Before Settling a Personal Injury Claim, Consider a Special Needs Trust

If a person with special needs receives a large personal injury award, paying for health insurance could become an unaffordable expense unless precautions are taken. Consider the case of Paula Homan, a 63-year-old California woman who was seriously injured in a car accident in 1980. Ms. Homan obtained an $800,000 settlement from the city where the crash took place. Half of the settlement covered Ms. Homan's past medical expenses and fees and the remainder was used to purchase an annuity that now pays her about $4,800 a month.

The funds from Ms. Homan's annuity have always been enough to cover the cost of her caretaker and some other minimal expenses, but she has never been able to afford medical insurance. Instead, her aging parents pay her premiums, which amounted to more than $1,000 a month in 2011. Ms. Homan's father explained to a reporter that because Ms. Homan's annuity income is so high, she is unable to qualify for public benefits like Medicaid that would make private insurance coverage unnecessary. As Ms. Homan ages, her parents worry about the increasing cost of insuring her and wonder what will happen to her when they are no longer able to cover her premiums.

It appears that this situation could have been avoided through the use of a "first-party" special needs trust. (The law in this area was very different in the early 1980's, so options that are currently available to people in Ms. Homan's situation may not have even existed when she was injured.) A first-party special needs trust is a trust that is designed to hold the individual assets of a person with special needs, and it is typically created for large accident settlements and inheritances that are given directly to a person with special needs. If properly drafted, the funds held in a first-party special needs trust will not count against a person with special needs if she requires government assistance in the future, but the government may be able to recover some of the cost of that assistance from the funds remaining in the trust when the beneficiary dies.

If Ms. Homan's injury had occurred recently, she could have created the first-party special needs trust and her annuity payments could have been directed right into the trust. In this scenario, the annuity income would not be attributed to Ms. Homan and, barring other disqualifying factors, she could qualify for Medicaid. The funds in the trust could still be used as they are now -- to supplement Ms. Homan's medical insurance and provide her with live-in care. Ms. Homan's parents would be able to save thousand of dollars a year and not have to worry about their daughter's future health care because she would have affordable comprehensive coverage.

First-party special needs trusts are not appropriate in all situations, but if you have been injured and are thinking of settling your case, you should certainly consider first speaking to your qualified special needs planner about creating one; it could pay dividends for years to come.