SETTLEMENT PROTECTION TRUSTS

by Thomas D. Begley, Jr., Esquire, CELA

What is a Settlement Protection Trust?

A Settlement Protection Trust (SPT) 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.  SPTs 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, an SPT is ideal.  If there is a minor, the monies can be deposited into the SPT 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.

In the case of an incapacitated person, the trust can last for the duration of the lifetime of that person.  In cases involving a minor or incapacitated person, the personal injury settlement must be approved by the court and the trust is usually approved as a part of the approval of the settlement.  In most states, the court does not retain jurisdiction over distributions.

 

Competent Adult Not Receiving Means-Tested Public Benefits

When a competent adult is not receiving public benefits, distributions may be made from income and principal without court approval.  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 SPT is a Special Needs Trust (SNT).  The SNT is required to maintain the means-tested public benefits; however, the requirements for a SNT are rigid.  For example:

 

• Sole Benefit Of. Monies from the SNT can only be used for the sole benefit of the injured party.
• In a special needs trust, on the death of the beneficiary or the termination of the SNT during the beneficiary’s lifetime, Medicaid must be repaid for all assistance paid on behalf of the injured party from birth.
• Distributions to Third Party Providers. Under an SNT, distributions must be made directly to the third party who provides the goods or services.  Monies cannot be paid directly to the injured party.  By utilizing an SPT, monies can be paid directly to the injured party, who then has the flexibility to pay all or part of his or her own bills.

 

Advantages of Settlement Protection Trusts

There are a number of advantages to establishing an SPT instead of having the injured party receive the money outright.

 

Asset Protection/Squandering

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.  An SPT will ensure that the monies are used wisely and will hopefully last for the lifetime of the injured party.

 

Medical Insurance

Thanks to Obamacare, individuals with preexisting conditions are now able to obtain private medical insurance from private companies at market rates.  In many instances, it is possible for an SPT to hire a family member, such as a parent, spouse or domestic partner, as a caregiver and pay the caregiver from the trust.  The trust has an arrangement whereby the caregiver and the caregiver’s family (including the injured plaintiff) can enroll in a large group health plan.  The trust could also hire outside caregivers.

 

Money Management

The SPT can arrange for expert money management.

 

Structured Settlement

If a Structured Settlement is involved, the SPT can be designed so that the payments from the structured settlement go into the trust.  The trust can prevent the beneficiary from selling the Structure at a large discount.

 

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.

 

Care Management

Care management can be arranged.

 

Flexibility of Distributions

Under an SPT, 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.  An SPT can be designed to benefit not only the injured party, but also family members such as spouses and children.  The beneficiary can also be given annual withdrawal rights. The withdrawal rights might be limited to a certain percentage of trust assets.

 

Who Should Serve as Trustee?

A professional trustee should always be considered for an SPT.  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.

 

Drafting Provisions

Trust Protector

When there is a professional trustee, a trust protector should be appointed and given the authority to remove and replace a trustee with another professional trustee.

 

Limited Power of Appointment

A beneficiary with capacity should be given a limited power of appointment. In cases involving a minor, the drafting attorney should contact the beneficiary on his or her 18th birthday and suggest that the beneficiary execute a will exercising the power of appointment.

 

Settlement Protection Trust/Special Needs Trust/Medicare Set-Aside Arrangement

There are situations where an SPT should include special needs provisions. For example, if a minor under age 18 is not receiving SSI and Medicaid because the parents’ income and assets are being deemed to the minor, consideration should be given to using an SPT but including a Special Needs Subtrust with authority for the trustee to transfer funds from the Settlement Protection Subtrust to the Special Needs Subtrust in the future.  Also, there are situations where a Medicare Set-Aside Arrangement (MSA) is needed. The MSA must be wrapped into the Special Needs Subtrust.