Settlements: structures, trusts, liens and court approval
The short answer
Agreeing a settlement is not the end. Four things then have to happen: liens are resolved, a structure is chosen, a trust is usually set up, and a court approves it because the money belongs to a child. 1 2
The mistake that costs families most is putting settlement money in a child's own name. It can end their Medicaid and SSI, which are often worth more over a lifetime than the settlement itself. 1
The numbers, up front
- Court approval
- A settlement on behalf of a minor is approved by a court, which reviews the amount, the fees and how the money will be held 1
- Why a trust
- A special needs trust holds funds for a person with a disability without those funds counting against Medicaid and SSI limits 1
- Medicaid has a claim
- A state Medicaid program generally has a right to be repaid from a settlement for medical care it has already covered 2
- The Ahlborn principle
- The Supreme Court held that a state could not claim the portion of a settlement not attributable to medical expenses 3
- Gallardo narrowed it
- The Supreme Court later held that a state may seek reimbursement from settlement funds allocated to future as well as past medical care 4
- Medicare has its own rules
- Where Medicare has an interest, separate coordination and set-aside rules apply 2
Lump sum or structured
A lump sum pays everything at once. It offers flexibility and control, and it carries the risk of poor investment, family pressure and the money running out.
A structured settlement pays over time through an annuity. Payments can be set for life, can rise each year, and can be shaped around expected needs, such as more at 18 for education or at 25 for housing. Payments are usually tax-free, and once set the structure generally cannot be changed.
Most cases use both. A lump sum for immediate needs, such as a home modification or a vehicle, and a structure for lifetime costs.
Questions to ask before agreeing a structure
- What are the payments, and when?
- Do they rise with inflation?
- What happens if my child dies before the payments end?
- Which company is the annuity with, and how strong are they?
- What is guaranteed and what depends on lifespan?
Ask for it modeled on paper against the life care plan, so you can see whether the payments actually match the years the costs fall in.
The special needs trust
This is the part that protects everything else.
Money paid directly to your child can end their Medicaid and SSI, because those programs have resource limits. Over a lifetime, Medicaid can be worth more than a settlement, particularly for personal care, equipment and therapy that private insurance will not cover.
A special needs trust solves it. The money is held by a trustee and spent for your child's benefit, without counting as their resource. 1
The kinds
First-party trust. Holds the person's own money, including a settlement. Subject to Medicaid payback rules on death. 1
Third-party trust. Holds someone else's money, such as an inheritance or a gift. Generally not subject to payback. This is what relatives should leave money to.
Pooled trust. Run by a non-profit that pools funds for investment while keeping a separate account for each person. Often used for smaller amounts. 1
What to ask about the trust
- Who is the trustee, and what do they charge?
- What can the trust pay for, and what can it not?
- What happens if we disagree with the trustee?
- Who succeeds them?
- How is spending reported?
Use a lawyer who does this specifically. Trust drafting is technical, and an error found years later is expensive and sometimes impossible to fix.
Alongside the trust, consider an ABLE account for everyday flexibility. The two work well together. 5
Medicaid liens and Medicare
If Medicaid has paid for your child's care, the state generally has a right to be repaid from a settlement for that care. 2
The law here has moved.
Ahlborn. The Supreme Court held that a state could not claim the portion of a settlement that was not attributable to medical expenses. 3
Gallardo. The Supreme Court later held that a state may seek reimbursement from settlement funds allocated to future medical care as well as past medical care. 4
The practical effect is that how a settlement is allocated between categories matters, and lien resolution is a specialist area within a specialist area.
Ask your lawyer directly. Who is handling the lien, what is the current claimed amount, and what is the plan for reducing it.
Where Medicare has an interest, separate coordination and set-aside rules apply. 2
Private insurance may also assert a right to be repaid, depending on the plan and on state law.
Liens can consume a large share of a settlement. They are negotiable, and how well they are handled makes a real difference to what reaches your child.
Court approval
Because the money belongs to a child, a court reviews and approves the settlement. 1
The judge looks at whether the amount is reasonable for the child, whether the fees and costs are appropriate, how the money will be held, and whether a trust is needed.
