Protecting Personal-injury Settlements with a Special-needs Trust

A Practical Option

By Seunghee Cha

When plaintiffs of medical malpractice or catastrophic accidents receive awards in personal-injury lawsuits, their settlement must be handled properly to provide for their long-term needs.

Personal-injury settlements are commonly received as a structured settlement or a lump-sum award. A structured settlement is a contract with the defendant-insured’s insurance company under which regular, ongoing payments are made for a period of time. These payments are called annuities, and for young plaintiffs they are typically designed to be for the plaintiff’s lifetime. With a lump-sum award, the plaintiff receives the settlement in one full payment at once.

One of the advantages of a structured settlement is protection against depletion of the settlement, which could happen in the hands of relatives who face financial difficulties. Also, a steady source of income can safeguard against bad investment decisions. In recent years with low interest rates, however, structured settlements have become less appealing because the return on the annuity payments is locked into the prevailing interest rate at the time of the agreement.

A lump-sum award, which is paid to the plaintiff all at once, allows for more investment flexibility. Also, it is more appropriate for plaintiffs who need access to larger funds to pay for big expenses, such as the cost of remodeling to make necessary accommodations for the home, special equipment or a specialized vehicle, or educational and rehabilitative expenses.

A major drawback of a structured settlement or a lump-sum award, however, is that it could result in the loss of financial eligibility for various means-tested government benefits. If the plaintiff has a disability, whether resulting from the underlying personal-injury claim or due to an existing condition, it is imperative to carefully evaluate whether the plaintiff receives means-tested government benefits that impose asset or income limits.

Two such essential benefits are federal and state Medicaid programs, which pay for a variety of medical care and community-based support and habilitative services, and Supplemental Security Income (SSI), a cash benefit to help cover the basic necessity of food and shelter.

A lump-sum award, which is paid to the plaintiff all at once, allows for more investment flexibility.

For plaintiffs with disability who anticipate a personal-injury settlement and who need to maintain eligibility for important means-tested government benefits, the best solution may be a self-settled supplemental-needs trust, also known as a ‘first-party’ or (d)(4)(A) trust — referring to the federal statute that permits this type of trust, 42 U.S.C. § 1396p(d)(4)(A). (The terms ‘supplemental-needs trust’ and ‘special-needs trust’ are interchangeable.)

The self-settled supplemental-needs trust makes it possible for the plaintiff to preserve means-tested government benefits and also to retain access to the personal-injury settlement. To achieve this result, the law requires transfer of the settlement to the trust designed for the primary benefit of the trust beneficiary; upon termination of the trust or the death of the beneficiary, the remaining trust assets must be used to reimburse the Commonwealth of Massachusetts, and any other state that provided Medicaid benefits, during the beneficiary’s lifetime. (Due to this reimbursement requirement, the trust is referred to as a ‘payback’ trust.)

The trust is intended to be used to pay for goods and services that are not covered by the trust beneficiary’s available government benefits for the purpose of enhancing the beneficiary’s quality of life by supplementing, not supplanting, government benefits. Examples of distributions include payment for therapy, professional services, travel and recreation, education and vocational training, and assistive technology.

The trust requires a ‘trustee’ to carry out the responsibility of administering the trust, which involves the duties of prudent investment, proper asset management, administrative tasks — e.g., recordkeeping, accounting, filing of tax returns, and payment of taxes — and distributions for the benefit of the beneficiary. An effective trustee maintains adequate communication with the beneficiary, and the beneficiary’s legal representatives and agents, to determine the beneficiary’s needs. Also, the trustee must learn to navigate the rules of the relevant government benefits to understand how trust distributions interact with these benefits and for the purpose of avoiding adverse consequences that could reduce or eliminate the benefits.

In many cases, a responsible, trustworthy relative can be a suitable choice of trustee. Depending on the size of the settlement, the government benefits involved, and the complex needs of the beneficiary, a corporate trustee, including a certified nonprofit corporation (called a ‘pooled trust,’ which derives its name from the practice of pooling together all beneficiary trust accounts for investment), may be a better option to ensure that the trust is properly administered.

Before choosing between a structured settlement or a lump-sum award, plaintiffs anticipating a settlement should seek the advice of an experienced attorney to determine whether a self-settled supplemental needs trust is appropriate. It could make a world of difference.

Seunghee Cha is a partner at Bulkley Richardson and a member of the firm’s Trusts & Estates and Special Needs Planning practice groups; (413) 272-6200.