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Sometimes Getting the Settlement Isn’t Enough – Special Needs Trusts and the Wary Practitioner

If you practice in the areas of family law, personal injury law, or estate law sometimes procuring a lump sum settlement can have unintended consequences. If your clients receive government benefits such as Medicaid or Supplemental Security Income (SSI), a lump sum settlement may affect income eligibility for those governmental benefits. In a situation where the settlement is not one that is going to take care of the client’s needs (income and medical) for the remainder of their life, care needs to be taken so that the settlement is structured so as to preserve these essential benefits.

SSI provides benefits for disabled individuals who are determined to be eligible on the basis of income. ¹ In order to remain eligible for SSI benefits a party’s income cannot be greater than $1,752 per calendar year for a single person and cannot have resources and assets that exceed $2,000. ² Personal injury settlements, family law settlements, and inherited assets may be considered income or resources/assets under SSI. ³ Other programs, such as Medicaid, have similar income restrictions for certain recipients.

If the settlement is a very small settlement, it may be able to be structured to comply with the income and resource limitations of the particular benefit program. However, more likely, it will need to be spent on exempt assets or put into a special needs trust. Expenditures from a special needs trust most likely will not affect the client’s eligibility for these governmental programs and can be used to pay for a host of the client’s expenses. There are various types of special needs trusts which can provide this benefit within a range of set up and maintenance costs. ⁴ A failure to recommend that a client discuss the implications of a lump sum settlement on their receipt of governmental benefits could have dire consequences for the client and, while clients may not always listen, it is important that they understand the consequences of failing to take action. While it is exciting to settle a case, the wary practitioner needs to take care to protect their client’s long term well-being.

Eric Nowak practices primarily in the areas of general civil litigation, personal injury and medical malpractice. To discuss these issues in greater detail, please contact Eric at enowak@dgfirm.com or 813-229-2775.

¹ 42 U.S.C. 1381.
² 42 U.S.C. 1382(a)(1) and (3)(B). These income and asset restrictions change for married individuals. Also the statutory scheme specifically defines what counts as income and what counts as resources or assets. See 42 U.S.C. §1382a and 42 U.S.C. §1382b.
³ Frerks v. Shalala, 52 F.3d 412 (2d Cir. 1995) (Medical malpractice proceeds considered income under SSI); Simmons v. Charter, 104 F.3d 168 (8th Cir. 1997) (Worker’s compensation settlement proceeds considered income under SSI); 20 C.F.R. §416.1121(b) and (e) (Alimony and death benefits are counted as unearned income under SSI).
⁴ See 42 USC 1396p(d)(4)(a) and (c). A pooled special needs trust is cheaper than an individualized special needs trust, generally both to set up and to maintain.