A settlement protection trust can help you safeguard a personal injury settlement. These trusts provide spendthrift protection, liquidity, and control over assets.
They can also protect against friends and family taking advantage, help obtain care management arrangements, and assist with navigating government benefit programs. Depending on the injured party’s situation, they can be revocable or irrevocable.
Preserving Settlement Proceeds
A settlement protection trust helps prevent wasteful dissipation of an injured party’s settlement award. Many injured parties are unsophisticated with money management and face pressure from significant others, family, or friends to spend their settlement. A settlement protection trust can arrange for expert money management and provide oversight and protection from overspending or exploitation by others. If the injury and the settlement amount indicate that public benefits will be needed in the future, consideration should be given to establishing a separate special needs trust within the settlement protection trust. This allows for flexibility by allowing the trustee to transfer assets from the settlement protection subtrust to the special needs subtrust if needed.
Avoiding Wasteful Disposition
The funds deposited into a settlement protection trust cannot be used for anything other than specified purposes. This helps prevent squandering of the funds or being coveted by family members.
It also prevents the encumberment of periodic distributions by settlement discounters. In addition, these funds are professionally managed and protected from inflation. They can also be supplemented during periods of unemployment or other financial reversals.
A Settlement Management Trust can be revocable or irrevocable and can be used by adults who want to protect their settlement proceeds from wasteful dissipation. The trustee screens all disbursements to ensure that they make fiduciary sense.
Protecting Assets from Creditors and Legal Action
When you set up a settlement protection trust, your assets will be shielded from creditors and legal action. Creditors who attempt to reach into the trust will be blocked from accessing your assets, which are protected by state laws. Most states offer varying degrees of protection for the assets within the trust. However, there are certain restrictions to keep in mind. For example, the trustee must be a resident of your state, and it is important to avoid making any transfers before filing for bankruptcy. These fraudulent transfers are penalized and could even prevent a discharge from the bankruptcy process.
Settlement protection trusts are typically used for minors or incapacitated adults, especially those not receiving means-tested public benefits such as SSI, Medicaid, many Medicaid Waiver Programs, SNAP (food stamps), and LIHEAP (energy assistance). A preservation settlement trust allows your loved one to deposit their settlement proceeds in a trusted account without jeopardizing eligibility for such benefits.
Irrevocable Trusts
It can be challenging for people to give up ownership rights of assets accumulated over their lifetime. However, when you establish an irrevocable trust, you have done just that. Since the assets are no longer under your name, they cannot be claimed by creditors in a lawsuit.
In addition, federal and state estate taxes do not apply to the property within an irrevocable trust. However, you must file an income tax return for any income earned by the assets.
You can retain flexibility with an irrevocable trust by utilizing powers of appointment and trust protectors. While you cannot freely amend an irrevocable trust, a court can petition for changes, or the trustee can agree to do so on your behalf. For many individuals, the protections provided by irrevocable trusts are well worth the sacrifice regarding flexibility. This is especially true for those needing to access government benefits or want to minimize their tax liabilities.
