Understanding the Basics of a Settlement Protection Trust

Understanding the Basics of a Settlement Protection Trust

Managing settlement proceeds often involves complex financial issues. Having someone to help you navigate your financial plan and protect your assets is essential to your overall settlement plan.

An asset protection trust can be one of the most vital tools in your settlement planning toolbox. Assets like cash, stocks and bonds, real estate and personal possessions can be transferred to a trust to help you avoid creditors and lawsuits.

What is a Settlement Protection Trust?

Settlement Protection Trust, or SPT, is a complex financial tool that can be beneficial in certain situations. It is best established with the assistance of a qualified estate planning professional.

An SPT is an irrevocable grantor trust that can protect a beneficiary’s settlement proceeds from wasteful dissipation and provide flexibility in one’s financial future. Periodic distributions can’t be encumbered or sold to a factoring company, and allocations can be adjusted for unemployment or other financial reversals.

A settlement protection Ttust is beneficial in cases involving minors or incapacitated persons not receiving means-tested public benefits such as Supplemental Security Income (SSI) or Medicaid. In these instances, the monies can be deposited into the Settlement Protection Trust rather than the Probate Court or Orphans’ Court. The funds can continue to be held for the person’s benefit for the rest of their life, and distributions can be made from income and principal without Court approval.

Who is a Beneficiary of a Settlement Protection Trust?

When clients receive a settlement from a personal injury lawsuit, they can either accept the money directly or place it in a settlement protection trust. The money in the trust can be used to meet cash needs now and in the future.

In most cases, the settlement protection trust is set up for a responsible adult who will manage the trust assets and distribute them according to a budget that meets their needs now and in the future. The trust is also set up so that distributions from the trust will last for the beneficiary’s lifetime.

All settlement trustees are fiduciaries obligated to act in the best interest of their trust beneficiaries. This means that they must be honest, fully disclose their and others’ interests to the trust beneficiaries, and not get a personal benefit at the expense of the trust beneficiaries.

What Are the Benefits of a Settlement Protection Trust?

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Frequently, an injured party receives a large personal injury settlement in a lump sum and needs to manage it properly. This can result in the money being squandered or used in ways that do not benefit the injured party.

A settlement protection trust can prevent the assets from being squandered, protect them from claims of creditors and divorce and ensure that the funds last for the beneficiary’s life. Typically, the Court will set up a budget and distributions are made following that budget.

This is especially helpful when an injured party needs to gain the expertise to manage their funds. In these cases, a professional trustee can manage the funds and navigate the system to help support the injured party. This can include assisting in the purchase of a home or automobile, care management and the like. Trustees are also often involved in tax preparation.

How Can a Settlement Protection Trust Help Me?

A settlement protection trust can help you secure and preserve the money you receive from a personal injury settlement or inheritance. It can also protect your assets from creditors, Medicaid, or lawsuits.

Generally, a settlement protection trust can be established to last for the beneficiary’s lifetime, and distributions can be made per a Court-approved budget or upon Court approval on an “as needed” basis.

This type of trust can be an excellent option for people who receive significant cash as part of their settlement and do not currently receive means-tested public benefits such as Supplement Security Income (SSI) or Medicaid.

A settlement protection trust can also be set up to protect the value of your assets if you require long-term care and are applying for Medicaid. A Medicaid Asset Protection Trust can be beneficial because it can reduce the amount of your estate counted as part of your total estate value, which could negatively impact your eligibility for Medicaid.