Jay J. Sangerman, PLLC
Attorneys at Law
August 23, 2005
BY FEDERAL EXPRESS # 8525 0537 2182
Ms. Nancy Veillon
Associate Commissioner for
Income Services Program
Social Security Administration
252 Altmeyer Building
6401 Security Boulevard
Baltimore, Maryland 21235-6401
Dear Ms. Veillon:
I am writing to you about the payment of structured settlement annuities into special needs trusts. This is an issue which I have discussed with Ken Brown over the last couple of years. I called Ken again today about this issue and he suggested that I write to you.
As you know, many medical malpractice and personal injury cases are settled by defendants with the use of structured settlement annuities. Pursuant to the Internal Revenue Code Section 104(a)(2), payments from a physical injury lawsuit are income tax free to the plaintiff. The payments retain their income tax free status, pursuant to the Code, also when the such payments are made through an annuity. Therefore, the annuity earns income, all of which is income tax free. The benefits to the plaintiff are potentially much enhanced payments from their lawsuits. The income tax free status is not only within the annuity (like an IRA), but also there is no income tax recognized upon the receipt of the periodic payments from the annuity. In fact, in New York State, our statute requires a structured settlement annuity when a medical malpractice or personal injury matter goes to verdict and the recovery for future needs exceeds $250,000.00.
Unfortunately, there are attorneys, who, I believe, do not understand the income rules pertaining to SSI. These attorneys state that (i) a structured settlement annuity payable into a special needs trust is income to the beneficiary and (ii) the annuity, if permissible, cannot be paid to the special needs trust upon the beneficiary's reaching the age of 65, arguing that the annuity is an impermissible addition to a special needs trust as of the beneficiary's reaching the age of 65 years. I believe that the attorneys who state the foregoing are incorrect for the following reasons:
1. The structured settlement annuity, pursuant to IRC 104(a)(2) and 130(c) does not, and cannot, belong to the plaintiff. The annuity continues to belong to the defendant, or the defendant's assignee.
2. The payments from the annuity are irrevocably made to the special needs trust. The plaintiff has no authority to change the payment stream to him/herself or to another. There is no cash value which the beneficiary of the special needs trust can receive in exchange for the structured settlement annuity.
3. The right to the payments from the annuity are vested as of the date of the annuity contract Therefore, any payments from a structured settlement annuity paid after age 65 years, but started prior to age 65, are not an addition to the special needs trust, but a continuation of payments to the special needs trust, which are vested payments.
4. The irrevocable periodic payments from the structured settlement into the special needs trust, which cannot be transferred or assigned to another, comes directly within the SSI POMs, as a payment, which is irrevocably assigned to a trust and, therefore, is neither income nor an asset to the trust beneficiary.
There is a great benefit to plaintiffs from a structured settlement. In addition to the income tax free status, the payments secure that the settlement funds from a medical malpractice or personal injury matter will not be dissipated. The structure, which is guaranteed, provides for a source of funds to the plaintiff for years, even for lifetime.
Unfortunately, due to certain estate planning attorneys who are telling plaintiff attorneys that a structured settlement paid into a special needs trust would disqualify the beneficiary of the trust from SSI and Medicaid benefits, plaintiff attorneys are fearful of agreeing to such settlements, even though they believe that a structured settlement would be in their client's best interests. As a result, cases are presently being settled without a structure.
As is clear from the above, I believe that a structured settlement can be an important component in the settlement of medical malpractice and personal injury matters. As an estate planning attorney whose practice is the drafting of special needs trusts in many jurisdictions and who serves as an advisor to trustees of such trusts, I have seen the value of the structure to disabled beneficiaries. Moreover, I have noted that many Medicaid districts prefer structured settlements because the slow and regular payments into special needs trusts provides a regular source of funds to the beneficiary, as well as potentially preserves funds for the Medicaid district's remainder interest in the special needs trust.
If possible, I would much appreciate if your Department could respond to this letter, clarifying, for the benefit of disabled beneficiaries of medical malpractice and personal injury matters, that a structured settlement, payable for life, can be made into a special needs trust, without causing any disqualification for SSI, and, therefore, for Medicaid benefits.
Due to the overlap with Medicaid issues, I am sending a copy of this letter to Roy Trudell at CMS, seeking a response from him. Thank you.
Jay J. Sangerman