A client walks into my office after years of litigation. An accident on a construction site in Queens left him unable to work, and after a long fight, he received a seven-figure settlement. The check is in his hand, the relief is immense—and then a new, more complex set of problems begins. That money, meant to provide a lifetime of care and replace lost income, is now vulnerable.
Most people focus entirely on winning the lawsuit. That’s understandable. But as an estate planning attorney, my work often starts where the personal injury attorney’s work ends. Securing a settlement is only half the battle. The other half is making sure that award accomplishes what it was meant to: providing security for a lifetime and, perhaps, for the next generation.
Without a deliberate plan, a settlement can be quickly diminished by creditors, poor financial decisions, or unforeseen medical costs. Worse, a lump-sum payment can disqualify an individual from essential government benefits like Medicaid or Supplemental Security Income (SSI), often at the very moment they are needed most.
The Settlement’s Unseen Tax and Benefit Traps
The structure of a personal injury award matters. While settlements for physical injury are generally not taxable income, any portion for lost wages or punitive damages may be. But the more immediate threat I often see is to needs-based government assistance.
Imagine an individual who relies on Medicaid for their ongoing medical care. A sudden influx of cash from a settlement can push their assets well over the strict eligibility limits. In New York, the 2024 Medicaid resource limit for an individual is just $31,175. They can be forced to privately pay for their care until the settlement funds are spent down, rapidly depleting the very money meant to secure their future.
This is not a theoretical problem. It’s a recurring crisis that we help families manage. The legal tool designed for this exact contingency is a Special Needs Trust, also called a Supplemental Needs Trust. When structured correctly, assets held in this trust are not counted for determining eligibility for programs like Medicaid. The funds don’t go directly to the individual. Instead, a trustee manages the money and pays for supplemental needs—things like physical therapy, home modifications, or specialized equipment that public benefits do not cover.
Prudent Stewardship of Your Financial Recovery
Placing a settlement into a trust does more than just preserve benefits. It imposes a framework of professional management and fiduciary duty on the assets. The person you name as trustee has a legal obligation to manage the funds responsibly. This is not a casual arrangement; it’s a serious legal duty governed by state law.
In New York, a trustee’s conduct is guided by the Prudent Investor Act, codified in EPTL § 11-2.3. This statute requires a trustee to exercise the skill and caution that a prudent person would in managing their own affairs. It’s a high standard that protects the beneficiary from mismanagement or reckless investing. The trustee must consider the trust’s purposes, terms, and distribution requirements, while diversifying investments to manage risk.
This legal standard transforms a simple pot of money into a managed asset designed for long-term stability. For a family whose financial future depends on that settlement, this structure is crucial. It provides a layer of protection against not only external threats but also the emotional—and sometimes impulsive—decisions that can follow receiving a large sum of money after a traumatic event.
Integrating the Settlement into Your Generational Legacy
A well-managed settlement should also be part of a larger estate plan. What happens to any remaining funds when the beneficiary passes away? Without a plan, the assets could end up in a lengthy and public probate process in Surrogate’s Court, subject to claims from creditors of the estate.
By integrating the trust that holds the settlement with a will and other estate planning documents, you can direct where those assets go. You can provide for a spouse, fund a child’s education, or leave a legacy to a charitable cause. This is the essence of stewardship—thinking beyond the immediate need and planning for the future. It ensures the financial recovery from a personal tragedy benefits not just one person, but the entire family for years to come.
The goal is to turn the resolution of a lawsuit into a source of lasting generational strength. It requires foresight and a shift in perspective, from winning the case to prudently managing the win.
If you or a family member are expecting a significant personal injury award, the planning should begin before the check is cut. A foundational step is to understand how the funds will impact your existing financial landscape. To help you prepare, my firm can schedule a confidential review to model how a settlement would affect your asset picture and eligibility for public benefits.
