A personal injury trust is a fund that holds and manages the proceeds of a compensation payout. The compensated person’s funds are not directly accessible, and a trusted trustee manages the fund.

A settlement preservation trust can prevent an influx of cash from disqualifying an individual from Medicaid and Supplemental Security Income (SSI). A few benefits that come with this type of arrangement include:

Tax Savings

When an injured plaintiff receives substantial money, protecting those funds from wasteful dissipation can be difficult. In this situation, a Settlement Preservation Trust can be established to help. This self-settled irrevocable trust allows the person who receives the award to be both the settlor and beneficiary. This trust can also protect a structured settlement annuity from creditor claims.

A special needs trust is a type of personal injury settlement trust that can be used to preserve eligibility for income-based government assistance programs such as Medicaid and Supplemental Security Income (SSI). This planning device is often utilized for individuals who have suffered debilitating injuries from medical malpractice. This type of trust can be revocable or irrevocable and is often combined with Medicare set-asides.

Tax Deductions

Some of the funds recovered in a personal injury settlement are taxable. By placing some or all of the funds into a trust and making adjustments, you can minimize the impact on taxes. This may include avoiding taxes on interest income, minimizing deductions for state and federal tax purposes, and avoiding penalties such as underpaying income tax. You can work with a trusted professional trustee to make these decisions.

For incapacitated individuals, a large increase in assets from a settlement could jeopardize their eligibility for public support programs such as Medicare or SSI. By establishing a special needs trust, you can segregate the funds and avoid the risk of losing these vital services.

Flexibility

A catastrophically injured plaintiff will likely experience a significant change in their financial situation. A Settlement Preservation Trust offers flexible, controlled liquidity that allows clients to adapt quickly to unforeseen circumstances.

Competent adults not receiving means-tested public benefits can have their personal injury settlements placed into a Settlement Protection Trust without Court approval. This strategy segregates their settlement money so it can be used for the benefit of the injured plaintiff and not squandered by creditors or coveted by family members.

This option is a practical alternative to a special needs trust where funds are distributed to multiple beneficiaries, often including a pooled SNT. This structure is managed by nonprofit corporations that call upon the skills of social workers, money managers, and special needs attorneys to provide families with a high level of service.

Tax-Free Income

Whether it comes as a lump sum or structured settlement payment, a personal injury settlement is considered income by the federal government. For people who rely on means-tested government assistance programs like Medicaid (including many Medicaid waiver programs), SSI, and Section 8 housing, an influx of assets can disqualify them from receiving these benefits.

One way to avoid this is to put the funds in a Special Needs Trust. However, this is only sometimes a desirable option because it restricts the monies to be used solely for the benefit of the injured party and cannot be passed to other family members. A Settlement Protection Trust solves this problem by allowing a professional trustee to distribute to third-party providers. These monies are not considered part of the settlement award and are tax-free.

Protection from Disqualification

Suppose the injured plaintiff receives a check for the entire settlement amount. In that case, they may be violating income and resource rules that can cause disqualification from certain means-tested government benefits like Medicaid and SSI. This is because these benefits require that you do not have any assets above a certain level.

A Personal Injury Settlement Trust will help you avoid this problem by allowing you to deposit your recovery into a special needs trust that is ignored for purposes of government considerations. A trustee, a trusted family member, or a professional will be responsible for dispersing the funds to you.