Structured Settlements With Special Needs Trusts

Structured Settlements With Special Needs Trusts
special needs trust
A structured settlement is ideally suited for funding a Supplemental Needs Trust or Special Needs Trust because of its inherent safety, security and guarantees from regulated life insurance companies.

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. 

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.

An event contingent commutation rider can be incorporated at the time structured settlement is created to provide liquidity, if needed, to pay off Medicaid liens at the death of the tort victim trust beneficiary or, to help pay any estate taxes.  The structured settlement agreement must identify the trustee as the payee and the SNT as the beneficiary. Upon the death of the beneficiary, the  Special Needs Trust, or Supplmental Needs Trust, must repay the state for any Medicaid disbursements made on the beneficiary's behalf. If the documents are improperly drafted, those reimbursements could be demanded earlier and the beneficiary could become ineligible for public benefits. Naming a family member beneficiary, a common error, could result in a fraudulent conveyance claim by the state.

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

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 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.

  • The reality is that 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.


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