Attorney fees are reviewed at this hearing, which is one reason to have understood the fee agreement from the beginning. See how to find and evaluate an attorney.
The hearing is usually short. You may be asked simple questions about your child's needs.
Ask to see the proposed order before the hearing, including the fee and cost figures, and ask about anything you do not understand.
The mistakes that cost the most
Money in the child's own name. It can end Medicaid and SSI. Use a trust. 1
Relatives leaving money directly to the child in a will. Same problem, different route. Tell your family, and point them at a third-party trust.
Agreeing a structure that does not match the life care plan. Payments should fall in the years the costs do.
Not asking about liens until the end. Ask at the start what is claimed and what the plan is.
Choosing a trustee without asking about fees and process.
No plan for after you die. Who will be trustee, who will advocate, and what should happen. Write it down. A letter of intent, describing your child's routines, preferences, communication and medical history, is not a legal document and is one of the most valuable things you can leave.
Assuming the settlement replaces benefits. It does not. Medicaid, SSI, waivers and school services continue to matter, and the trust is what protects them. See paying for care.
This page is general information, not legal or financial advice. These rules are technical and they differ by state. Use an attorney who does this work.
Questions parents ask
Why can we not just put the money in a savings account for our child?
Because settlement money in a child's own name counts as their resource and can end their Medicaid and SSI. Over a lifetime, those programs are often worth more than the settlement, particularly for personal care, equipment and therapy. A special needs trust holds the money without it counting. 1
What is a Medicaid lien?
A state Medicaid program's right to be repaid from a settlement for medical care it already covered. 2 The Supreme Court has addressed what portion a state may claim, first in Ahlborn and later in Gallardo, which allowed recovery from funds allocated to future as well as past medical care. 3 4 Liens are negotiable, and how they are handled affects what reaches your child.
Is a structured settlement better than a lump sum?
Neither is better in the abstract. A structure gives predictable, usually tax-free payments over a lifetime and cannot easily be changed. A lump sum gives flexibility and carries more risk. Most cases use both. Ask for the structure modeled against the life care plan so you can see whether the payments fall in the years the costs do.
Who approves the settlement?
A court, because the money belongs to a minor. The judge reviews the amount, the attorney fees and costs, and how the money will be held. 1 Ask to see the proposed order before the hearing.
What should we write down for whoever comes after us?
A letter of intent. It is not a legal document. It describes your child's routines, how they communicate, what they like and dislike, their medical history, who their doctors are, and what you want for them. Families and trustees consistently describe it as one of the most useful things a parent can leave.
Words on this page, in plain English
- structured settlement
- A settlement paid out over years instead of all at once, usually through an annuity.
- life care plan
- A detailed written estimate of everything a person will need over their lifetime and what it will cost.
- special needs trust
- A trust that holds money for a person with a disability without making them lose Medicaid or SSI.
- ABLE account
- A tax-free savings account for a person whose disability began before age 26. Money in it does not count against most benefit limits.
Where these facts come from
- Social Security Administration. Program Operations Manual System, SI 01120.203 Special Needs Trusts. 2025. secure.ssa.gov/poms.nsf/lnx/0501120203. Link checked September 3, 2026.
- Centers for Medicare and Medicaid Services. Medicare Secondary Payer and Liability Settlements. 2025. www.cms.gov/medicare/coordination-benefits-recovery. Link checked September 3, 2026.
- Supreme Court of the United States. Arkansas Department of Health and Human Services v. Ahlborn, 547 U.S. 268. 2006. supreme.justia.com/cases/federal/us/547/268/. Link checked September 3, 2026.
- Supreme Court of the United States. Gallardo v. Marstiller, 596 U.S. 420. 2022. supreme.justia.com/cases/federal/us/596/20-1263/. Link checked September 3, 2026.
- ABLE National Resource Center. What are ABLE Accounts. 2025. www.ablenrc.org/what-is-able/what-are-able-accounts/. Link checked September 3, 2026.