Why Special Needs Planning Is Critical Following a Personal Injury Settlement
As an estate planning attorney practicing in Pennsylvania with a strong focus on special needs planning, I frequently work alongside personal injury counsel to address a critical but often overlooked consequence of settlement: the potential loss of needs-based public benefits. The intersection between personal injury litigation and public benefits law is complex, and without proper legal planning, a personal injury recovery can easily jeopardize a client's long-term security.
This article outlines the key legal considerations and tools that attorneys across jurisdictions should evaluate when advising injured clients who may qualify for Medicaid, Supplemental Security Income (SSI), or similar needs-based benefits.
Settlement Awards Can Jeopardize Public Benefits
Most needs-based benefits programs impose strict asset and income limitations. These limits are federally defined in programs such as SSI and Medicaid but may have state-specific implementation rules. For example, in Pennsylvania, Medicaid eligibility requires that countable resources not exceed $2,000 for a single applicant.
A personal injury settlement—even a modest one—can push a client over the eligibility threshold. This is especially problematic because the value of these public benefits, such as access to long-term care services or in-home assistance, often far exceeds the size of a typical personal injury award. The result: a client may be temporarily enriched by the settlement but lose crucial services that would otherwise have supported their care indefinitely.
Practitioners in every jurisdiction should flag settlement proceeds as a risk factor when clients are enrolled in or anticipate qualifying for needs-based programs.
The Legal Tool: Special Needs Trusts (SNTs)
A properly drafted and administered Special Needs Trust (SNT) can resolve this dilemma. SNTs are authorized under federal law (42 U.S.C. §1396p(d)(4)) and provide a mechanism to preserve a beneficiary’s eligibility for public benefits by sheltering settlement assets in a trust that supplements but does not supplant those benefits.
There are three primary categories of SNTs, and the distinctions are crucial:
1. First-Party SNTs (also known as d(4)(A) trusts):
a. Funded with the beneficiary's own assets, typically from a lawsuit settlement.
b. Must be established before the beneficiary turns 65.
c. Must include a payback provision to the state Medicaid agency upon the death of the beneficiary.
d. Requires state approval in many states (including Pennsylvania).
2. Third-Party SNTs:
a. Funded with assets belonging to someone other than the beneficiary, such as parents or grandparents.
b. No Medicaid payback provision is required.
c. Commonly used in long-term planning or estate plans for families with special needs dependents.
3. Pooled Trusts (d(4)(C) trusts):
a. Administered by nonprofit organizations.
b. Allow beneficiaries to pool resources for investment purposes while maintaining individual sub-accounts.
c. Frequently used for smaller settlements or when a corporate trustee is impractical.
Why Coordination Between Personal Injury and Estate Planning Counsel Is Essential
Settlement planning is not simply a financial question—it is a legal one. Courts often require a structured plan for distributing funds to minors or incapacitated persons. Likewise, in cases involving Medicaid recipients or SSI beneficiaries, proper structuring can mean the difference between lifelong access to essential care and immediate disqualification from vital benefits.
Attorneys representing injured clients should initiate dialogue with special needs planning counsel before settlement negotiations conclude. Early collaboration ensures:
- SNTs are drafted and funded in compliance with state and federal law.
- Petitions for court approval, if required, are prepared in advance.
- Structured settlements and annuities are aligned with the trust architecture.
- Corporate or nonprofit trustees are vetted and selected.
- Benefit eligibility is preserved without delay or disruption.
Practice Tip: State-by-State Nuances Matter
Although the federal framework for SNTs provides consistency, implementation details vary widely. For instance, some states require court oversight of SNT disbursements; others mandate annual trust accountings. Practitioners must understand their state’s probate code, trust statutes, and public benefits regulations.
In Pennsylvania, for example, funding a First-Party SNT always requires notifying the Department of Human Services and may involve filing a petition for approval with the Orphans' Court. Other jurisdictions may allow administrative approval or rely on nonprofit pooled trusts with streamlined processes.
Conclusion: A Legal Imperative, Not Just a Planning Option
Special needs planning should not be treated as an optional add-on in personal injury cases. It is a legal necessity when representing clients who are disabled or at risk of losing critical public benefits. Attorneys in every practice area that touches on personal injury, elder law, or disability planning should be equipped to identify the issue and collaborate with experienced special needs counsel.
For estate planning attorneys, this represents an opportunity to add value and prevent harm. For personal injury counsel, it is a crucial step in protecting the very clients for whom they fought so hard to secure compensation. Thoughtful, coordinated legal planning ensures that a hard-won settlement enhances a client’s future rather than undermining it.
*A Pennsylvania-based estate planning attorney with a concentration in special needs and settlement planning wrote this article. The principles discussed herein apply broadly across jurisdictions and are intended for legal practitioners advising clients receiving personal injury settlements.*
