Are structured settlement payments considered income for purposes of public benefit programs, such as social security and medicaid?

There are strict rules about the amount of assets and income a person can have and still qualify for public benefits including Social Security, Medicaid, Supplemental Security Income, Aid for Families with Dependent Children (AFDC), food stamps, certain veterans benefits and Section 8 housing. Personal injury claims often result in monetary awards in amounts that could cause the claimant’s loss of eligibility for governmental assistance. A lump sum cash settlement could wipe out those benefits, effectively reducing the overall value of the settlement. Just as with a lump sum settlement, a structured settlement’s periodic payments will be counted as income for qualifying purposes.

There is a way, however, to receive and protect that money, and still qualify for government benefits. Your attorney is obligated to inquire about government services you receive or will be applying for; he or she will make sure that those benefits are protected at the time of settlement. A properly drafted special needs trust, also sometimes referred to as a medical needs trust or a settlement preservation trust, would be set up to be the payee of the structured payments. A trust is money or property held by one party for the benefit of another. A structured settlement can be designed to pay into the trust so that the claimant’s (beneficiary’s) benefits eligibility will be preserved while his financial needs are satisfied. The trust keeps the money out of the claimant’s name. A trustee is appointed to set it up, usually a parent or other relative or a third party. The money would still be tax-free, and would be paid out over time by the Trustee. The setting up of such a trust in connection with the settlement of an injury claim must be approved by the court.

There are some disadvantages of special needs trusts. The individual or family cannot have unrestrained use of the money to spend in any way they want. It will be earmarked to pay for all expenses other than basic support. It cannot pay for room and board, but it can pay for medical and dental expenses, annual checkups, transportation and vehicle purchase, medical equipment, vocational training programs, education, insurance, rehabilitation, at home health aid, and even vacations.

The special needs trust is irrevocable. The trustee has discretion to use assets for the benefit of the injured person and must handle all distributions from the trust. Medicaid will have a lien against the assets remaining in the trust at the death of the beneficiary to the extent that Medicaid payments have been made for his benefit. If there is any money remaining in the trust after the beneficiary dies and the Medicaid lien is paid off, any unused assets may go to his heirs.