STRUCTURED SETTLEMENTS & SPECIAL NEEDS TRUSTS.

People who receive personal injury or medical malpractice awards usually do so in the form of structured settlements (usually annuities). Structured settlements ensure that the beneficiary receives his or her payments gradually over their expected lifetime. Often persons receiving the injury awards are already receiving needs-based government benefits (such as SSI and/or Medi-Cal). In such cases, a Special Needs Trust is usually established to receive all payments that would otherwise go directly to the beneficiary. The structured settlement and the Special Needs Trust work together. Let us examine how this works.

A structured settlement turns a lump sum settlement award into a secure and steady stream of income for the disabled person’s lifetime. Typically, some, or all of the settlement award is used to purchase an annuity contract that provides a steady stream of income. When a Special Needs Trust is in existence, the income payments are paid to the trustee of that trust and not to the beneficiary, so as to protect the needs-based government benefits.

The risk with investing the entire lump sum award into a structured settlement is the inflexibility of the structured settlement and the eroding effect that inflation has on fixed incomes. If money is needed to make a large purchase or to pay for an emergency expense, the structured settlement is unavailable, except to the extent of the fixed payments – which may not be enough. Also, the rising cost of living eats away at the purchasing value of the structured settlement’s fixed income payments. Any modest index for inflation doesn’t usually keep pace with inflation, which often results in a declining standard of living for the beneficiary.

Accordingly, a proper balance must be struck between how much of the settlement award goes toward funding the structured settlement, and how much goes directly into the Special Needs Trust. Structured settlements are complex and often involve a life care planner, an independent financial planner, and a structured settlement broker, all working together. Any remaining portion of the award that is not invested in the structured settlement is assigned to to the trustee of the Special Needs Trust.

The purpose of the Special Needs Trust is to preserve the needs-based government benefits that would otherwise be lost if the beneficiary received the money directly, instead of being received by the trustee. The Trustee of the Special Needs Trust has absolute discretion over whether, how and when to use the trust’s funds to supplement the government benefits being received by the person with special needs. Otherwise, the trust funds would be considered available and countable resources for purposes of continued eligibility to receive, or to qualify for needs based government benefits.

Giving the trustee a portion of the lump sum settlement award up front –with the remainder placed into the structured settlement – allows the trustee more money on hand to meet the beneficiary’s immediate needs at the outset. The trustee could then buy a home, purchase a van that is modified for persons with disabilities, and deal with emergency needs. In addition, the trustee could invest some of that money into other investments that might partially offset the effects of inflation associated with fixed income payments.

In conclusion, careful consideration and planning for the immediate and future needs of the special needs beneficiary are necessary at the time before the personal injury award settlement is committed to a structured settlement. Reaching the correct solution requires enlisting the assistance of professionals with whom the trial attorney that won the settlement award may or may not be used to dealing. Engaging a Special Needs Trust attorney is, therefore, advisable in order to bring in the necessary expertise.