When a Lawsuit Changes a Family’s Finances: How Trusts Can Protect a Major Settlement or Damage Award
Trusts are most often discussed as estate-planning tools, but they can also be valuable after a major lawsuit. A properly designed trust can provide professional management, establish reasonable limits on distributions, protect children and vulnerable beneficiaries, and help ensure that a settlement continues serving its intended purpose long after the lawsuit has ended.
A trust does not make the settlement larger. It does not automatically eliminate taxes or protect the money from every creditor. It also does not allow a family to take money away from a competent adult simply because the family disagrees with that person’s decisions.
What a trust can do is create a structure. It separates the right to benefit from the money from the responsibility of managing it. The trustee holds and administers the settlement proceeds under written rules, while the beneficiary receives the support, income, education, health care, or other benefits the trust was created to provide.
The following case studies are fictional, but each illustrates a problem that can arise when a lawsuit suddenly changes a family’s financial future.
Three Families Receiving Life-Changing Settlements
In the first case, Emily dies at age 46 following a preventable surgical complication. She leaves behind her husband, David, and two children. The medical-malpractice case produces a multimillion-dollar settlement.
During the litigation, David begins drinking heavily to cope with Emily’s death. He remains legally competent, but his judgment has deteriorated. He is making impulsive purchases, lending money to people he barely knows, and refusing treatment. His family fears that unrestricted access to several million dollars will worsen both his alcohol problem and his financial situation.
In the second case, Jason and Maria are killed in a wreck caused by an impaired driver. They were in their early thirties and leave behind children who are five and eight years old.
The wrongful-death recovery, life-insurance proceeds, and the parents’ other assets will provide the children with substantial financial resources. The children are far too young to manage the money, and the relative who will raise them has no experience investing or accounting for a multimillion-dollar fund.
In the third case, Harold is 77 years old when he is killed in a collision with a commercial truck. His will is not unusually complicated. It leaves the residue of his estate equally among his three children, with the descendants of any deceased child receiving that child’s share.
One of Harold’s children died before him and left six children. As a result, Harold’s two surviving children and six grandchildren may receive portions of any recovery passing through his estate. Some of those beneficiaries are financially secure. Others are young, receiving public benefits, dealing with creditors, or simply unprepared to manage a large distribution.
Each case produces a substantial recovery. The challenge is determining what should happen after the money is paid.
What Can Happen If No Trust Is Used
The simplest approach is to divide the settlement and issue checks to the people entitled to receive it. That may be appropriate for some beneficiaries. A financially experienced adult receiving a manageable amount may have no need for a continuing trust.
In other situations, an outright distribution creates risks that cannot easily be corrected later.
David could receive his entire share of the medical-malpractice settlement while he is grieving and struggling with alcohol. He might spend the money, give it away, finance his addiction, make poor investments, or become the target of people who see an opportunity to take advantage of him. By the time he seeks treatment, the money intended to support him and his children could be substantially depleted.
The minor children cannot manage their own recovery. Their money might instead be placed into a restricted account, conservatorship, guardianship estate, or other court-supervised arrangement. Depending on the governing law and the court’s order, they could eventually become entitled to direct control at a relatively young age. A person can be legally an adult and still be completely unprepared to manage several million dollars.
Harold’s beneficiaries present a different problem. One distribution method may not fit eight different people. An outright payment may be sensible for one beneficiary but harmful to another. A distribution could disrupt means-tested public benefits, become exposed to creditors, complicate an ongoing divorce, or be exhausted by an inexperienced beneficiary.
A trust can place enough distance between the beneficiary and the money to reduce those risks. That distance may consist of professional investment management, gradual access, direct payment of major expenses, or independent review before a large distribution is made.
The goal is not to place every settlement into a trust. The goal is to identify the actual risks and use a trust when its protection and administrative cost are justified.
Before Designing the Trust, Determine Who Owns the Recovery
In any lawsuit involving a death, the first question is not what type of trust should be created. The first question is who is legally entitled to each portion of the recovery.
A death case may include both wrongful-death and survival claims. Although the claims may be resolved through the same settlement, they do not necessarily belong to the same people.
A wrongful-death claim generally compensates the surviving family members or beneficiaries identified by state law. The decedent’s will may have little or no control over that portion of the recovery. A survival claim generally preserves a claim that belonged to the injured person before death. That portion may belong to the estate and ultimately pass under the will after the estate’s expenses, claims, and administration requirements have been addressed.
The exact rules vary considerably by state. North Carolina, for example, separately addresses claims that survive to the personal representative and wrongful-death proceeds that are distributed under statutory rules. South Carolina likewise distinguishes wrongful-death and survival claims and requires court approval of settlements involving those claims.
