Settlement Preservation Trust
A Settlement Preservation Trust, or SPT, is not a special needs trust. Instead, the purpose of an SPT is exactly as the name suggests; it is a trust intended to help preserve settlement proceeds against potential hazards. Different from SNTs, SPTs were not created by federal law and, because it does not offer the same SSI and Medicaid benefit protections, it does not need to follow the same rigid rules and guidelines. An SPT is entirely different trust and is used for very different purposes.
Protection from Spendthrift Habits and Exploitation
Preserving the settlement proceeds with an SPT protects the beneficiary's best interests by avoiding wasteful spending. Many recipients of legal settlements are not experienced in managing large sums of money. Often, these beneficiaries have been unable to work and generate an income because of their injuries, taking on debt and accumulating bills for basic living expenses. The settlement funds are quickly applied to the growing list of unpaid expenses. As those expenses are paid, the spending tends to continue beyond the beneficiary's immediate needs. One objective of the SPT is to avoid the potential for excessive, wasteful spending.
A similar protection offered when establishing a Settlement Preservation Trust is a defense against exploitation. Unfortunately, close friends and family can influence beneficiaries of legal settlements to spend their proceeds on items or services that may only benefit those individuals, not the beneficiary. Friends and family may try to provide guidance or financial advice that may not be sound. At worst, there are people who simply prey on the vulnerable and take advantage of other's generosity. With an SPT managed by a third-party trustee like DBF, these funds are not available or accessible to those with only their personal interests in mind.
Scheduled Payments and Access to Funds
Some recipients of legal settlements chose to structure their settlement through the purchase of an annuity that makes periodic cash payments over time. While a structured settlement may work for some, an SPT may be a valuable alternative for others. The SPT provides a means of making periodic payments directly to the trust beneficiary, while supporting the beneficiary's supplemental needs. Unlike a structured settlement, an SPT can make scheduled cash distributions directly to the beneficiary, while the trust also maintains liquid assets to help support the beneficiary's needs between scheduled distributions.
An SPT can also work in conjunction with a structured settlement. The trust can be funded with an initial deposit and the annuity payments from the structured settlement can be paid directly into the trust. This would allow for immediate liquidity and the use of funds in the SPT while the annuity payments add to the balance over time. The trust serves as an account to receive the periodic payments from the structured settlement and manages any scheduled distributions to the beneficiary, as well as other day-to-day needs.
Preparing for the Unknown
One of the many advantages of an SPT is its flexibility as a settlement planning tool. It is unreasonable to expect that any person can plan every future event or need for the remainder of their life. When major incidents occur, the SPT has the flexibility to manage these needs and overcome many unforeseen financial obstacles. If employment status, health issues, and any other difficult personal circumstances change, the trust can provide the financial flexibility to help manage or assist in these unpredictable challenges.
A common use for an SPT is for legal settlements involving minor claimants. Directing the settlement proceeds into a SPT allows the parents, or legal guardian, to develop a plan for how the funds will be used and to set benchmarks in the beneficiary's life which could trigger trust distributions. For example, the funds in an SPT for a minor child could be earmarked for summer camps, educational needs, specified recreational and sports programs. Additionally, the parents or guardian could schedule a distribution at age 16 for help with purchasing a car, at age 18 to assist with tuition costs for college or trade school, and/or periodic cash distributions at different stages of the beneficiary's early adulthood to ensure the trust funds last and to avoid a one-time distribution of a large sum of cash to beneficiary on their 18th birthday.
Key Points
- An SPT is not a special needs trust and does not protect a beneficiary's eligibility for SSI and Medicaid programs.
- An SPT protects its beneficiary from their potential spendthrift tendencies and those who may prey on the vulnerable or overly generous.
- An SPT is a method of providing period payment or cash distributions to beneficiaries.
- An SPT allows for access to funds for more immediate needs beyond periodic cash distributions.
- An SPT is flexible and can adapt to the circumstances of the beneficiary's life to help provide the necessary financial support.
A qualified trustee of a Settlement Preservation Trust will provide peace of mind to each beneficiary, their families, and the attorneys who represent them. They will take the time to understand the beneficiary's current needs and create a flexible plan for continued support for the future.
For more information or questions about establishing a Settlement Preservation Trust administered by The Directed Benefits Foundation, Inc., please contact our team to schedule a free consultation.
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