Special Needs Trust helps protect your malpractice settlement while preserving benefits. Learn 11 essential steps to secure your future.

Special Needs Trust & Malpractice Settlements: 11 Smart Steps to Protect Your Benefits

Ever wondered if winning a malpractice settlement could actually cost you more than it gives? 😟

Receiving a big payout can make you lose important government benefits. But, there’s a legal tool that can help: a Special Needs Trust (SNT).

Let’s explore how it works, why it’s important, and how to set one up correctly.

What Is a Special Needs Trust?

A Special Needs Trust (SNT) is a legal tool. It holds money for someone with a disability. This way, they can keep getting Medicaid or SSI.

The money goes into the trust, not directly to the person. The trustee then pays for things the government doesn’t cover. This includes therapy, mobility aids, and in-home care.

Why Malpractice Settlements Can Be Risky

Imagine getting a $250,000 malpractice settlement. It sounds good, but it can cause problems. If the money goes into your bank account, you might lose Medicaid and SSI.

Even a small settlement, like $15,000, can make you lose benefits.

How a Special Needs Trust Solves the Problem

By putting your settlement into a First-Party Special Needs Trust, you can:

• Keep your Medicaid and SSI benefits
• Use the funds for qualified expenses
• Avoid benefit disqualification or repayment penalties

This is key for people under 65 who get personal injury or malpractice settlements.

First-Party vs. Third-Party Special Needs Trusts

Trust Type	Funded By	Common Use
First-Party	The beneficiary’s own money	Malpractice or personal injury payouts
Third-Party	Parents, relatives, or others	Gifts, inheritance, estate planning

If the funds come from a lawsuit or settlement awarded to the person with the disability, a First-Party SNT is the right choice.

Why Attorneys Must Get This Right

Not setting up an SNT for a client who gets a settlement can lead to big problems. It can hurt the client and the attorney.

In one case, lawyers paid millions in damages for not setting up a Special Needs Trust for an injured child. The child lost important government support, and the law firm had to pay.

What Can the Trust Pay For?

Funds in a Special Needs Trust can cover:

• Medical and dental expenses
• Home healthcare aides
• Rehabilitation or therapy
• School and training
• Transportation (vehicles, modifications)
• Recreational activities
• Special equipment (wheelchairs, lifts)

But here’s the catch: The trust cannot give the beneficiary cash directly. If they do, the funds might be counted as income.

The Role of the Trustee

The trustee is the person or group that manages the trust.

They make sure the money is used right and follows the rules. A good trustee must:

• Be organized and trustworthy
• Know the rules well
• Keep good records
• Avoid giving out money the wrong way

A bad trustee can cause big problems. They might lose benefits or even steal money.

Structured Settlements & Special Needs Trusts

Some settlements are paid out over time, not all at once.

You can put these payments into a Special Needs Trust. This helps:

• Keep benefits
• Avoid losing money because of too much at once
• Give a steady income for future needs

Structured settlements and SNTs work well together. They offer stability and follow the rules.

Real-Life Warning: What Happens Without Oversight

A big scandal happened in Florida. Over $100 million went missing from a trust foundation. Families, including a mother with a disabled daughter, were left without money.

The lesson is: Choose your trustee wisely. And always check how your trust is doing.

Steps to Set Up a Special Needs Trust

Here’s how to do it:

1. Hire an Attorney – Get a lawyer who knows special needs planning.
2. Determine the Right Type – First-party or third-party?
3. Choose a Trustee – Pick someone who is honest, organized, and knows what they’re doing.
4. Draft the Trust Agreement – Make it fit state and federal laws.
5. Obtain Court Approval – Needed for many first-party trusts.
6. Fund the Trust – Move the settlement money into it.
7. Notify Government Agencies – Tell Medicaid, SSI, and others.
8. Start Managing the Trust – Give out money carefully.
9. Document Everything – Keep all records very well.
10. Review Regularly – Make sure it stays legal over time.
11. Plan for the Future – Choose successors for trustee and beneficiary.

Common Mistakes to Avoid

🚫 Delaying the Setup – Waiting too long can lose benefits.
🚫 Poor Trustee Choice – A bad trustee can cause big problems.
🚫 Failing to Report – Not telling agencies can lose benefits.
🚫 Unauthorized Spending – Using money the wrong way can ruin everything.

Benefits of a Special Needs Trust

✅ Keeps access to SSI and Medicaid
✅ Provides financial safety without losing benefits
✅ Covers things not paid for by the government
✅ Gives peace of mind to the whole family

Conclusion

A Special Needs Trust is more than a legal form. It’s your safety net. If you or your loved one gets a malpractice settlement, don’t risk losing Medicaid or SSI.

Setting up an SNT makes sure the money helps you, not hurts you.

Don’t wait. Don’t guess. Plan smart.

FAQs

Q1: Can I set up a Special Needs Trust after the settlement has been paid?
Yes, but you risk losing benefits in the meantime. It’s best to set it up beforehand.

Q2: Who can be the trustee?
A family member, close friend, bank, or professional trust company—just make sure they understand the rules.

Q3: Can the beneficiary access money directly?
No. Giving cash to the beneficiary can jeopardize benefits. The trustee makes all distributions.

Q4: What happens to leftover funds when the beneficiary dies?
First-party SNTs must reimburse Medicaid. Any remaining funds can go to heirs if allowed.

Q5: Do I need a lawyer to create one?
Absolutely. Special Needs Trusts are complex and must follow strict legal requirements.