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John Bair
John Bair
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Structured Settlements, Annuities & Special Needs Trusts

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Personal injury lawsuits involving minor or moderate injuries are often settled with lump sum payments, in which the entire settlement amount is simply paid to the plaintiff in full. Cases involving severe injuries, on the other hand, commonly lead to structured settlements.

What Is A Structured Settlement?

Structured settlements can be an appropriate choice for plaintiffs who will require long-term medical treatment or are facing a permanent disability.

Rather than receive a lump sum, the plaintiff will receive regular payments over the course of time. In many cases, the settlement itself actually comes in the form of an annuity – a financial arrangement developed by the trial attorney and their adviser, assigned by defendant or their insurance company.

Structured Settlement Annuities

Lump sum settlements are nearly always tax-free, but there are a few notable exceptions to this general rule. Awards for punitive damages, for example, are usually taxable under the US Tax Code, as is interest that accrues on the settlement. In other words, most settlements that are accepted as lump sums don’t get taxed, until you start investing the money. But the payments from an annuity are tax-free, so plaintiffs who opt for a structured settlement will receive a steady stream of un-taxed payments.

One of the biggest risks in accepting a structured settlement directly from a defendant(without a plaintiff broker), whether that’s an individual or a company, is the insolvency or bankruptcy and the inability to pay out the rest of the settlement. Every structured settlement we are involved in, we mandate an assignment, and ownership by a major US Life Insurance company. These insurer’s obligations will be met due to the rigorous regulation and oversight by State Insurance Commissioners.  Advocates for plaintiffs and the disabled recognize the guaranteed, tax free nature of structured settlements can play a key role in planning their financial future.

Structured Settlements & Special Needs Trusts

Structured settlements can be a great option for some people with disabilities, but accepting those payments directly may have unintended – and undesirable – consequences. While a structured settlement will guarantee an injured plaintiff steady income, the money can threaten the person’s government benefits, programs like SSI and Medicaid upon which many people with disabilities depend.

Instead of accepting the structured settlement payments directly, some people choose to establish a special needs trust, and then use payments from the structured settlement to fund the trust. This strategy ensures that the person’s ongoing needs will be met, through a combination of government benefits and purchases made with assets from the trust.

To ensure that the plaintiff’s government benefits aren’t suspended or reduced, it’s crucial that a structured settlement identify the special needs trust as the recipient of future payments, rather than the individual who will ultimately be the trust’s beneficiary.

Using A Structured Settlement To Fund A Special Needs Trust

Many experienced financial advisers will recommend that a hefty portion of the settlement amount is taken as a lump sum and used to establish the trust. The remaining assets can be added to the special needs trust in installments, as payments made from the structured settlement annuity.

This approach, which combines a lump sum with a structured settlement, is particularly important when the plaintiff is a minor or legally incapacitated for some other reason. When the beneficiary of a special needs trust is a minor or legally incapacitated, the trustee will need to get a court’s approval before using the trust’s principal. Thus it’s probably better for the trust to be adequately-funded from the start, and generating enough income to support the beneficiary’s needs.

Where especially large settlements are concerned, families may want to have a corporate fiduciary manage the trust, rather than a family member or friend. But many of the most reputable corporate fiduciaries, like banks and independent trust companies, won’t even consider managing a special needs trust with a low principal.

Take Caution

Many of the regulations governing special needs trusts vary from state-to-state. We urge plaintiffs who are nearing settlement to speak with experienced financial planners and attorneys who are familiar with the relevant requirements. An improperly structured special needs trust, especially one integrated with a structured settlement, jeopardizes not only the person’s benefits, but their long-term care plan as well.