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 Estate & Wealth Advisors either online or by calling us at (310) 337-7696.
- Reasons to Incorporate a Living Trust into My California Estate Plan - August 16, 2026
- What You Need to Know about Funding a Trust in California - August 15, 2026
- Estate Planning for Real Estate Owners in California - August 14, 2026
