals.

Structured Settlement Payment Options

Structured settlements offer various payment options to suit individual needs:

Lump-Sum Payments: A portion of the settlement can be received as a lump sum to cover immediate expenses, such as medical bills or home modifications.
Periodic Payments: The settlement can be paid out in regular installments, such as monthly or annually, to provide a steady income stream.
Deferred Payments: Payments can be deferred to a later date, such as when the recipient reaches retirement age or anticipates significant expenses like college tuition.

It’s important to note that structured settlements are generally less flexible than lump-sum payments, and the fixed payments may not keep pace with inflation over time.

Protecting Government Benefits And Structured Settlement with Special Needs Trusts

Individuals with disabilities are eligible for various government public benefits, including:

Supplemental Security Income (SSI): A needs-based program that provides cash assistance to aged, blind, or disabled individuals with limited income and resources.
Social Security Disability Insurance (SSDI Benefit): A program that provides benefits to disabled individuals who have paid into the Social Security system through payroll taxes.
Medicaid: A joint federal and state program that provides health coverage to low-income individuals, including those with disabilities.

For people with disabilities who rely on needs-based government benefits, receiving a settlement can be problematic. These benefits, such as SSI and Medicaid, have strict income and asset limits. For example, to be eligible for SSI in 2023, an individual’s countable resources must not exceed $2,000 (or $3,000 for a couple). If a person’s resources exceed these limits, they may lose their eligibility.

This is where Special Needs Trusts come in. An SNT is a legal arrangement that allows a person with a disability to hold assets in a trust without jeopardizing their benefits. The trust is managed by a trustee who uses the funds to pay for things that enhance the beneficiary’s quality of life, such as:

Therapy and rehabilitation
Education and training
Recreation and travel
Home modifications and accessible vehicles

There are different types of SNTs, each with its own rules and requirements. For example, a First-Party SNT is funded with the beneficiary’s own money (like a settlement), while a Third-Party SNT is funded by someone else, like a parent or grandparent. Pooled SNTs are managed by nonprofit organizations and can be a good option for smaller settlements.

Merging Structured Settlements With Special Needs Trusts

Structured settlement annuities and SNTs can work together to provide a comprehensive financial solution for people with disabilities. By directing structured settlement payments into an SNT, the beneficiary can receive a steady income stream without disrupting their benefit eligibility.

It’s essential to strike a balance between immediate and long-term needs. Some of the settlement money may be needed right away for things like medical expenses or home modifications, while the rest can be structured to provide ongoing income. An experienced settlement planner can determine the right mix of lump-sum and structured payments based on the individual’s unique circumstances.

Real-Life Example

John, a 30-year-old with a spinal cord injury, received a $1 million settlement. After consulting with a special needs attorney and settlement planner, John decided to allocate $200,000 to a First-Party SNT for immediate needs like a wheelchair-accessible van and home modifications. The remaining $800,000 was used to fund a structured settlement, providing John with a monthly income of $3,000 for the next 20 years. This approach ensured that John had the resources he needed upfront while also securing a long-term income stream without jeopardizing his eligibility for SSI and Medicaid.

Integrating Structured Settlements and SNTs

Integrating structured settlements and SNTs involves some legal and financial considerations. There are strict rules around how SNTs must be set up and administered to preserve benefit eligibility. It’s essential to work with professionals who specialize in this area, such as:

Special Needs Attorneys: These lawyers understand the intricate rules surrounding SNTs and government benefits. They can draft trust documents that comply with all the necessary requirements.
Settlement Planners: These experts help determine the best way to structure a settlement, taking into account the individual’s needs, goals, and benefit eligibility.
Trustees: The trustee is responsible for managing the SNT and making distributions according to the trust’s terms. It’s crucial to choose a trustee who is knowledgeable, experienced, and trustworthy.

Other factors to consider when integrating structured settlements and SNTs include:

Taxes: While structured settlements are generally tax-free, it’s important to ensure they are set up properly to maintain this status.
Funding Options: Structured settlements can be funded by annuities from life insurance companies or U.S. Treasury obligations. It’s important to choose a reputable and financially stable funding source.
Medicaid Payback: When a First-Party SNT is funded with the beneficiary’s own money, any remaining funds in the trust must be used to reimburse Medicaid after the beneficiary’s death.