This distinction is particularly important in Harold’s trucking case. His will may control the survival recovery that becomes part of his estate, but it does not necessarily control the wrongful-death recovery. The settlement must first be divided into the correct legal categories. Only then can the attorneys determine who receives each share and whether that share can or should be placed into a trust.
Case Study One: Medical Malpractice, Grief, and Alcohol Abuse
David’s family has legitimate concerns. Those concerns do not, by themselves, give the family the legal authority to take away his settlement.
Alcohol abuse, even serious alcohol abuse, does not automatically make an adult legally incapacitated. If David remains competent, his share of the settlement belongs to him. His family, the litigation attorney, and the other settlement recipients cannot force him to place the money into a trust simply because they believe he will misuse it.
The result may be different if David’s substance abuse becomes so severe that he can no longer manage his financial affairs. In that situation, a court could be asked to appoint a conservator, guardian of the estate, or comparable fiduciary. The terminology and legal standard vary by state. The essential point is that a court proceeding and a finding of incapacity or need for protection would be required. Concern about bad judgment, standing alone, is not the same as a court determination that someone is incapable of managing his property.
The other option is voluntary planning. While David still has capacity, he can execute a durable financial power of attorney giving someone he trusts authority to manage the settlement proceeds. A power of attorney is commonly used to authorize an agent to manage the principal’s financial assets and may reduce the need for a later court-appointed fiduciary.
A power of attorney should not be confused with transferring ownership of the settlement. David would still own the money. While he remains competent, he would ordinarily retain the ability to act for himself, and the power of attorney alone would not necessarily prevent him from withdrawing or spending the funds.
A power of attorney may therefore provide assistance without creating meaningful restrictions. If David wants stronger protection, he would generally need to participate voluntarily in establishing and funding a properly drafted trust, or a court would need to appoint a fiduciary after finding that he requires legal protection.
A workable voluntary plan might give David a reasonable amount of immediately available money for debts, home repairs, and an emergency reserve. Another portion could provide dependable periodic income. The largest portion could be placed into a trust administered by an independent trustee.
The trustee could pay David’s mortgage, property taxes, insurance, medical expenses, treatment costs, and other major bills directly. David could receive a regular allowance for ordinary living expenses, with additional distributions available for legitimate needs.
The trust could authorize the trustee to reduce unrestricted cash distributions during a documented period of serious substance abuse while continuing to pay for housing, food, insurance, treatment, and other necessities. That decision should not depend solely on the trustee’s personal opinion. The document could allow the trustee to rely on information from physicians, licensed treatment providers, court records, or other objective sources.
The trust should also provide a path toward greater independence. If David completes treatment, maintains stability, and demonstrates responsible financial management, the trustee could increase his access to the funds. The purpose is to protect him during a crisis, not to assume that he will remain in crisis forever.
The trust might also provide that any property remaining at David’s death will continue for his children or be distributed to them at appropriate ages.
Because David’s own settlement proceeds would fund a trust for his benefit, the arrangement should not be described as guaranteed creditor protection. Its primary purpose would be management and preservation of the settlement.
Case Study Two: Preserving the Recovery for Minor Children
The children in the second case need a different kind of protection. Their settlement must help provide for them now while preserving enough money to support them through college, early adulthood, and possibly the rest of their lives.
The person raising the children may serve as their guardian, but that person does not necessarily need to control the settlement proceeds. Separating the guardian and trustee roles can create valuable accountability.
The guardian makes ordinary parenting decisions. The trustee manages the children’s financial assets, reviews significant requests, maintains records, and ensures that the settlement is not gradually absorbed into the guardian’s household finances.
A separate trust could be created for each child. The trustee could pay for counseling, medical care, tutoring, education, extracurricular activities, camps, transportation, college, vocational training, and other expenses that improve the child’s life. The trust could also contribute a fair portion of housing and household costs attributable to the child, provided those payments are reasonable and properly documented.
The trustee should have enough flexibility to recognize that the children may have different needs. One child may attend an expensive university. The other may pursue a trade or need extensive medical treatment. Treating the children fairly does not always require making identical distributions at identical times.
Depending on the governing law and the court’s order, the trust should not necessarily terminate the moment a child reaches 18. The child might receive partial access at later ages, such as 25, 30, and 35. Another option is to continue the trust for a longer period while allowing broad distributions for education, health care, housing, transportation, and other appropriate purposes.
Long-term protection should be paired with financial education. As each child matures, the trustee can include the child in meetings, explain investment reports, establish a budget, and discuss the consequences of major purchases. The objective is not to hide the settlement. It is to prepare the child to use it responsibly.
