February 6, 2023

A Settlement Preservation Trust: What Is It? How Does It Work?

Settlement Preservation Trust

A Settlement Preservation Trust protects your settlement from being squandered. Upon receiving a settlement, you should discuss restrictions limiting how you distribute your money.

A trust can protect your money from being squandered because you may not be as sophisticated as you would like to manage money.

For example, your significant other may influence your decision-making, or friends and family may take advantage of you.

Protection of SSI and Medicaid benefits

Settlement Preservation Trust can protect SSI and Medicaid benefits for a disabled person. This trust protects government benefits for individuals with limited assets and helps them maintain access to the programs.

The beneficiaries are not legally required to contribute to the trust, but it may be used to supplement public programs such as Medicaid.

A Settlement Preservation Trust may be revocable or irrevocable, depending on the circumstances of the injured person.

If the injured party cannot make decisions regarding the distribution of the funds, the irrevocability option may be used to protect the trust assets.

The income from the trust is not reported to the IRS, as it would be if there were no trust. Instead, the individual beneficiaries report the trust’s income on their tax returns.

In addition to paying for necessities, the trust can be used to pay for special needs services. For instance, the trust can pay for medical care, dental care, eyeglasses, and entertainment. The money can even be used to pay for a caregiver.

Transfer of Assets to a Special Needs Trust

A special needs trust can supplement government benefits for a disabled beneficiary. This type of trust owns and manages property for the beneficiary’s benefit and does not disqualify the beneficiary from receiving need-based government benefits.

The trustee must manage the trust assets following the beneficiary’s needs. Transferring assets to a special needs trust are often done after a person passes away.

The assets transfer may be through a living trust, a will, or beneficiary designations. However, the person should be aware that restrictions and rules are involved.

For example, a person may want to transfer assets to a special needs trust only if they plan to use the money for the beneficiary’s needs.

Transferring assets to a special needs trust has several advantages. First, a person should set up a first-party trust rather than a third-party trust.

Moreover, a first-party trust allows the beneficiary to retain control of their assets as a resource. This means the beneficiary will not have to worry about Medicaid or SSI if the property is in a trust.

Mandatory Distribution

If you are awarded a personal injury settlement, it is crucial to consider estate planning. It’s especially important if you have to deal with federal estate taxes. Setting up a trust and leaving it alone is not enough. Proper planning is vital.

In most cases, you will need the Court’s permission before any distributions can be made. However, in certain cases, a competent adult who is not eligible for public benefits may be able to receive a distribution without the Court’s permission.

Also, the distribution can be made from the principal or income of the trust. You can also consider a professional trustee who will help you navigate the process.

This person will have expertise in taxation and investment management. Unlike a family member, a professional trustee is not required to post a bond in most states.

Another alternative is a structured settlement annuity. Structured settlement annuities are tax-free and the most common choice for preserving minor settlements. They are also one of the cheapest options available.

Customization by Parents of the Beneficiary

If a child is a beneficiary of a large settlement, the parents can customize certain trust provisions. For example, they can withdraw money at ages 30, 35, and 40.

The parents can also include a clause allowing the beneficiary to withdraw money at a later time if needed. This will help protect the child from exploitation.

Settlement Preservation Trusts are a great way to protect a beneficiary’s interests in the settlement proceeds. There are many reasons a trust can help preserve the settlement funds, and one is to avoid the wasteful disposition of those assets.

One such example is if the beneficiary is disabled. This trust can protect assets that would otherwise be spent on health care.

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