You just received a settlement of your personal injury claim. But, what should you do with that money? This is an extremely important question, if you receive any need-based government benefits. Receiving a large monetary payment could potentially jeopardize your eligibility for certain benefits. For example, to be eligible Supplemental Security Income (SSI), you must have less than $2,000 in assets if you are single and less than $3,000 if you are married. You must also have very limited income. So, how to protect personal injury settlement from creditors? You must place your settlement proceeds in a Special Needs Trust.
Do I need a special needs trust?
If you are wondering how to protect personal injury settlement from creditors, you should first determine whether it is necessary for you. Whether a client needs a special needs trust depends on what types of benefits the client is receiving. There are certain types of benefits that require a Special Needs Trust, including:
- SSI
- Medi-Cal
- Medi-Cal Waiver Programs
- Section 8 Housing
- Supplemental Nutrition Assistance Program (Food Stamps)
- Residential Housing through the Division of Developmental Disabilities (DDD)
Other public benefits, like SSDI, Medicare, and Children’s Health Insurance Program (CHIP) are not means-tested programs. Often, clients confuse SSI with SSDI and Medicare with Medi-Cal.
How to Protect Personal Injury Settlement from Creditors with a Special Needs Trusts
In 1993, Congress authorized what are known as Self-Settled Special Needs Trusts. The purpose of this particular type of trust is to allow an injured plaintiff to continue to remain eligible for public benefits, like SSI and Medi-Cal, while still benefiting from a personal injury settlement. Otherwise, any recovery from the lawsuit would be countable as an asset, in determining eligibility for need-based programs. Special needs trusts can also be funded by property acquired from a divorce settlement, retirement plan, life insurance policy or inheritance.
The good thing about a special needs trust is that the funds in the trust will not be counted for means-tested public benefit purposes, as long as the income from the trust is distributed directly to third-party providers of goods and services. It cannot be used for food or shelter.
What type of special needs trust should I set up?
If the settlement proceeds exceed $100,000, the general practice is to establish a standalone Special Needs Trust for that individual plaintiff. You may want to consider using the services of a professional trustee who has experience navigating the maze of public assistance benefits and tax issues. If the settlement amount is smaller, a Pooled Trust may be a better option. With a pooled trust, the assets are combined with the assets of other beneficiaries, for investment management purposes, which allows for better investment options. Each beneficiary maintains a sub-account, and regularly receives reports on deposits and disbursements.
If you have questions regarding special needs trusts, or any other estate planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.
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