Medicare Set-Asides (MSAs)

In some cases, a portion of the settlement may need to be set aside to cover future medical expenses that would otherwise be paid by Medicare. This is known as a Medicare Set-Aside (MSA). MSAs are often required in workers compensation cases and may also be necessary for certain personal injury settlements.

When an MSA is required, it’s crucial to integrate it with the SNT to ensure compliance with both Medicare and Medicaid rules. This may involve creating a separate sub-trust within the SNT to manage the MSA funds.

Qualified Settlement Funds (QSFs)

A Qualified Settlement Fund (QSF) is a temporary holding account for settlement proceeds. QSFs can be useful when multiple parties are involved in a settlement or when time is needed to establish an SNT or other financial arrangements.

Advantages of using a QSF include:

Allowing time for the claimant to create an SNT without delaying the settlement
Providing a mechanism for the defendant to pay the settlement and obtain a tax deduction while the claimant determines the ultimate distribution of the funds
Enabling the claimant and their attorney to negotiate and resolve liens and other claims against the settlement proceeds before distribution

Estate Planning Considerations

When creating an SNT, it’s essential to consider how the trust fits into the bigger picture of estate planning. This includes:

Coordinating beneficiary designations: Ensuring that beneficiary designations for life insurance policies, retirement accounts, and other assets align with the goals of the SNT.
Naming remainder beneficiaries: Specifying who will receive any remaining assets in the SNT after the primary beneficiary’s death, taking into account Medicaid payback requirements for First-Party SNTs.
Integrating with other estate planning tools: Making sure the SNT works in harmony with other parts of the estate plan, such as wills, trusts, and powers of attorney.

Divorce and Child Support

Divorce can complicate matters for SNTs and structured settlements. It’s important to take steps to protect these assets during divorce proceedings, such as:

Negotiating a property settlement agreement that clearly excludes the SNT and structured settlement from division
Arguing that these assets are separate property intended to provide for the individual’s disability-related needs
Using a Qualified Domestic Relations Order (QDRO) to direct a portion of the structured settlement payments to the ex-spouse as part of the property division while preserving the recipient’s benefit eligibility

In some cases, structured settlement payments may be used to fulfill child support obligations. However, it’s crucial to work with experienced professionals to ensure that any such arrangement is properly structured and complies with all applicable laws and regulations.

Remember, every situation is unique, and there’s no one-size-fits-all solution. It’s essential to seek personalized advice from qualified experts who can help you make informed decisions based on your individual needs and goals. With careful planning and the right support, you can ensure that your settlement provides the maximum benefit for years to come.

Resources

Special Needs Alliance: https://www.specialneedsalliance.org/find-an-attorney/
National Structured Settlements Trade Association: https://nssta.com/
Social Security Administration: https://www.ssa.gov/
Medicaid.gov: https://www.medicaid.gov/

Glossary

Structured Settlement Annuity: A financial arrangement that provides a steady stream of tax-free payments over a specified period, often as part of a personal injury settlement.
Special Needs Trust (SNT): A legal arrangement designed to hold assets for the benefit of an individual with a disability without jeopardizing their eligibility for needs-based government benefits.
Medicare Set-Aside (MSA): A portion of a settlement that is “set aside” to cover future medical expenses that would otherwise be paid by Medicare.
Qualified Settlement Fund (QSF): A temporary holding account for settlement proceeds, designed to provide time to determine the ultimate distribution of funds.
Supplemental Security Income (SSI): A needs-based program that provides cash assistance to aged, blind, or disabled individuals with limited income and resources.
Social Security Disability Insurance (SSDI): A program that provides benefits to disabled individuals who have paid into the Social Security system through payroll taxes.
Medicaid: A joint federal and state program that provides health coverage to low-income individuals, including those with disabilities.

Bara Goldberg Finance Writer

Bara Goldberg - Amanda Dobanton Esq. is a General Counsel for Fairfield Funding. She has been crucial to the growth of Fairfield Funding for the past 9 years. Prior to Fairfield, she interned at a law firm in Gwinnett County. Ms. Dobanton received a B.S. in History and Political Science from Brenau University and went on to obtain her Juris Doctorate Degree from Atlanta’s John Marshall Law School. Amanda is currently serving on the Board for the National Association of Settlement Purchasers. Amanda is a seasoned expert in the structured settlement and annuity field.

See Full Bio