Several aspects must be considered when setting up a settlement protection trust. These include the funding source, taxation of long-term capital gains, and using a private trust company to act as the trustee. Understanding these three components of trust will help you make the best decision for your situation.
Funding for a Settlement Protection Trust
Settlement protection trusts, also known as settlement preservation trusts, are very important in personal injury lawsuits. They allow the injured party to protect the assets they receive in a lawsuit while allowing their family to maintain control over their finances. In addition, these trusts are important in estate planning, particularly when federal and state estate taxes are involved.
These trusts are designed to provide for the beneficiary’s education, health, and maintenance. They can also provide for the beneficiary’s housing, vehicles, case manager, and other needs. They are generally used by plaintiffs who are not eligible for means-tested public benefits. Using a Settlement Protection Trust can provide several benefits that would not be possible to obtain from a straight payout.
Funding for a settlement protection trust is a straightforward process. It involves depositing money into a trust and transferring control to the beneficiary. The funds can come from a variety of sources, including annuity structures. Depending on the claimant’s circumstances, distributions may be tax-free or taxable. In addition, since the trust is designed with the injured party, it carries lower ongoing fees than a typical trust company.
Funding a settlement protection trust is important because most large personal injury settlements are only good for three to five years. In addition, most personal injury victims do not know money management and are pressured by family members. With a Settlement Protection Trust, the injured party can protect their assets and avoid potential creditors and divorce proceedings. Aside from preventing the squandering of settlement funds, a Settlement Protection Trust will ensure that their assets are used wisely. It will also arrange for an expert money manager to oversee their funds.
Taxation of Long-Term Capital Gains
A trust is a great way to protect your estate from tax. Your beneficiary will pay taxes on the money received from the trust, not the principal balance. This eliminates double taxation.
Some considerations should be considered when setting up a trust. First, know that capital gains are taxed differently than ordinary income. The Trust rates vary by state. As a result, a trust can claim preferential capital gains rates, offset losses, and carry excess losses.
Second, a trust can deduct reasonable fees for accounting and trustee management. In most cases, the fees are deductible based on a percentage of taxable income. For example, a trust can deduct half of its accounting and management fees if it has a taxable income of $10,000. Another benefit of using a trust to protect assets is that it can deduct any cash donations to charity. However, the trust cannot deduct more than its taxable income.
The amount of income you can deduct will vary depending on the type of irrevocable trust you use. For example, an irrevocable trust may not pay taxes on the initial distribution of funds. However, if the beneficiary later sells an asset, they may have to pay capital gains taxes. Generally, capital gains taxes are calculated based on the asset’s value at the time of distribution.
Using a Private Trust Company as a Trustee
If you want to use a private trust company as the trustee of a settlement protection trust, you have a few choices. Firstly, you can’t just use any private trust company; you must ensure that the private trust company is reputable. This way, you’ll have the peace of mind that the company isn’t going to take advantage of you by undervaluing the trust assets. Moreover, you can petition the court if the private trust company fails to meet its duties.
The trustee must act in the best interests of the beneficiaries. Therefore, they must appoint managers and directors to oversee the trust’s affairs. Sometimes, the court may appoint a special fiduciary to handle trust transactions.
In addition, you can also choose to have a disinterested person act as the trustee. A disinterested person is someone who is not related to the trustee. The disinterested person can also exclude the settlor and other interested trustees. Furthermore, the governing instrument must require that an annual distribution of unitrust amount equals a fixed percentage of net fair market value.
Another benefit to using a private trust company as the trustee is that they don’t have a conflict of interest. While a trustee can have an interest in a transaction, they can also have a conflict of interest if the transaction involves the opportunity itself.