How Settlement Trusts Protect Clients from Selling Structured Settlements for Pennies on the Dollar

How Settlement Trusts Protect Clients from Selling Structured Settlements for Pennies on the Dollar

We’ve all seen the commercials. The ones with ear-worm jingles urging those with structured settlements not to wait for their money when they could have it all now! It sounds great to the injury victim, and occasionally it makes sense, but what often happens is the client ends up undoing much of the work their attorney did to provide for the client’s injury related long-term needs. A client with severe injuries might be facing decades of follow-up care or need to plan for their inability to work.

While getting funds “now” might sound like a fiscally-responsible thing to do when the client wants to take care of overdue vehicle repairs or purchase a home, there are a two reasons why this can be a bad idea. First, even in reasonable circumstances, the client is going to lose upwards of 15% right off the top, which could translate to tens of thousands of dollars over time. There are also some notable rip-offs resulting in court-approved structured settlement annuity sales that netted less than 30% of the funds.[1] Second, most Americans are not financially savvy[2] and unlikely to know how to responsibly manage a large lump sum. This is often why structured settlements are created in the first place. Most personal injury victim clients have future ongoing needs which are funded by the ongoing periodic payments from a structure.  When a client is forced to sell their structured settlement, their future care needs are put in jeopardy and may not be met.

So, what can personal injury attorneys do to make sure their clients continue to benefit from their hard-earned recovery? A great option is preventing the sale in the first place by having settlement funds flow into an irrevocable trust. An irrevocable trust means that the client (the beneficiary of the trust) has no power to liquidate the account. All disbursements are approved by a trustee who has the discretion to decline if the beneficiary’s request violates the terms of the trust, is illegal, or is an imprudent use of funds. Further, the payee is also irrevocable, meaning the client can’t just call up the life company and change the payee. Unless the trust is modified by a court, the client has only the power given to them by the trust document. Since an irrevocable trust cannot give the client the ability to revoke the  trust or change the structured settlement payee, the client would never be able to sell the annuity, at least not without consent of the trustee and a court order. This set-up protects the client from predatory factoring companies and from themselves. By incorporating a trust, it also provides liquidity and a way to get money out when an unforeseen need arises.  This is only so if the settlement monies are properly allocated between a structured settlement and the trust corpus.

Once established, the client is essentially locked into their structure, unable to turn their annuity into a discounted lump sum. That being said, the client isn’t completely out of luck in the event they do need more cash than they have on-hand or in the trust. If there are sufficient funds in the trust, the money can be distributed for appropriate needs.  Also, if the terms of a trust permit, a trustee can make a loan to the client. So long as a sufficient number of annuity payments remain to pay back the loan in full, and the client understands they are not going to have access to their annuity payments until the loan is repaid, the client can have the best of both worlds. Unlike selling a structure, the client won’t lose money they otherwise could have spent, and if the spend is unreasonable or risky, the trustee can simply say no. The trustee, in stark contrast to factoring companies, does not profit from this arrangement.

Whenever a client finds him- or herself with a significant amount of funds, there will always be those who wish to profit. Naming an irrevocable trust as the payee of their structured settlement can ensure that the client’s funds are protected and available to them for the long haul.

[1] https://www.washingtonpost.com/local/social-issues/the-flawed-system-that-allows-companies-to-make-millions-off-the-injured/2015/12/27/cce16434-9212-11e5-a2d6-f57908580b1f_story.html?noredirect=on&utm_term=.bae9aaf27617.

[2] https://www.forbes.com/sites/danipascarella/2018/04/03/4-stats-that-reveal-how-badly-america-is-failing-at-financial-literacy/#49e5a0932bb7.