Structuring future payments into a special needs trust allows a claimant the peace offered by a guaranteed, tax-free annuity, while the trust allows continuance of needs-based government benefits and maintain flexibility and liquidity.
One of the issues with using trusts in general is that the principal amount placed inside the trust is not guaranteed and could lose value. Special needs trusts are likely to be invested more conservatively than most, but some risk still remains. In addition, any interest earned inside the trust is fully taxable. These drawbacks (investment risk and tax liability) can be mitigated by funding them in part with structured settlement annuities established to pay into the special needs trust. Structuring future payments into a special needs trust allows a claimant the peace offered by a guaranteed, fixed, tax-free annuity, while the trust allows continuance of needs-based government benefits and offers the flexibility and liquidity to meet the client’s ever-changing life situation. However, the structured settlement cannot be designed in such a way to thwart Medicaid’s right of recovery following the death of the beneficiary of the special needs trust.