Special Needs Trusts

Settling clients often need to retain eligibility for needs-based government entitlements such as Medicaid and SSI. A Special Needs Trust (SNT) allows the client to remain eligible for Medicaid and SSI benefits while the funds within the SNT are used to enhance the client's quality of life by paying for "supplemental" needs...

Special Needs Trusts

Settling clients often need to retain eligibility for needs-based government entitlements such as Medicaid and SSI. A Special Needs Trust (SNT) allows the client to remain eligible for Medicaid and SSI benefits while the funds within the SNT are used to enhance the client's quality of life by paying for "supplemental" needs.

There are specific rules relating to establishing and maintaining a SNT, and a qualified attorney should be retained to advise the client and draft the trust agreement. 

Settlement Protection Trusts

If a client does not need to maintain any form of means tested entitlement but has a desire to have some dissipation protection and flexibility, a Settlement Protection Trust (SPT) can be created. A SPT incorporates the ability to receive residual payments based on annual or monthly need as well as discretionary distributions as allowed by the trust document or at the trustee's discretion. 

Advantages

Injured clients often have needs that are not predictable enough in nature to fund with cash or structured settlement annuities. Settlement trusts can add flexibility and liquidity while providing dissipation protection and professional management of the funds. The timing and amounts of future expenses are not always predictable. College costs, future medical procedures, or unforeseeable future contingencies are hard to price at the time of the settlement. A settlement trust can offer the flexibility, liquidity and protection often needed in circumstances arising from settlement. 

Disadvantages

The disadvantages of settlement trusts include the cost to establish them, the ongoing trustee and investment fees and expenses, and the non-guaranteed nature of the trust principal. Even the most progressive and client-friendly corporate trustees will rarely accept a settlement trust under $100,000, and generally will charge annual trustee fees of at least 1% and incur investment expenses of another 1% per year. These minimums and fees make trust planning for smaller settlements particularly difficult. Additionally, while trust assets are generally invested conservatively, the principal amount placed inside the trust is not guaranteed and may lose value, and any interest earned inside the trust is likely to be fully taxable. 

Annuities and Trusts

Structured settlement annuities can pay into a settlement trust. Structured properly, this can incorporate the advantages of both strategies while minimizing the disadvantages of each. For example, a catastrophically injured client will often require guaranteed lifetime income to ensure basic funding for his/her lifetime care. The client will also require significant flexibility to pay for future unknown medical and life expenses, and may need to remain eligible for Medicaid and/or SSI. Structuring future payments into a properly drafted trust may allow the client the assurance of guaranteed, fixed, tax-free, lifetime payment from an annuity which pays into a trust which offers the flexibility and liquidity to meet the client's ever-changing life situation.