Special planning is required if either child has a disability and receives, or may later need, means-tested benefits such as Supplemental Security Income or Medicaid. Settlement proceeds paid directly to the child may become countable income or a countable resource. Federal guidance recognizes that a settlement paid directly into a qualifying special needs trust or pooled trust account may avoid being treated as an available resource, provided the arrangement satisfies the applicable requirements.
That planning should occur before the settlement is distributed. Once the money has been paid into an ordinary account in the child’s name, correcting the problem may require additional court proceedings and expense.
Case Study Three: Dividing a Recovery Among Several Beneficiaries
Harold’s case shows how a relatively straightforward will can still produce a complicated distribution.
His will leaves the residue of his estate equally among his three children, with a deceased child’s descendants taking that child’s share. Because one child died before Harold and left six children, Harold’s two surviving children would each receive one-third of the estate passing under the will. The six grandchildren would divide the remaining one-third.
The will is not unusually detailed, but it produces eight beneficiaries with different ages, needs, and financial circumstances.
The first step is to determine which part of the trucking settlement is wrongful-death recovery and which part belongs to Harold’s estate through a survival claim. The beneficiaries entitled to the wrongful-death recovery may not be identical to the beneficiaries receiving property under the will.
Once ownership has been established, the personal representative must follow the applicable law, the settlement order, and Harold’s will. If the will requires an outright distribution to an adult beneficiary, the personal representative generally cannot impose a new trust merely because the personal representative believes a trust would be better.
That does not make trust planning impossible. It means the correct method may differ among the beneficiaries.
A minor grandchild’s share may require a court-approved trust or another protective arrangement. A beneficiary receiving means-tested public benefits may need a properly drafted special needs trust. An adult beneficiary who wants professional management may voluntarily establish a receiving trust before the distribution. A beneficiary facing creditor, bankruptcy, or divorce concerns should obtain separate advice before receiving or redirecting the money.
Other beneficiaries may simply receive their shares outright. A financially experienced adult receiving a moderate distribution may not need a trustee, annual trust tax filings, or continuing administrative expenses.
The plan should match the protection to the risk. Creating eight separate trusts merely because there are eight beneficiaries could produce unnecessary cost and complexity. Failing to create an appropriate trust for the one beneficiary who genuinely needs it could be far more expensive.
Harold’s case also illustrates the value of advance estate planning. A will or revocable trust can authorize continuing trusts for children and grandchildren rather than requiring immediate distributions. If Harold’s estate plan had included that authority, it could have provided a ready-made structure for the survival recovery passing through his estate. It would not change the statutory ownership of the wrongful-death proceeds, but it could improve the management of the estate’s portion of the settlement.
The Trustee Does Not Have to Be an Attorney
A trustee is responsible for carrying out the trust agreement. That ordinarily includes taking control of the property, keeping it separate from personal assets, maintaining records, investing the money, paying appropriate expenses, communicating with beneficiaries, and making distributions under the standards stated in the trust.
The trustee does not have to be an attorney. A close family friend, pastor, retired business owner, accountant, banker, or other trusted adult may be able to serve.
The better question is not whether the person has a law degree. The better questions are whether the person has sound judgment, can remain impartial, will keep adequate records, can say no when necessary, and understands when professional assistance is needed.
A lay trustee does not have to personally prepare tax returns, draft legal documents, or select every investment. The trustee can retain attorneys, accountants, investment advisers, property managers, and other professionals. The trustee remains responsible for selecting and overseeing those professionals, but the trustee does not have to perform every task alone.
For a very large settlement, a professional or corporate trustee may be appropriate. A professional trustee may have stronger systems for custody, accounting, investment management, and reporting. The disadvantage is that an institutional trustee may not know the beneficiary personally and may apply its policies too rigidly.
In some cases, a trusted family friend or pastor may serve as the independent trustee and retain professional advisers as needed. In other cases, the individual and a professional fiduciary may share responsibilities. The professional provides financial infrastructure, while the trusted individual provides knowledge of the beneficiary and the family’s intentions.
The word “independent” can have a technical meaning in certain trust and tax provisions. A close family friend or pastor may be sufficiently independent to serve, but the drafting attorney should confirm that the person’s relationships, financial interests, and assigned powers are consistent with the purpose of the trust.
How a Trust Protector Can Provide Additional Oversight
A trust protector is different from the trustee. The trustee manages the trust’s day-to-day affairs. The trust protector is given specific oversight powers that can be used when circumstances change or when the trustee is no longer the right person for the job.
Depending on the trust agreement and governing law, the protector might be authorized to remove and replace a trustee, appoint a successor protector, resolve a deadlock between fiduciaries, approve an extraordinary distribution, change the trust’s place of administration, or approve limited changes needed to address developments in trust law.
