One obstacle that may hinder settling a personal injury suit, and certainly an area of potential professional negligence, is the potential loss of entitlement benefits SSI, Medicaid, etc) following a settlement. This might occur if the recipient obtains assets and/or income that exceed the statutory qualification thresholds (usually $2000). In the exceptional case where the award is significantly greater than the lifetime value of the entitlement benefits, the loss of those benefits may be of little consequence. However, in many settlements, benefit termination is an economic disadvantage for the injured party and may produce a worse financial situation than prior to settlement. Under this scenario, the injured party must first exhaust the awarded funds before reapplying for entitlement benefits. During that period of time, they have no income and risk tougher scrutiny as they attempt to re-qualify for benefits.

Even a large award may inadequately replace terminated entitlement benefits. Depending on the life expectancy and medical condition of an injured party. When the disabling injury occurs to a minor, entitlement benefits may not be available due to the combined assets of their family. However, a Special Needs Trust may still be appropriate as the child can become eligible once independent of his/her family at age 18.

Pursuant to Omnibus Reconciliation Act of 1993 [revised 42 U.S.C. 1396 p(d)(4)] assets held in a trust are not considered assets of the individual. Beneficiaries of trusts that comply with the Act's provisions need not exhaust trust assets to qualify for Medicaid or certain other government assistance, since the assets of this kind of trust don't count in determining eligibility for Medicaid. When the beneficiary dies, however, the State gets back from the trust whatever it paid for medical care on his or her behalf.

"A trust containing assets of an individual under Age 65 who is disabled….and which is established by a parent, grandparent, legal guardian of the individual or the Court, if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State Plan under this title" (the Medicaid Title)

An appropriate Special Needs Trust (Supplemental Needs Trust in New York) must be drafted by legal counsel to comply with the Omnibus Reconciliation Act of 1993 [revised 42 U.S.C. 1396 p(d)(4)] and approved by the court as part of the settlement agreement or release. As part of the trust agreement, the injured party may not own or have direct access to the trust fund, and the trust must be irrevocable. Trust funds may not be used to provide for rent, clothing, or food, only for expenses not covered by entitlement benefits. The injured party cannot be the grantor or settlor of the trust; trustee and successor trustees must be other than the injured party; and trustees have absolute discretion regarding the disbursement of funds for supplementary needs. Often, an additional benefit of the properly drafted trust is the protection of trust assets from creditors.