Settlement planning is the practice of law that helps individuals secure and preserve benefits they rightfully receive from a legal settlement, inheritance or judgment. It can cover many issues, from money management enhancements to protection from foolish spending.
A Settlement Preservation Trust (SPT) is an irrevocable trust. It can hold structured settlement annuities and meet Medicare Set Aside subtraction requirements.
Tax-Free Distributions
Unless they have significant tax liabilities, most injured parties are best served by placing their settlements in a Qualified Settlement Fund (QSF). A QSF is a trust that allows funds to be distributed without being subject to federal income taxes.
This is important because it allows the funds to be distributed more quickly than if they were in a revocable trust. It also helps prevent the client from selling a structured settlement at deep discounts to satisfy an emergency.
If the injured party is expected to need means-tested public benefits, consideration should be given to establishing a Settlement Protection Trust with special needs provisions. This arrangement involves one trust document with two sub-trusts: a settlement protection subtrust and a special needs subtract. Monies can be moved from the settlement protection subtrust to the special needs subtrust when needed. This flexibility helps ensure that the funds do not disqualify the person from receiving government assistance such as SSI, Medicaid and many Medicaid Waiver Programs.
Tax-Free Annuities
An income annuity can be structured to provide a mix of both taxable interest and tax-free principal, depending on the actuarial life expectancy used to calculate your payments. However, you live longer than your actuarial life expectancy. In that case, the portion of your expenses that come from your principal is fully taxable, as is any withdrawal of your original investment.
A Settlement Protection Trust can be set up so that periodic distributions from a Structured Settlement are directly deposited into the trust, an irrevocable grantor trust for income tax purposes. This allows the injured party to have significant liquidity and financial flexibility while protecting the assets from wasteful disposition or the risk of friends, significant others or family members taking advantage.
This type of trust is ideal for a minor or incapacitated plaintiff who does not receive means-tested public benefits like SSI, SNAP (food stamps), LIHEAP (energy assistance) and many Medicaid waiver programs. It can also be designed to comply with legal requirements for a Medicare Set Aside subtraction, and it can be revocable or irrevocable as the injured person chooses.
Tax-Free Investments
Investing in tax-free investments like municipal bonds can offer income tax savings. These investments often have lower return rates than taxable accounts but are an excellent option to consider if an individual is in a high tax bracket.
A preservation trust, revocable or irrevocable, is another way to maximize tax efficiency by providing spendthrift protection and liquidity control. It allows structured settlement payments to be deposited directly into the trust, which can prevent them from being sold at a discount by a discounter or other market participants.
It also helps protect against friends, significant others or family members taking advantage of the injured party. It can help with care management arrangements, navigating government benefits, buying a new home or car and more. In addition, it can be used in conjunction with a Structured Settlement to comply with Medicare Set Aside rules and reduce the risk of loss of public benefits eligibility.
Tax-Free Income
Many injured parties can benefit from having their settlement funds in a preservation trust. This can help keep their money available longer, shielding them from the bad behavior of friends, family members or acquaintances.
A settlement protection trust can be revocable or irrevocable, depending on the injured party’s needs. It can also be designed with sub-trusts, including a Medicare Set Aside (MSA) subtrust compliant with legal requirements to avoid losing means-tested public benefits such as Medicaid or SSI.
The trustee can collect bills from third-party providers and submit them to the injured party’s financial professional, who will issue the beneficiary a check for the bill amount. This helps the beneficiary manage their expenses and allows them to spend or save as they choose. The trust can be a domestic asset protection trust or an irrevocable special needs trust and can also include state income tax savings for beneficiaries in no-income-tax states.