The title varies. The person may be called a trust protector, trust adviser, trust director, or power holder. The common feature is that someone other than the trustee is given authority over a defined part of the trust’s administration.
A trust protector does not have to be an attorney. A longtime family friend, pastor, mentor, former business partner, or trusted adviser may be especially well suited for the position. That person may understand the beneficiary’s history and the family’s intentions better than a bank or professional trustee ever could.
For example, a corporate trustee may be excellent at investing the money and maintaining records but poor at communicating with the beneficiary. A family pastor serving as trust protector might be authorized to remove and replace that trustee if the relationship becomes unworkable.
A close friend of deceased parents might serve as protector of their children’s trusts. That friend could ensure that the trustee continues considering the parents’ values and the children’s individual circumstances without becoming responsible for every investment, payment, or tax filing.
The position should not be treated as an honorary title. A protector may have fiduciary responsibilities and potential liability, depending on the trust and governing law. The document should clearly define the protector’s authority and avoid giving the protector every imaginable power.
The strongest protector provisions identify the particular problems the protector is intended to solve and grant only the authority reasonably needed to solve them.
Trusts and Structured Settlements Can Work Together
A trust and a structured settlement serve different purposes.
A trust provides flexibility. The trustee can respond to changing medical needs, educational opportunities, housing expenses, and family circumstances. That flexibility also requires continuing judgment, recordkeeping, and administration.
A structured settlement provides predictability. It can establish monthly payments or larger payments at selected ages. Qualified structured-settlement payments generally must be fixed as to amount and timing and cannot be accelerated, deferred, increased, or decreased by the recipient.
That rigidity can be useful because the beneficiary cannot spend next decade’s payments this year. The disadvantage is that the payment schedule may not respond well to an unexpected need.
Many settlement plans use both. The structured settlement creates dependable future income. The trust holds a flexible pool of invested assets. A smaller amount may be paid directly for immediate expenses and an appropriate emergency reserve.
A Brief Note About Taxes
Placing settlement proceeds into a trust does not determine whether the settlement is taxable. The tax treatment depends primarily on the nature of the underlying claim and what the payment was intended to compensate.
Compensatory damages received on account of personal physical injury or physical sickness are generally excluded from federal gross income, subject to statutory limitations. Punitive damages are generally taxable. A trust does not change the basic tax character of the payment merely by receiving it.
The settlement documents and trust should be reviewed by the appropriate tax professionals before the proceeds are distributed, but tax planning should support the settlement plan rather than overwhelm it.
The Best Time to Plan Is Before the Money Is Distributed
Once a settlement check has been issued directly to a beneficiary, some planning opportunities may become more difficult or disappear.
The opportunity to establish structured payments may have passed. A disabled beneficiary may already have received a countable resource. A minor’s money may already be subject to a restrictive court order. An adult beneficiary may have exposed the proceeds to creditors, family pressure, or impulsive spending.
Planning should begin when a substantial recovery becomes reasonably likely, not after the money has been deposited.
A good settlement plan does not assume that every beneficiary is irresponsible. It recognizes that even responsible people can make poor decisions while grieving, recovering from an injury, struggling with addiction, or adjusting to sudden wealth. It also recognizes that children, people with disabilities, and financially vulnerable adults may need protections that an outright check cannot provide.
The trustee does not have to be a lawyer. The trust protector does not have to be a lawyer. In the right case, a trusted family friend, pastor, or adviser can provide the judgment and personal knowledge that a financial institution may lack. Professional attorneys, accountants, and financial advisers can then support that person in carrying out the trust.
A lawsuit can produce the money needed to support a family after an irreplaceable loss. A properly designed trust helps ensure that the recovery continues serving that purpose long after the lawsuit itself has ended.
These case studies are fictional and are provided for general educational purposes. Wrongful-death, survival, trust, guardianship, conservatorship, power-of-attorney, tax, creditor, public-benefit, and minor-settlement laws vary by state. Any settlement plan should be reviewed by attorneys and financial professionals familiar with the particular claims, beneficiaries, settlement documents, and governing law.
Plan Before the Settlement Is Paid
A major settlement should not be treated like an ordinary check. The decisions made before the money is distributed can determine whether the recovery provides lasting security or creates a new set of problems.
Brown Law Office, LLC helps families, litigation attorneys, and settlement recipients design trusts that reflect the beneficiary’s age, needs, judgment, family circumstances, and long-term goals. If a substantial settlement or damage award is expected, contact Brown Law Office, LLC before the release is signed and the proceeds are distributed.