A trust is a legal entity concerning the ownership, use and distribution of property. To create a trust, the owner of property (grantor) transfers property (trust corpus) to another person or company (trustee) who is responsible for maintaining and protecting the property on behalf of one or more persons (beneficiary). A trust generally requires a formal document (trust agreement) which states the trust purposes as well as the terms and conditions for administering the trust and for the beneficiary to receive and use trust property.
Trusts may be either revocable or irrevocable by the grantor. Trusts may be created either during the grantor’s lifetime (intervivos) or by will following the grantor’s death (testamentary). Trusts separate ownership of assets into legal ownership (control by trustee) and equitable ownership (use by beneficiary). Trusts have many purposes including: wealth accumulation, spendthrift protection, avoidance of probate, and reduction of taxes.
Trusts which are used in connection with personal injury settlements are referred to as settlement trusts. Settlement trusts are generally irrevocable intervivos grantor trusts with spendthrift features. Similar to structured settlement annuities, the purposes of settlement trusts include: preventing the claimant/beneficiary from squandering settlement proceeds; insuring that those settlement proceeds are used for their intended purposes; and providing funds in amounts and at times when needed.
Several types of settlement trusts exist including:
1. Qualified Government Bond Trust – IRC Section 130 permits a qualified assignee to purchase either annuities or US government obligations to fund structured settlement payments. When government bonds are purchased, the qualified assignee is usually a trust or a custodial account.
2. Reversionary Grantor Trust – With a reversionary grantor trust, a defendant transfers assets into a trust which makes distributions for the benefit of the personal injury claimant based upon conditions in the trust agreement. Upon the claimant’s death, the remaining trust corpus reverts to the defendant.
3. Settlement Preservation Trust – Settlement preservation trusts provide claimants with spendthrift protected taxable or tax-free payments as well as liquidity and flexibility. They are especially useful when the timing or amount of a claimant’s future needs are unpredictable or event contingent.
4. Special Needs Trust – A special needs trust is used to preserve a claimant’s SSI and/or Medicaid eligibility. For additional information, see “Special Needs Trusts”.
5. Medicare Set-aside Trust – A Medicare Set-aside trust is used in certain categories of workers compensation and personal injury settlements to set aside money for future medical expenses which would otherwise be covered by Medicare. For additional information see “Medicare Set-aside Arrangements”.
6. 468B Trusts – 468B trusts are used by defendants to obtain immediate tax deductions in class-action lawsuits and by plaintiffs to control structured settlement funding decisions. For additional information see “468B Settlement Funds”.
7. Special Purpose Trusts – Special purpose trusts are used to set aside moneys to pay for specific anticipated expenses such as a child’s future college education.
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