Before You Settle a Personal Injury Claim, Protect Benefits

Takeaways

• A settlement can reduce or end Medicaid and Supplemental Security Income (SSI) benefits if it puts the person over program income or resource limits.
• A first-party special needs trust may let settlement funds be used for quality-of-life needs while helping preserve eligibility for needs-based benefits.
• How the settlement is paid (lump sum vs. structured payments) matters.
• The best time to plan is before you sign. Once money is paid to the injured person directly, options may shrink and the cleanup can be costly.

If you (or your child) are about to receive a personal injury settlement and you also receive or may need Medicaid or Supplemental Security Income (SSI), you should assume one thing until a professional confirms otherwise: the way the settlement is paid could affect benefits.

That’s because SSI and many Medicaid programs are “needs-based,” meaning they look at income and resources. A settlement check paid directly to the injured person can be treated as income and/or a countable resource. Even well-meaning choices — like taking a lump sum “just to be safe” or setting up monthly structured payments — can accidentally create ongoing income or assets that push the person over program limits.

This doesn’t mean you shouldn’t pursue compensation. It means you should build a plan before you sign the release so the settlement supports long-term care and quality of life without causing avoidable disruptions in coverage.

What Can Go Wrong With a Settlement and Public Benefits

The two most common issues are:

• The injured person receives money directly and then exceeds program resource limits (often by a large amount).
• Ongoing payments (including structured settlement annuity payments) are made directly to the injured person, creating ongoing income that can disrupt eligibility.

Even a well-intentioned decision — like investing the settlement conservatively or purchasing an annuity for stability — can cause problems if it increases countable resources or creates countable income.

When a First-Party Special Needs Trust May Help

A special needs trust (SNT) is a legal arrangement that allows a trustee to hold and manage funds for a person with a disability.

A first-party SNT is commonly used when the money belongs to the person with a disability — for example, proceeds from a personal injury settlement.

When properly drafted and administered, a first-party special needs trust can allow settlement funds to be used to improve the person’s quality of life while helping preserve eligibility for needs-based government benefits.

Note: First-party special needs trusts generally include a Medicaid payback requirement when the beneficiary dies. Whether payback applies — and how it works in your state — is something to review before you commit to this approach.

Structured Settlements: Helpful Tool, Not a Complete Solution

Structured settlements can be an excellent way to create predictable cash flow for future care, housing, transportation, therapies, and support.

But a structured settlement can also create benefit problems if payments go to the wrong place.

If the injured person is on (or may need) SSI or Medicaid, families often explore whether structured settlement payments can be made to the trust rather than to the person.

Questions to Ask Before Signing a Settlement

The following questions can help families spot issues early — before they become expensive to fix.

• Will the injured person need Medicaid now or later for long-term care, in-home supports, or waiver services?
• Is the injured person receiving SSI now (or likely to apply)?
• Will the settlement be paid as a lump sum, structured payments, or a combination?
• If there will be structured payments, who is listed as the payee?
• Are there any liens or reimbursement claims that must be handled (for example, Medicaid or Medicare-related claims)?
• Who will serve as trustee if a trust is created, and what experience will they need?

What a Special Needs Trust Can Pay for (and What to Be Careful About)

A major benefit of a properly run special needs trust is flexibility. The trust can often pay for many items that improve daily life.

At the same time, some categories of spending can reduce SSI if handled incorrectly.

Don’t Forget ABLE Accounts

Depending on the person’s disability onset date, an ABLE account may be another tool to discuss. ABLE accounts can be especially useful for certain categories of spending and for giving the beneficiary more independence.

However, ABLE accounts have contribution limits and rules that may make them a complement — not a replacement — for a trust.

To understand the options, refer to this article comparing special needs trusts and ABLE accounts.

A Simple Planning Checklist for Families

If your family is negotiating a settlement and public benefits are part of the picture, a coordinated approach is often the safest. Here are steps you can take:

• Tell your personal injury attorney right away if the injured person receives (or may apply for) Medicaid or SSI.
• Before signing any release or settlement agreement, consult with a special needs planning attorney.
• Ask whether a first-party special needs trust or a pooled trust should be explored before funds are paid out.
• If the settlement may include a structured settlement, ask who will be listed as the payee and whether payments can be directed to a trust (when appropriate).
• If a trust will be used, determine who will serve as trustee and what day-to-day administration will look like (how bills get paid, what approvals are needed, and how distributions are documented).

The Bottom Line

A personal injury settlement should support long-term safety, stability, and quality of life — not accidentally cut off health care coverage or income support.

If you are thinking about settling, speak with a qualified special needs planning professional before you finalize terms. A small amount of planning upfront can prevent years of benefit and care disruptions later.

• People With Disabilities Can Now Create Their Own Special Needs Trusts
• What Is a Pooled Trust and How Can It Protect My Benefits?