The Interplay Between Litigation Trusts and Structured Settlements

There are five types of trusts commonly used in settling personal injury litigation:

  • Self-settled special needs trust

    • Used when the individual will need means-tested public benefits such as Medicaid and Supplemental Security Income (SSI).

    • Funded with assets of the beneficiary, who is the person receiving the settlement.

    • Individual must be under 65.

    • Trust must be for the sole benefit of the plaintiff with disabilities.

    • Must be established by the plaintiff, their parent, grandparent, guardian or the court.

    • Requires a Medicaid payback.

  • Self-settled special needs trust with Medicare set-aside (MSA) provisions

    • MSA funds are intended to cover potential future medical expenses related to the injury that Medicare would otherwise be required to pay for.

    • Conservative approach is to include the MSA within the special needs trust to ensure there is no disagreement about whether or not MSA-held funds will affect eligibility for means-tested public benefits.

  • Settlement protection trust

    • A support trust used when public benefits are not required.

  • Settlement protection trust with special needs provisions

    • Often used for a minor who won’t be eligible for public benefits till age of 18, due to parents’ income.

    • Funds transferred to a special needs trust when/if means-tested public benefits are needed.

  • Settlement protection trust with both special needs and MSA provisions.

    • Begin by funding the MSA and settlement protection trust, then transfer settlement protection trust funds to a special needs trust when/if means-tested public benefits are needed.

The benefits of structured settlements are huge. Many people receiving personal injury settlements are not financially sophisticated, and it’s reported that the average settlement lasts three to five years. A structured settlement establishes “a rated age” as the basis for regular monthly payments that are guaranteed for life. Often those payments are larger than the individual could expect if they were to invest a lump sum settlement on their own. The structured settlement payments are tax-free, protected from creditors and avoid the possibility that the settlement will be squandered.

My firm usually begins by assuming that we will structure 50 percent of the settlement, then we revise that figure based on the individual’s specific circumstances.  Most trustees will only administer a trust if there is some lump sum cash involved.

I’d like to alert you to several issues relating to settlement protection trusts with special needs provisions.  New Jersey, where I practice, requires that when there’s a special needs trust, the structured settlement contract must contain a commutation rider, and the payee of the commutation rider must be the settlement protection trust. They do this so that they get their Medicaid payback right away. We recently had a case where the plaintiff died shortly after the settlement, and due to the rider, the parents, who were beneficiaries upon death, lost about a million dollars. Attorneys and structure brokers need to ensure that families understand such risks or they could be open to charges of malpractice.

In addition, the Dallas region of Social Security has said that a special needs trust is invalid unless there is a letter from Social Security determining the individual to have a disability. When you have a settlement protection trust with special needs provisions, parents typically don’t apply to SSI on behalf of their child until the child is 18, when they would become eligible for that benefit.  I have always assumed that if the child did, in fact, have a disability at the time that the trust was established, they would not need a letter, but it’s unclear how this will play out. 

Another objection raised by Social Security is that a trustee could theoretically transfer funds from a settlement protection sub-trust to a special needs sub-trust gradually so that the Medicaid payback could be avoided. If the person were receiving Medicaid because of their SSI, you couldn’t do that because you’d have too much money in the settlement protection sub-trust. But if they were receiving Medicaid under Obamacare or some other program, that would be a possibility. You need to evaluate these factors if you’re considering a settlement protection trust with special needs provisions.

Posted on August 23, 2019 .

New Life Insurers Attempt to Thrive in Niche Markets

There’s been a lack of new life insurers entering the industry due to it being run by large incumbents, but those that are popping up are attempting to thrive in niche markets, according to a Life Annuity Specialist report. The article says only four life insurers launched last year - Employers Protective, Independent Life, Lumico Life Insurance Company of New York and Imperial Insurance.

A senior research analyst at S&P Global told Life Annuity Specialist that, “startup life insurance companies without an affiliation with an existing life insurance group or distribution partner haven’t had a lot of staying power.” For example, one of the insurers that started last year, Independent Life, is targeting the structured settlement market. Structured settlement broker, Mark Wahlstrom, said having an insurer that can write structured settlements qualifying for income tax-free treatment and for monies subject to taxation, non-qualified structures is “an important step forward for the is only a matter of time before other life insurers recognize this ‘niche market’ is potentially worth three to four times its current premium written and that we will see other major players enter with innovative products.”

Posted on July 17, 2019 .