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.