Planning For the Unexpected – Why You Need a Settlement Preservation Trust

A settlement preservation trust is ideal for an injured plaintiff who wants their settlement to last a long time. It allows the beneficiary to receive expert money management while protecting them from friends, significant others, and family who could exploit them.


Protection from Wasteful Disposition

The average personal injury settlement lasts only three to five years. Injured parties are often unsophisticated in money management and at risk of being taken advantage of by significant others, friends, or bad acquaintances. A settlement preservation trust offers a solution to these issues.

With a settlement protection trust, the injured party and trustee agree on a budget that will last their lifetime with adequate reserves to cover unexpected expenses. In addition, the trustee is legally required to keep detailed records of all disbursements.

A settlement protection trust can be revocable or irrevocable and may be combined with a special needs subtrust. It can also be structured to comply with Medicare Set Aside subtraction rules. In cases involving minors or incapacitated persons not receiving means-tested public benefits, the trustee can directly deposit structured settlement payments into the settlement protection trust. 


Financial Flexibility

Financial flexibility is the ability to arrange funds for unforeseen events in a cost-efficient manner. Businesses with flexible finances can seize opportunities that arise without suffering financial distress. According to academic research, companies with greater financial flexibility succeed more in a highly unpredictable market.

The key to financial flexibility is diversifying revenue streams, using lower-interest business lines of credit, and budgeting wisely. Achieving this designation takes time and strategy but can help your organization stay ahead of the competition.

For example, a client might be injured in an accident and receive a substantial settlement. Rather than depositing it in the Probate Court and potentially losing means-tested public benefits such as SSI and Medicaid, the funds could be placed in a Settlement Protection Trust. The trust could be revocable if the injured party has capacity or irrevocable, and it would be considered a grantor trust for income tax purposes.


Controlled Liquidity

Liquidity is the amount of liquid assets a company can convert into cash to pay for short-term expenses. Companies with inadequate liquidity risk being forced to sell long-term investments at a loss, which could leave them with less cash than they need.

Settlement preservation trusts offer financial flexibility and controlled liquidity. They are ideal for clients with uncertain, variable, and contingent future needs. Structured settlement payments are deposited directly into the trust, which protects them from factoring and exploitation by family members, friends, and bad acquaintances. The trustee is legally required to keep detailed records of all disbursements.


Tax Benefits

A settlement protection trust (SPT) offers many benefits compared to other settlement vehicles. It is often a good option for injured parties who want to safeguard their settlement funds from financial losses, such as being sold at a discount or becoming part of the estate tax.

Depending on the injured party’s needs, an SPT can be revocable or irrevocable and structured as a grantor or non-grantor trust for income tax purposes. In addition to offering spendthrift protection, SPTs provide liquidity control and various investment options.

An SPT is especially beneficial for catastrophically injured clients who require ongoing care and services and may lose eligibility for means-tested government benefits such as SSI and Medicaid due to strict income and asset limits. In some cases, combining an SPT with a special needs sub-trust is recommended to comply with Medicare Set Aside rules. A SNT can also be a practical option for clients with small estates that would otherwise require the cost of hiring professional trustees.