Personal Injury Settlements and Special Needs Trusts
A personal injury settlement is meant to make an injured person whole. For a person who depends on Supplemental Security Income and Medicaid, it can do the opposite: the month the money arrives, benefits stop, and the health coverage that was paying for the very care the injury requires is gone. The settlement is then consumed by care costs that Medicaid would have covered, and the family is left with less than if the case had never been brought.
That outcome is avoidable, but only if the planning happens before the funds are disbursed. A first-party special needs trust, funded directly from the settlement, preserves eligibility. A structured settlement can pay into the trust over time. Medicaid’s lien on the recovery can be negotiated and resolved so that the trust receives what it should. And where the injured person is a minor or lacks capacity, the court’s approval of the settlement can include approval of the trust.
Milvidskiy Law Group P.C. works with personal injury attorneys, structured settlement professionals, and families to design and establish the trust, resolve the benefit and lien issues, and put a trustee in place before the check is written.
Key Takeaways:
- Settlement proceeds paid to an injured person who receives SSI or Medicaid count as a resource and end benefits unless they are placed in a first-party special needs trust or another exempt arrangement before they reach the beneficiary.
- Medicaid has a claim against the settlement for medical expenses it paid for the injury. Federal law limits that claim to the portion of the recovery allocable to medical expenses, and resolving it correctly can preserve a substantial part of the settlement for the trust.
- The order of operations matters: trust drafted and approved, lien resolved, structured settlement designed, and then disbursement into the trust. Reversing the order forfeits benefits and options.
Why the Settlement Threatens Benefits
SSI has a resource limit of $2,000 for an individual and $3,000 for a couple, according to the Social Security Administration’s program operations manual, and Medicaid eligibility for people with disabilities in New York, New Jersey, and Connecticut carries its own asset tests. A settlement of any meaningful size exceeds those limits. Once the funds are in the injured person’s name or in an ordinary guardianship account, benefits are suspended or terminated until the funds are spent down.
The loss is larger than the monthly SSI check. Medicaid pays for home care, therapies, equipment, prescriptions, and, if needed, nursing facility care that no settlement short of the very largest can fund for a lifetime. Preserving Medicaid is usually worth more than the settlement itself.
The First-Party Special Needs Trust
Federal law allows an injured person’s own settlement to be held in a trust that does not count against SSI and Medicaid if the trust meets specific conditions: the beneficiary is under 65 when it is funded and meets the Social Security definition of disability, the trust is established by the beneficiary, a parent, a grandparent, a legal guardian, or a court, the trust is for the beneficiary’s sole benefit, and the state is repaid for Medicaid at the beneficiary’s death. Our first-party special needs trust page describes those requirements and the administration that follows. For smaller settlements, a pooled trust run by a nonprofit may be the practical vehicle.
The settlement funds go from the defendant or the personal injury attorney’s escrow account directly into the trust. They do not pass through the beneficiary’s hands, and they are not deposited into a guardianship or custodial account first.
Resolving the Medicaid Lien
When Medicaid has paid for treatment of the injuries that gave rise to the claim, the state has a right to be reimbursed from the recovery. The lien must be addressed before the settlement is finalized, and the amount is negotiable in two respects. First, federal law as interpreted by the United States Supreme Court limits the state’s recovery to the portion of the settlement that represents payment for medical expenses; it cannot reach the portion attributable to pain and suffering, lost wages, or other damages, though a later decision permitted states to reach amounts allocated to future medical expenses. Second, the state agencies typically negotiate, particularly where the recovery is limited by insurance coverage or comparative fault. An allocation of the settlement among categories of damages, supported by the record, is the foundation for the negotiation.
If the injured person is a Medicare beneficiary, Medicare’s separate recovery rights and the question of a Medicare set-aside for future injury-related care are addressed as well. Private health insurers and ERISA plans may also assert reimbursement claims. Each is resolved in writing before disbursement.
Structured Settlements Paid Into the Trust
A structured settlement converts part of the recovery into a stream of guaranteed periodic payments from an annuity purchased by the defendant’s insurer. When the payments are made to a first-party special needs trust rather than to the beneficiary, the arrangement preserves benefits, provides predictable funding for the trust over the beneficiary’s lifetime, and produces income tax advantages for a physical injury recovery. The trust, not the beneficiary, is the payee; a structure that names the beneficiary directly defeats the plan. The design of the structure, the amounts, the timing, the guarantee period, and the balance between a lump sum for immediate needs and periodic payments, is coordinated with the trustee’s projected budget.
Minors and Adults Without Capacity
Settlements for minors, and for adults who lack capacity, require court approval in New York, New Jersey, and Connecticut through the proceedings each state’s courts use for that purpose. The approval order can and should direct the proceeds into the special needs trust and approve the trust’s terms, which avoids a second proceeding and gives the trustee a court order to rely on. Without that planning, courts commonly direct settlement proceeds into a restricted account or a guardianship, which preserves the funds but not the benefits. Where the injured person will need a guardian for personal and financial decisions beyond the trust, our adult guardianship practice coordinates the two.
Wrongful Death and Survivors
When a wrongful death recovery passes to a surviving family member who has a disability and receives benefits, the same problem arises: the share is the survivor’s own property, and it belongs in a first-party trust. The settlement structure and the distribution order should be drafted with that in mind before the funds are allocated.
