A structured settlement annuity is ideally suited for part of the funding of a Special Needs Trust or Supplemental Needs Trust because of its ability to provide 

• stable income
• tax benefits
• hedging of longevity risk
• guarantees from highly rated insurance companies
• It may also provide a savings in administration costs.

Rated Age or Impaired risk annuities (consideration given to reduced life expectancy due to current health conditions) offer superior economic performance on the right case. Where the party has a severe disability that resulted from brain damage or a spinal cord injury, the cost of lifetime payments (from a structured settlement) is often discounted substantially. On catastrophic cases there may be considerable divergence of opinion on the life expectancy of the tort victim. We routinely seek rated ages from a broad spectrum of annuity issuers. In some cases the divergence of opinion on life expectancy, among annuity issuers' medical departments, could be 10 or more years apart. Fiduciary responsibility would require a trustee to take into account the range of possibilities when determining the appropriate investment strategy. 

Stock market volatility can make long-term planning more difficult, especially when payments for supplemental and special needs continue to be deducted from the trust during market down swings.

In cases where there is a high rated age, the structured annuity can be used as an "insurance backstop" with a deferred start date. 

Conservative fixed income strategy

Income Tax-free structured settlement payments feeding into a Special Needs Trust are essentially a conservative fixed income strategy. In addition to the aforementioned "insurance backstop" strategy, a structured settlement annuity can be crafted to simulate a bond ladder, where there are a series of fixed or escalating payment streams followed, at the end of the period, by a "return of premium" to the Special Needs Trust as a large lump sum.

Interest Rate Linked, Index Linked and Market Based Structured Settlement Options

A number of additional options exist to suit the needs of any particular case. An indexed linked structured settlement annuity option may be suitable for example, where there is a longer-term horizon. Index-linked structured settlements offer potential upside with downside protection.

Lower Special Needs Trust Professional Administrative Expense

The ongoing funding of a Special Needs Trist or Supplemental Needs Trust with a structured settlement annuity payments directly deposited into the SNT may lower the cost of professional trust administration, since typically only the assets actually in the trust are subject to trust administration fees.

Buffer against harassment from structured settlement factoring companies

The trustee steps in and "pennies on the dollar merchants" go nowhere when you pair the structured settlement with the trust.

What About Liquidity ?

Are you being told that a structured settlement is not appropriate for use with a Special Needs Trust? One Board Certified Elder Law Attorney has stated on her web site that "structures do not provide funds for large capital purchases, such as house, a medical expense that is uncovered by insurance, or a wheelchair capable van". We feel that the statement simply highlights the opportunities for elder law attorneys and other special need trust drafting attorneys to be better educated about structured settlements.

• A structured settlement DOES NOT provide for specific items, a well-crafted settlement financial plan DOES.
• A structured settlement MAY be part of that well-crafted settlement plan as a funding instrument, or one of the funding instruments.
• A settlement plan, which contemplates the expenditures that a tort victim is likely to encounter, can use a structured settlement IF the amount and timing of payments is known or can be approximated. For example, if a life care plan has been created, THEN  the structured settlement payments can be tailored to match the known elements of the life care plan.
• Regardless of the specific case application, a sufficient amount of cash could (and should) also be allocated up front and apart from the structured settlement to cover the unanticipated expense, or the unanticipated occurrence of such expense.  We often work in conjunction with elder law attorneys as part of a team, to determine expenditure plans and to agree on an appropriate balance of cash, structured settlements and seed money for a special needs or supplemental needs trust.

Structured Settlement Liquidity at Death with Commutation Riders

An event contingent commutation rider can be incorporated at the time structured settlement is created to address potential liquidity needs, to pay off Medicaid liens at the death of the tort victim trust beneficiary or, to help pay any estate taxes if the value of the estate exceeds current limits.  Structured settlement commutation riders have been around since the latter part of the 1990s when an IRS Private Letter Ruling was obtained by Allstate.

Modern structured settlement commutation riders offered by a number of structured settlement annuity issuers, such as Berkshire Hathaway Life Insurance Company of Nebraska and Independent Life Insurance Company, enable deficit sensitive structured settlement commutations that respond to notice by the trustee of a liquidity deficits needed to pay Medicaid liens at death or, to pay estate taxes. What this means is that these event specific liquidity needs can be addressed while providing a means for survivors to benefit from ongoing stable income with tax advantages..

We believe that there are significant advantages to working with institutional trustees in this area.

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Last updated March 12, 2023