i. WHAT IS A SETTLEMENT PROTECTION TRUST?
- Support Trust. A Settlement Protection Trust is a support trust designed to provide for the health, education, maintenance, and support of the beneficiary. Settlement Protection Trusts are generally used for plaintiffs who are not receiving means-tested public benefits, which include SSI, Medicaid, many Medicaid Waiver Programs, SNAP (Food Stamps), and federally assisted housing.
ii. Advantages. There are several advantages to establishing a Settlement Protection Trust instead of having the injured party receive the money outright.
- Asset Protection. One of the major problems with personal injury settlements is that the average settlement lasts only three to five years, regardless of the amount of the settlement or award. Many injured parties are unsophisticated in money management or are subject to pressure from spouses, significant others, family, and friends. A Settlement Protection Trust will prevent the assets from being squandered and will protect the beneficiary from claims of creditors and divorce. The trust will also ensure that the monies are used wisely and will hopefully last for the lifetime of the injured party.
- Money Management. The Settlement Protection Trust can arrange for expert money management. Most individuals do not have expertise in managing money or the incredible discipline required to say no to themselves and others.
- Structured Settlement. If a structured settlement is involved, the Settlement Protection Trust can be designed so that the payments from the structured settlement go into the trust, and the injured party is prevented from selling the structured settlement at a deep discount in the future. The result of these factoring transactions is that the client usually satisfies an emergency that would not have been created had there been a Settlement Protection Trust in place, and then subsequently runs out of money when the funds received from the factoring transaction are exhausted.
- Tax Preparation. Usually, the injured party can arrange for the trustee to either prepare or supervise the preparation of tax returns for the injured party.
iii. Distribution
- Under a Settlement Protection Trust, distributions can be very flexible. In many instances, a budget is prepared, and the trustee simply writes the beneficiary a check every month to pay all his or her monthly bills. In other instances, the beneficiary prefers to submit the bills to the trustee, and the trustee then pays the third-party provider of goods and services directly. If there are needs for money beyond that which is budgeted, arrangements can be made for the trustee to send the beneficiary additional money or to pay the additional bill directly to the third party. Generally, one of the objectives of the Settlement Protection Trust is to ensure that the money in the trust lasts as long as possible. If there is sufficient money, the goal is usually to ensure that the money lasts for the lifetime of the injured plaintiff. Therefore, a discussion should be held as to some restrictions on distributions which will ensure that the money is not squandered. In some cases, the injured plaintiff might not be sophisticated in managing and preserving money. In other cases, a spouse or significant other might exert influence, and, in many cases, friends and family may take advantage of the person who recovered the settlement. The trust is designed to protect the settlement and the beneficiary in these situations.
iv. WHO SHOULD SERVE AS TRUSTEES?
- A professional trustee should always be considered for a Settlement Protection Trust. The professional trustee has expertise in investment management, taxation, and navigating the system to support the injured party. Courts rarely require a bond for a professional trustee.
v. FEATURES
- Remove and replace. Either the injured party or a trust protector acting on behalf of the injured party should be given the authority to remove and replace the professional trustee if the injured party is not satisfied with the relationship. Knowing that the trustee can be removed is comforting to the beneficiary.
- Compensation. Each trustee publishes a standard schedule of charges for the services of a trustee. It is usually a declining sliding scale based on the size of the trust assets under management. It should be noted that these trustee commissions are generally comparable to those charged by any investment manager or even mutual funds. A good trustee will provide personal attention to the trust beneficiary.
- Limited Power of Appointment. The Settlement Protection Trust should give a beneficiary with capacity a limited power of appointment. This means that the injured party can execute a will disposing of the assets in the trust. It is better to give the injured party the limited power of appointment than to have the trust determine who will receive the funds on the death of the beneficiary because the injured party can exercise the appointment from time to time and change the disposition of assets as he or she sees fit. Please note that estate planning is crucial in the settlement of a personal injury case, particularly where federal and state estate and inheritance taxes are involved.
- Revocable/Irrevocable. The trust can be revocable by the injured party, if the party has the capacity, or it can be irrevocable. If one of your goals is to protect against squandering assets, it is advisable to make the trust irrevocable. Grantor Trust. The Settlement Protection Trust is a grantor trust, which means that, for income tax purposes, it is ignored. The income tax treatment of the income and deductions about the trust are the same as they would be if there was no trust. The individual beneficiary picks up the income and deductions on his or her tax returns.
- Grantor Trust. The Settlement Protection Trust is a grantor trust, which means that, for income tax purposes, it is ignored. The income tax treatment of the income and deductions about the trust are the same as they would be if there was no trust. The individual beneficiary picks up the income and deductions on his or her tax returns.