Working With Personal Injury Counsel
The personal injury attorney’s job is to obtain the recovery. Ours is to make sure the recovery does not cost the client the benefits they depend on. We are typically brought in when settlement discussions begin, and our role includes advising on the allocation of damages for lien purposes, drafting the trust and obtaining the necessary approvals, coordinating with the structured settlement broker on payee and payment design, preparing the disbursement instructions, and handling the notices to the Social Security Administration and the Medicaid agency so that benefits continue without interruption. Cases arising from nursing home abuse and neglect and other injuries to older or disabled clients frequently involve exactly this sequence.
Common Mistakes
- Disbursing the settlement to the client or a guardianship account and then trying to fix eligibility afterward.
- Structuring payments to the beneficiary directly rather than to the trust.
- Accepting the Medicaid lien at face value without allocating damages or negotiating.
- Establishing the trust after age 65, or funding a third-party trust with the beneficiary’s own settlement.
- Naming a trustee who does not understand the benefit rules, so that early distributions reduce or suspend SSI.
When a Special Needs Trust Is Not the Answer
If the injured person does not receive and will not need means-tested benefits, the settlement can be held in an ordinary trust, a structured settlement, or outright. If the injured person is 65 or older, an individual first-party trust is unavailable and a pooled trust or Medicaid planning under our Medicaid planning practice is considered. And for a small settlement, an ABLE account or a spend-down on exempt items may be simpler than a trust. We advise on the right vehicle before recommending one.
What Our Service Includes
- Early consultation with personal injury counsel on benefits, liens, and the settlement structure.
- Drafting the first-party special needs trust, or arranging a pooled trust account, to satisfy the Social Security Administration and the state Medicaid agency.
- Court approval of the settlement and the trust for minors and adults without capacity.
- Negotiation and resolution of Medicaid, Medicare, and insurer reimbursement claims, including damage allocations.
- Coordination of the structured settlement design with the trust as payee.
- Trustee selection, including our own special needs trust trustee services, and ongoing distribution guidance. See our special needs planning page for the broader practice.
Schedule a Consultation Before the Settlement Is Paid
If you or your client receives SSI or Medicaid and a settlement is approaching, the trust should be ready before the funds are. Our attorneys practice in New York, New Jersey, and Connecticut and work with personal injury counsel. Contact Milvidskiy Law Group P.C. to schedule a consultation.
This page is provided for general informational purposes only and does not constitute legal advice. Laws differ by state and change over time. Benefit figures are as of the date stated and can change. For advice about your situation, consult a qualified attorney.
Frequently Asked Questions
Will a personal injury settlement affect SSI and Medicaid?
Yes, if it is paid to the injured person. SSI has a resource limit of $2,000 for an individual and $3,000 for a couple, and Medicaid for people with disabilities has its own asset tests. A settlement paid outright exceeds those limits and ends benefits until it is spent down. Placing the settlement in a first-party special needs trust before disbursement preserves eligibility.
What is a first-party special needs trust in the settlement context?
It is a trust that holds the injured person’s own settlement proceeds so they are not counted for SSI and Medicaid. The beneficiary must be under 65 and disabled, the trust must be established by the beneficiary, a parent, grandparent, guardian, or court, it must be for the beneficiary’s sole benefit, and it must repay the state for Medicaid at the beneficiary’s death.
Does Medicaid have a claim on my settlement?
If Medicaid paid for treatment of the injuries in the case, the state has a right to reimbursement from the recovery. Federal law limits that claim to the part of the settlement that represents medical expenses, and the amount is often negotiable. Resolving the lien before the settlement is finalized, with a supported allocation of damages, protects the rest of the recovery for the trust.
What is a structured settlement, and can it pay into a special needs trust?
A structured settlement pays part of the recovery as guaranteed periodic payments from an annuity purchased by the defendant’s insurer. The payments can and should be made to the special needs trust rather than to the beneficiary, which preserves benefits, funds the trust predictably over time, and carries income tax advantages for a physical injury recovery.
Does the court have to approve the trust for a minor?
Settlements for minors and for adults without capacity require court approval in New York, New Jersey, and Connecticut. The approval order can direct the proceeds into the special needs trust and approve its terms at the same time, which avoids a second proceeding. Without that request, courts often place the funds in a restricted account that protects the money but not the benefits.
When should the special needs trust attorney get involved?
When settlement discussions begin, not after the settlement is signed. The trust must be drafted and approved, the lien resolved, and the structured settlement designed with the trust as payee before disbursement. Once funds have been paid to the client, the options narrow and benefits may already be interrupted.
What if the injured person is over 65?
An individual first-party special needs trust cannot be established for a beneficiary who is 65 or older. A pooled trust account may be available, and other Medicaid planning tools are considered. The analysis differs by state and should begin as soon as a recovery is anticipated.
Can the settlement be used to buy a home or a vehicle?
Often, yes, through the trust. The trust can purchase and hold a home for the beneficiary and a vehicle for the beneficiary’s transportation, subject to planning around the SSI rules on shelter and the Medicaid rules on exempt assets. The trustee makes those purchases in the trust’s name rather than distributing cash.
What about Medicare's rights?
If the injured person is a Medicare beneficiary, Medicare has its own reimbursement rights for injury-related care it paid, and the settlement may need to address future injury-related medical costs through a set-aside arrangement. These are resolved alongside the Medicaid lien before the settlement is disbursed.
Who should be the trustee of a settlement-funded trust?
Someone who understands the benefit rules, will pay providers directly rather than giving the beneficiary cash, and will keep records that satisfy SSI redeterminations and Medicaid recertifications. For larger settlements a professional or corporate trustee, alone or with a family co-trustee, is common. Our attorneys serve in that role when families want an experienced administrator.
