Will A Personal Injury Settlement Affect Government Benefits?
When a minor or disabled person receives a personal injury award or settlement it may affect his or her government benefits. Eligibility for some government benefits, such as Supplemental Security Income (SSI) and Medicaid, is based on financial need. Receipt of the proceeds from a personal injury settlement is a mixed blessing if the result is the loss of important benefits.
Does A Special Needs Trust Protect The Settlement?
In many cases it is advantageous for a person under the age of 65 to transfer a personal injury settlement to a Special Needs Trust. This allows the beneficiary to keep government benefits and at the same time have a fund set aside to pay for goods and services not otherwise covered by government benefits.
What Is The Effect Of A Structured Settlement On Public Benefits?
Injured Party As Beneficiary of Income Stream. If the claimant or the conservator is named as the direct beneficiary of an annuity purchased in the context of a structured settlement, then it could cause the beneficiary to permanently lose eligibility for government benefits.
Denial or termination of government benefits may be avoided by creating a Special Needs Trust and directing the stream of income to the trustee of the trust. Although this approach has often been used successfully in Oregon and Washington, in some other areas of the country government agencies have denied or terminated government benefits even under these circumstances.
Flexibility. In some cases it may be unclear whether the beneficiary will need government benefits throughout his or her lifetime. It may be advisable to build flexibility into the settlement order and annuity beneficiary designations to allow the court to change the beneficiary from the Special Needs Trust for the benefit of the recipient to the beneficiary himself or herself. This must be done carefully to insure that it does not negatively affect the tax benefits of the structured settlement.
Timing. If the annuity payments are made first to the beneficiary, and are 'unassignable,' then some government agencies will treat them as received by the individual each month even if the payments are contributed by the beneficiary to the Trust. Therefore, it is essential that the Special Needs Trust be created before the annuity is purchased so that an irrevocable designation to the trustee of the Trust can be made at the time of purchase.
Estate Taxes. A structured settlement with a large payout and a long term certain may trigger an estate tax problem. If the life beneficiary dies before the term certain has expired, the present value of the periodic payment stream may, in combination with any other assets in the minor´s estate, exceed the amount exempt from estate tax. The Internal Revenue Service takes the position that the present value of the remaining term is included in the estate. In such situations, counsel should be consulted before the annuity is purchased.
For more information, see 'Tips and Traps for Minors and Disabled Clients' by Donna Meyer.
Would A Lump Sum Settlement Be Better Than A Structured Settlement?
There can be certain tax and other benefits to a structured settlement which should be discussed with the personal injury lawyer. At this time structured settlements are being used in Oregon and Washington in connection with Special Needs Trusts to protect government benefits. However, agency rules and interpretations may change in the future. The choice to take periodic payments is irrevocable, and should be made only after careful analysis weighing the benefits and risks. Although nothing is certain in the arena of public benefits law, one of the most certain planning techniques today is to create a Special Needs Trust funded with a lump sum.
Are There Other Timing Issues To Be Aware Of?
Numerous problems can be avoided if the personal injury lawyer identifies the existence of government benefits sufficiently ahead of the settlement or award to engage a Special Needs Trust lawyer. The trust lawyer can then determine whether the beneficiary is receiving government benefits based on financial need, help the personal injury lawyer and the injured party decide on a plan, and then obtain court approval, if needed, prior to or contemporaneous with the settlement or award.
When settling a case for the benefit of a person who lacks capacity (even legal capacity, such as a minor) the settlement must be approved by the court. If a Special Needs Trust will be used, approval of the Special Needs Trust can be obtained at the same time.
What If There Are Medical Liens?
It may be considered fraud to transfer the funds to an irrevocable spendthrift trust such as a Special Needs Trust. There may be medical liens on the judgment. Liens by the State of Oregon for medical assistance paid on behalf of the recipient as a result of the injury generally must be paid prior to transfer of funds into a Special Needs Trust. Medicare liens are more complicated. The personal injury attorney must evaluate this issue carefully to determine if such a lien is valid.
Litigation is currently taking place to clarify when liens by insurers of employment related insurance governed by ERISA must be paid prior to transfer of funds to the Special Needs Trust. This is something the personal injury lawyer must consider prior to transfer of assets to the trust. Once the assets have been transferred to the Special Needs Trust, they may not be available to pay the lien.
What If There Are Potential Creditors?
Transferring the net proceeds of the settlement to the Special Needs Trust if the beneficiary has creditors is another troublesome issue. Since the Special Needs Trust is funded with the beneficiary´s own funds and being used for the beneficiary´s benefit, the Special Needs trust may not shield the assets from creditors. Even if the Special Needs Trust does shield the assets from creditor claims, it may be considered fraud if transfer to the Trust rendered the beneficiary insolvent. In most cases it is wise to pay creditors before transferring assets to the Special Needs Trust.