Bradley Frigon on Developing a Financial Plan for a First-Party SNT Receiving a Personal Injury Settlement

When the beneficiary of a
first-party special needs trust (SNT) receives a personal injury (PI)
settlement or a damage award with a structured settlement annuity contract, a
financial advisor must address many factors in creating a financial plan.
Factors range from the structuring of the settlement through the beneficiary’s
special requirements and the trust’s payback provisions. In this Analysis,
Bradley J. Frigon discusses how to develop and implement a financial plan for a
first-party SNT receiving a PI settlement. He writes:

[a] Introduction

     There are many factors for a
financial advisor to consider when creating a financial plan for a beneficiary
of a first-party special needs trust (SNT). In many cases it may not be
possible to communicate with the beneficiary due to mental capacity issues, or
the beneficiary may have physical constraints that make communication
difficult. A personal injury settlement or damage award often involves a
structured settlement annuity contract. In some cases, the financial advisor is
not consulted on how much of the settlement or damage award should be paid in
cash or structured. The beneficiary may have substantial up-front cash
requirements for the purchase of a home or specialized equipment. The special
needs beneficiary may have a family member serving as trustee or be more
susceptible to financial exploitation. It may be difficult to predict the level
of a beneficiary’s government benefits or anticipate the loss of subsidized
benefits. A beneficiary may want to set aside funds for specialized medical
procedures that are costly and not paid by public benefits. A first-party trust
requires the trustee to reimburse the state for medical assistance provided to
the beneficiary upon his or her death requiring the trustee to maintain an
adequate level of available cash. Additional concerns with regard to the
payback provision of the trust involve a trustee’s duty to invest trust assets
for the remainder beneficiaries of the trust. In many states, the state
Medicaid agency is a beneficiary of the trust and not simply a creditor.

[b] Uniform Prudent Investor Act

     The starting point for any
financial plan begins with an analysis of the Uniform Prudent Investor Act
(UPIA). The UPIA applies modern portfolio theory to trust management and
investment. The UPIA changed the basic tenets of trust investing in the
following ways:

  • The standard of prudence is applied to the total
    portfolio and not to isolated assets in the portfolio;
  • The risk versus return theory of investing
    should be the primary consideration;
  • Trustees have no restrictions on the choice of
    investment asset classes;
  • Investments must be properly diversified;
  • Trustees may delegate the investment function to
    an outside advisor.

     A trustee is required to diversify
the investments of the trust unless the trustee reasonably determines that,
because of special circumstances, the purposes of the trust are better served
without diversifying. The UPIA does not contain a limitation on damages and
there are few reported cases on this specific matter.

(footnotes omitted)

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