A successful personal injury settlement can provide lifelong financial security. For a client receiving—or likely to receive—Supplemental Security Income (SSI) or Medi-Cal, however, an improperly handled settlement can unintentionally jeopardize essential public benefits.
For California plaintiff’s attorneys, identifying these issues before settlement is finalized can make the difference between protecting a client’s long-term financial security and creating avoidable complications.
The Role of a First-Party Special Needs Trust
A first-party Special Needs Trust (SNT), authorized by 42 U.S.C. § 1396p(d)(4)(A), allows a disabled individual under age 65 to preserve eligibility for means-tested public benefits while retaining the benefit of his or her own settlement proceeds. Since enactment of the 21st Century Cures Act, a competent disabled individual may establish his or her own first-party SNT without requiring a parent, grandparent, guardian, or court to establish the trust. The trust must still satisfy all federal statutory requirements, including the mandatory Medicaid (Medi-Cal) payback provision upon the beneficiary’s death.
California practitioners should remember that a first-party SNT is appropriate only when the assets funding the trust belong to the beneficiary, such as proceeds from a personal injury settlement or judgment.
Timing Matters
One of the most common—and costly—mistakes occurs when settlement proceeds are distributed directly to the injured client before special needs planning has been completed.
Once received, those funds may become countable resources for SSI and Medi-Cal eligibility purposes, potentially resulting in a suspension or loss of benefits.
For that reason, plaintiff’s counsel should identify potential public-benefit issues early in the litigation, rather than after settlement has already been negotiated.
Draft the Settlement Agreement with the Trust in Mind
If a first-party Special Needs Trust is anticipated, the settlement agreement itself should expressly contemplate funding the trust instead of simply directing payment to the plaintiff.
Addressing the trust during settlement negotiations allows counsel to:
- Coordinate preparation of the trust before disbursement;
- Obtain any required court approvals;
- Properly direct structured settlement payments into the trust when appropriate;
- Coordinate lien resolution; and
- Avoid delays or eligibility problems after the settlement check is issued.
Early planning is almost always easier—and less expensive—than attempting to correct problems after funds have been distributed.
Court Approval Is Frequently Required in California
Although federal law permits a competent disabled individual to establish his or her own first-party SNT, California law frequently requires court approval when settlement proceeds are being distributed pursuant to a court-approved compromise or judgment involving a minor or a person with a disability.
Under California Probate Code §§ 3600–3613, a court approving such a settlement may order that the recovery be paid into a first-party Special Needs Trust. Before doing so, the court must determine that the trust satisfies the statutory requirements and approve its terms. Probate Code § 3604 authorizes the court to approve the trust and impose appropriate conditions regarding administration and distribution of the settlement proceeds.
Because these matters involve specialized probate and public-benefits issues, the California Standards of Judicial Administration, Standard 7.10, recommends that courts assign these matters to judges with probate and trust expertise whenever practical.
For that reason, coordinating with special needs planning counsel before the settlement approval hearing is a best practice.
Resolve Government Liens Before Funding the Trust
Another critical consideration is lien resolution.
A first-party Special Needs Trust does not eliminate valid governmental reimbursement claims arising from the personal injury recovery.
Indeed, California Probate Code § 3604(d) requires that before settlement proceeds are transferred into a court-approved Special Needs Trust, all applicable statutory liens owed to the California Department of Health Care Services (DHCS), the Department of State Hospitals, the Department of Developmental Services, and applicable counties or cities must first be satisfied. Likewise, DHCS guidance provides that Medi-Cal personal injury liens should be resolved before funding a first-party Special Needs Trust.
Accordingly, lien resolution should be treated as an integral component of settlement planning: not as an afterthought. Coordinating with experienced settlement planning professionals can significantly streamline this process.
A Valuable Resource for Plaintiff’s Attorneys
Successfully navigating catastrophic injury settlements often requires coordination among plaintiff’s counsel, special needs planning attorneys, structured settlement consultants, and lien resolution professionals.
For attorneys seeking educational resources and professionals experienced in Special Needs Trusts, settlement planning, Medicare and Medi-Cal liens, and public benefits preservation, consider visiting The Lien Project. The organization provides educational content and connects attorneys with professionals who regularly assist with these complex settlement issues.
Conclusion
When a personal injury client has a disability—or may require means-tested public benefits in the future—the conversation should extend well beyond the settlement amount.
By identifying benefit eligibility issues early, drafting settlement agreements that contemplate Special Needs Trust planning, obtaining court approval where necessary, and resolving statutory liens before funding the trust, California plaintiff’s attorneys can help maximize both the value of the recovery and the client’s long-term financial security.
Early collaboration between the litigation team and special needs planning professionals remains one of the most effective ways to protect vulnerable clients long after the case has settled.
Visit SdCountyTrusts.com to learn more about how we protect families in Vista, Oceanside, Carlsbad, and throughout San Diego County.
Authorities
- 42 U.S.C. § 1396p(d)(4)(A) (First-Party Special Needs Trusts)
- 21st Century Cures Act, Pub. L. No. 114-255, § 5007
- California Probate Code §§ 3600–3613, particularly §§ 3602 and 3604
- California Standards of Judicial Administration, Standard 7.10
- SSA POMS SI 01120.203 – Trusts Established with the Assets of an Individual
- California Department of Health Care Services – Special Needs Trust Information
- California Department of Health Care Services – Personal Injury Program (Medi-Cal Liens)