Medicaid and Structured Settlements

Structured Settlements are the compensation money to the claimant who suffers any form of personal injury and files a lawsuit against the other party, the defendant, who agrees to pay a settlement amount, and wherein at least a fraction of the total compensation amount is in the form of periodic payments scheduled by the structured settlement agreement. It was brought into force by the legal arrangement in 1983 wherein the claimant can receive his settlement/compensation amount in installments rather than as a lump sum amount.

Structured Settlements were first brought to the financial scene as a mode of claims settlement when in 1960s, a drug sold widely to treat morning sickness in pregnant ladies, called Thalidomide, caused huge deformities and birth defects in small children. Structured settlement was used to pay off the claims of a large number of the affected people since the drug manufacturer did not have enough money to settle all claims at once in lump sum amount.

Now Medicaid is an entirely different concept. Social Security Act Title XIX has established Medical Assistance Program or “Medicaid,” as a central program supervised and handled by the states to provide medical facilities and care to certain categories of people with low income and less assets.

Each state appoints an agency that helps in the administration of this program. Medicaid rules are very complicated and are subject to changes and amendments every now and then with the changing financial and legal scenario thus every state choses its own Medicaid rules among the options provided and hence, end up with Medicaid programs distinct from other states.

But before any of this the claimant has to be eligible for the Medicaid. This eligibility is determined by the assets of the individual. According to the law the following assets are exempt from being counted while judging the eligibility of an injured or disabled person for Medicaid:

  • The house of the injured/disabled claimant where he residesstructured settlement and medicaid
  • One car (only if it’s used at least four times a year to fetch medical equipment, prescriptions or is equipped with wheelchair etc. to assist the disabled claimant)
  • Furniture, clothing, crockery etc. in the house
  • Redeemable maturity value of life insurance up to $1,500
  • Accounts assigned and set aside for burial (maximum $1,500) and burial spaces

Now, if the person receives structured settlement payments, these may be counted as his assets and may suddenly render him ineligible to receive Medicaid benefits. This is where the need of the trust arises. According to the law, for a person who has been injured severely or disabled, is less than 65 years old and is eligible to receive Medicaid benefits, The Medicaid Disability Trust must be put in place by his guardian or by the court. This is also sometimes popularly called as the Special Needs Trust that maintains the eligibility of the disabled person to receive the structured settlement payments along with the Medicaid benefits he is entitled to. This trust has only the claimant’s money and once established, is irrevocable. It pays for the medical, psychological and other costs of education, and rehabilitation for the claimant. A professional or a guardian may serve as the trustee.

Since trust management fees are calculated based on the amount under the trustee’s control, a structured settlement can actually save costs for the claimant. The structured settlement annuity is not the property of the claimant thus the assets of this trust only include the “seed money” put directly into the trust at the time of settlement along with the money left over from the periodic payments already paid into the trust. The income earned by this trust is liable to pay taxes annually.

Now, the claimant keeps receiving these Medicaid benefits as long as he is alive together with the tax-free Structured Settlement payments directed towards him by the court and paid by the defendant party accused of wrongdoing. But once the claimant dies, the trust must pay back the state for the expenses borne by the state on behalf of the claimant. This could be done by disposing off the assets with the trust. If not properly taken care of beforehand, the state can claim the rights to receive all the leftover structured settlement payments in lieu of the deceased claimant’s liability towards the state for provision of the Medicaid to him.

If the structured settlement is properly drafted, the claimant can have a certain sum of money to go periodically into the Medicaid Trust and direct all future payments after his death to his surviving family members.