There are many ways to shield assets before a claim, from the very complex to the simple. A personal injury settlement trust is an option for those who have been awarded a large sum of money but are concerned that they may not be sophisticated enough to manage it or have family members who may try to take advantage of them.
How They Work
A personal injury settlement trust is a legal entity that can hold money and property. Solicitors normally establish it from payments received from an accident or injury. A trustee is appointed to look after the funds and ensure they are not squandered or used in ways that jeopardize eligibility for means-tested public benefits.
It is best to set up a PI trust as soon as possible, preferably before receiving any compensation. If it is not set up within 52 weeks of receiving the first payment, it will be considered part of the person’s account and would, therefore, impact any assessment of means-tested benefits.
There are several types of personal injury trust, and the choice will depend on the individual’s requirements. Bare trusts are the simplest and only have one beneficiary. Discretionary trusts are more complex and have multiple beneficiaries.
Benefits
Many strategies claim to protect assets from lawsuits. Some of these are legitimate and cost-effective, while others are not.
Asset protection is important for many reasons. Lawsuits and creditor judgments can decimate personal assets, such as the home, car, money in checking and savings accounts, and more. They can also siphon funds for legal fees and cause stress, loss of income and reputation.
Effective asset protection strategies include:
Domestic asset protection trusts (DAPTs). These can be an extremely effective means of shielding personal assets from creditors.
A DAPT can be drafted to protect your compensation award from future creditors. It can even ensure that you do not lose access to means-tested benefits. This option, however, requires you to give up direct control and ownership of your awarded funds. For this reason, it may not be appropriate for everyone. There are other options to consider that can provide more security, such as an Irrevocable Trust for yourself or family members.
Taxes
Generally, funds received through structured settlement annuity payments are not subject to income tax. However, investment income generated by the trust portfolio may be taxed at the state level. This is why working with an experienced attorney specializing in structured settlements is important.
The lawyer will help the injured person design a payment stream to meet short- and long-term needs. For example, the plaintiff might need a wheelchair-accessible van or a home renovation that will increase accessibility. In addition, they might require money to pay for carers, specialist equipment and treatment, or holidays.
If the injury victim will need means-tested public benefits in the future, it is recommended that a special needs personal injury trust (SNT) be established. This type of trust is typically designed with two sub-trusts so that if the injury victim needs public benefits in the future, the trustee can move assets from the settlement protection subtotal to the special needs subtotal without needing court approval.
Distributions
Depending on the nature of the injury, an injured party may require public support services. To avoid an influx of cash disqualifying an individual from receiving federal support (SSI, Medicaid, many Medicaid Waiver Programs, and SNAP/Food Stamps), consideration should be given to establishing a Settlement Protection Trust with special needs provisions.
This type of trust will allow for expert money management. It can prevent the funds from being squandered by beneficiaries who lack sophistication or are subject to pressure from spouses, significant others, family members, and friends. It is often best to grant a beneficiary with capacity a limited power of appointment over the assets in the trust.
