SETTLEMENT PROTECTION TRUST WITH SPECIAL NEEDS PROVISIONS: WHAT IS IT AND WHEN SHOULD I USE IT?
by: Begley Law Group
by Thomas D. Begley, Jr., Esquire, CELA
What is a Settlement Protection Trust?
Trusts are often useful devices in the settlement of a personal injury case. A settlement protection trust is a support trust designed to provide for the health, education, maintenance, and support of the beneficiary. Support includes buying a home, a vehicle, and arranging for a case manager as appropriate. 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), LIHEAP (energy assistance) and federally-assisted housing.
When to Use a Settlement Protection Trust?
Minor or Incapacitated Person – Plaintiff Not Receiving Means-Tested Public Benefits
In these situations, a settlement protection trust is ideal. If there is a minor, the monies can be deposited into the settlement protection trust rather than a guardianship account or restricted account with the Court. In large settlements, the beneficiary may be given the right to withdraw money in stages, such as at ages 30, 35, and 40 with or without court approval. These provisions can be customized by the parents of the beneficiary.
In the case of an incapacitated person, the trust can last for the duration of the lifetime of that person. Again, the money is deposited into the trust, rather than the guardianship account or restricted account with the Court, and the beneficiary enjoys the advantages of the trust discussed below.
In cases involving a minor or incapacitated person, the establishment of the settlement protection trust must be approved by the Court.
Competent Adult Not Receiving Means-Tested Public Benefits
When a competent adult is not receiving public benefits, distributions may be made for the benefit of the competent individual. The trust serves to protect the settlement from being squandered by the injured plaintiff or being coveted by family members and friends.
Large Settlement – Client Receiving Means-Tested Public Benefits
In many large settlements, the client may be receiving SSI and Medicaid. In some cases, the Medicaid benefit may be modest and, therefore, unnecessary. In other cases, the Medicaid benefit may be significant, but can be replaced by private insurance or a combination of Medicare and private insurance. In these cases, it is often beneficial to consider giving up the public benefits in exchange for greater flexibility and avoid the “sole benefit of” rule, the payback requirement, and the restriction that distributions must be made directly to third parties. The alternative to the settlement protection trust is a special needs trust. The special needs trust is required to maintain the means-tested public benefits; however, the requirements for a special needs trust are rigid.
Advantages of Settlement Protection Trusts
There are a number of advantages to establishing a settlement protection trust instead of having the injured party receive the money outright.
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 ensure that the monies are used wisely and will hopefully last for the lifetime of the injured party.
Many plaintiffs in personal injury cases are the victims of catastrophic injuries, which make it impossible for them to obtain private medical insurance on the individual market. However, under the Affordable Care Act, an individual with preexisting conditions can still obtain private medical insurance. The trust can pay the premiums.
The settlement protection trust can arrange for expert money management. Most individuals do not have expertise in managing money, and certain financial advisors may put themselves ahead of their clients.
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. Often parties involved in the settlement believe that if a significant portion of the settlement is structured, the plaintiff will be protected from squandering the money. However, the injured party is able to sell 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.
Usually the injured party can arrange for the trustee to either prepare or supervise the preparation of tax returns for the injured party.
Under a settlement protection trust, distributions can be very flexible. In some instances, a budget is prepared, and the trustee simply writes the beneficiary a check every month to pay all of 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.
Who Should Serve as Trustee?
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.
Settlement Protection Trusts/Special Needs Trust/Medicare Set-Aside Arrangement
Settlement Protection Trust/Special Needs Trust
In many cases, an individual may not need public benefits or may not even be eligible for public benefits at the time the trust is established. However, the nature of the injury or the amount of the trust may indicate that public benefits could be required in the future. In most cases, consideration should be given to establishing a settlement protection trust with special needs provisions. Under this arrangement, one trust document is established with two subtrusts. Initially, the settlement protection trust is funded with all of the flexibility outlined above. If, in the future, the injured party requires public benefits, the trustee can transfer the trust assets from the settlement protection subtrust to the special needs subtrust. At that point, the injured party is willing to accept the restrictions required by a special needs trust because of the importance of the public benefits. That decision can be deferred until some future time.
At such time as the special needs subtrust is funded, the Trust must become irrevocable.
Medicare Set-Aside Subtrust
If there is any possibility that the assets in the settlement protection subtrust will be transferred to a special needs trust in the future, and if there is a requirement for a Medicare Set-Aside arrangement (MSA), the MSA must be wrapped into the special needs trust. In those situations, the settlement protection trust should be designed with three subtrusts: one for the settlement protection trust, one for the special needs trust, and a third subtrust for the MSA.