5 Key Benefits of Establishing a Settlement Protection Trust

A settlement protection trust (SPT) can provide investment efficiencies and creditor protections while protecting the injured party’s eligibility for income-based government benefits. It can also help prevent the sale of payments to structured settlement discounters and limit personal discretion, providing spendthrift protection.

Asset Protection

A Settlement Protection Trust (SPT) is an irrevocable trust that shields assets from creditors and court rulings. It’s a great option for those who want to keep their assets when they settle.

SPTs can help to insulate settlement funds from future long-term care costs, lawsuits, and creditors. They can also help preserve eligibility for income-based government benefits such as SSI, Medicaid, and many Medicaid waiver programs.

While revocable living trusts can protect estate assets from creditor claims, SPTs offer additional protection by protecting the settlement fund from future creditor actions. 

Tax Savings

A Settlement Protection Trust (SPT) allows your client to agree with the trustee on a budget that will last their lifetime. Distributions are made according to this budget, ensuring reserves are maintained for emergencies. This helps prevent the funds from expanding too quickly and avoids taxes.

Your injured client may experience a major change in their financial position after settling their personal injury claim or lawsuit. A SPT provides flexibility to manage these changes and can be combined with structured settlement enhancement and annuities.

A SPT can be revocable or irrevocable and can have either income tax or non-tax treatment. In addition to the spendthrift feature, an SPT gives your injured clients a limited power of appointment for their benefit so they can dispose of their assets as they see fit.

Flexibility

A preservation trust is ideal for clients who need the financial flexibility of a structured settlement but want to ensure that their settlement funds last through many years and do not jeopardize eligibility for income-based government benefits like SSI and Medicaid. The preservation trust is also more affordable to manage than a special needs trust, allowing more freedom and flexibility to invest the assets.

A personal injury client can experience unexpected future financial issues that can cause rapid dissipation of their settlement funds. A domestic asset protection trust (DAPT) can prevent this by requiring the trustee to approve all income and principal distributions.

Periodic payments can be adjusted to account for unemployment or other financial reversals, and the trust can even include springing powers that convert the DAPT into a special needs trust and Medicare set-aside subtrust to preserve SSI and Medicaid eligibility.

Care Management

A settlement protection trust is an excellent vehicle to insulate a client’s funds from long-term care costs, lawsuits, and creditors. Trustees can make payments to care providers and arrange expert money management services.

These trusts allow clients to agree on a budget with trustees and receive distributions from those funds according to that budget while ensuring reserves are maintained for emergencies. An SPT can fund a Medicare Set-Aside account (MSA) if needed.

While an SPT cannot shelter assets from existing government liens like a Special Needs Trust or Pooled Trust (PT), proper planning can eliminate the client’s pay-back obligations. Your Ringler settlement consultant can assist with these arrangements.

Eligibility for Government Benefits

A settlement protection trust manages personal injury settlement funds with a financial institution and may be used with a structured settlement annuity. It does not shelter settlement monies from valid existing government liens and is most appropriate for an adult who does not receive means-tested benefits.

On the other hand, a first-party special needs trust (SNT) is an appropriate tool for clients who rely on means-tested government benefits like Supplemental Security Income and Medicaid. These programs have strict income and resource-limited eligibility requirements that can be violated if assets are received directly from a settlement or litigation-based recovery.

Image Source: Freepik