Personal injury is an area of law designed to protect individuals and families who are injured by the negligence, recklessness, or intentional act of another. Imagine you are driving home from work, and you are stuck in stop-and-go traffic. You brake behind the car in front of you, but the driver behind you wasn’t paying attention. His car slams into the back of yours, causing your head to whip back and forth. You immediately begin to feel neck pain.
In this straightforward scenario, it is clear that you deserve compensation from the driver that hit you for any damages to your car, medical expenses incurred in treating your whiplash, and other expenses associated with the accident. Often, a settlement for your damages will be reached with the negligent driver’s insurance company. However, there are personal injuries that are much more complex and serious than that scenario described here. Accidents and intentional acts can cause severe injury, permanent disability, and death, and in these cases, a personal injury attorney is focused on getting the victim and his or her family the compensation it deserves. However, when the personal injury claim is settled, or a judgment is awarded at trial, what happens to the money?
In some cases, the amounts are distributed directly to the injured party in a lump sum. In other cases, distributions may be more complex. That’s where an estate planning attorney can step in to help. Here are three reasons to consider using a trust in a personal injury settlement:
1. If the Injured Party is a Minor
Under the law, children do not reach legal competency until the age of 18. For this reason, they are not able to receive judgment proceeds or a settlement amount outright. This means, if a child is injured and receives compensation as a result of a personal injury claim, the funds distributed to benefit the child will have to be managed by a third party on the child’s behalf one of the following ways:
Custodial Account
When a minor is injured in an accident, personal injury attorneys will often recommend putting settlement funds into a custodial account for the minor child. They recommend this method because they view it as the easiest and cheapest option (there are no legal fees or court costs to pay), although that may not necessarily be the case. In Georgia, the Uniform Transfers to Minors Act (UTMA) establishes special bank accounts that can hold settlement or judgment funds for the benefit of the injured minor. While the minor is underage, the bank account is titled in the name of a custodian, often a parent, guardian, or trust. When the child reaches the statutory age limit (in Georgia, the age is 21), the account fully vests in the child’s name. This is the biggest challenge with this option: the child will end up receiving a windfall at the age of 21, which can have significant tax impacts, open that amount to vulnerability from any creditors, and give the young adult access to a large amount of cash at a young age.
Conservatorship
Conservatorship is when the court appoints a conservator with the power to invest, administer, and distribute the minor’s funds for the minor’s benefit. A conservator can be an individual or a corporate trustee. Because the court oversees conservatorships, there is more statutory protection for the minor’s settlement assets and additional responsibilities for the conservator. Because conservatorship requires ongoing court appearances, legal fees will accrue. Like a custodial account, conservatorship terminates at the child’s age of majority. In the State of Georgia, that is the age of 18. Again, this means that that young adult would have immediate access to the full amount of the settlement or judgment.
Trust
A trust, on the other hand, is a mechanism that is not often recommended by personal injury attorneys. The reason for this is because establishing a trust does come at a cost in the beginning. However, the legal fees associated with setting up a trust are generally comparable to the cost of implementing a conservatorship in court. In the long run, the use of a trust offers the greatest flexibility and protection for the child’s interests.
Unlike custodial accounts (which transfer in total to the young adult at the age of 21) and conservatorships (which terminate when the beneficiary turns 18), trusts offer more control. Distributions to the beneficiary can be staggered and released at different times throughout the beneficiary’s life. Additional distributions can be made for expenses such as education, housing, and medical costs. Depending on how a trust is structured, full and final distributions can be delayed and released to the beneficiary at a time in their life when they are better equipped to handle a large influx of cash. By staggering distributions in an irrevocable trust, this limits the impact on a young adult’s tax burden, and it continues to shelter the funds from any creditors.
2. If the Injured Party is Considered Legally Incompetent
In general, the majority of adults with disabilities are considered legally competent to manage their own financial affairs. However, if a personal injury victim was either mentally incapacitated prior to the accident or becomes so as a result of the accident, a court will likely decide that a conservator or trustee must oversee the distribution of settlement or judgment amounts. Unlike for children, there are no UTMA available for incapacitated adults.
In a process very similar to the minor child conservatorship described above, however, a court can become involved in appointing a conservator to oversee an incapacitated adult’s legal and financial matters. This court-appointed individual is subject to court oversight, and because the beneficiary will not necessarily reach an age or point in time when capacity is restored, this arrangement could become a very long-term obligation.
Another concern that is specific to incapacitated adults is the matter of public support. If an adult with disabilities is receiving federal support, there are likely income limits on how much money that individual can have if he or she is to continue receiving public benefits. In order to avoid an influx of cash that would disqualify or delay the individual’s public benefits, it is possible to create a Special Needs Trust. These trusts, if structured properly, allow the beneficiary to continue receiving public benefits while also receiving the support and care required to sustain their standard of living from their personal injury settlement. To learn more about Special Needs Trusts, check out our blog post on the topic. Unlike conservatorship, a trust can be structured to provide support throughout the beneficiary’s lifetime without ongoing oversight or reporting requirements.
3. If There are Minor Children Descendants in a Wrongful Death Suit
In the State of Georgia, there are two kinds of wrongful death claims that arise when a death is caused by negligent, reckless, intentional, or criminal actions by another person or entity. These claims include a “Wrongful Death Claim,” which is typically brought by the surviving spouse, and a “Estate Claim,” which can be brought by the administrator of the decedent’s estate.
Wrongful Death Claim
By Georgia statute, a surviving spouse (or, if there is no surviving spouse, the decedent’s children) can bring a wrongful death claim against the negligent or reckless party for the “full value of the life of the decedent.” To determine the full value of a life, the law points to two measures: 1) the intangible value (reaching milestones, spending time with friends and family, etc.) and 2) the tangible value (measured by the decedent’s economic potential, how much he or she could have earned over a lifetime plus the value of what he or she contributed in the home). Typically, wrongful death claims are settled out of court. However, if they do go to trial, it is up to a jury to determine the “full value of the life of the decedent,” and they can decide in favor of a judgment against the responsible party.
Estate Claim
An estate claim is brought by the decedent’s estate, for the purpose of recovering the losses of the family. Unlike the wrongful death claim, an estate claim seeks recovery of losses for 1) the pain and suffering of the decedent before he or she passed, 2) any medical bills incurred before death, 3) funeral expenses, and 4) any other financial losses caused by the negligent, reckless, or intentional act. In cases of extreme recklessness, a court may even award punitive damages to deter others from committing the same actions as the defendant.
Compensation Distribution
In general, compensation will be distributed to the appropriate surviving family members outright. However, this again can be a significant windfall for beneficiaries. If the survivors or dependents of the decedent are minors or adults who are found legally incompetent, the funds cannot be simply distributed to them. As in the above examples, the best way to ensure that the beneficiaries are cared for over time and are able to fully benefit from a wrongful death settlement or judgment is to create a trust tailored to their specific needs.
Ask for a Referral from Your Personal Injury Attorney
If one of the above situations applies to you and your loved ones, it is time to think about structuring your settlement distributions in a way that preserves those assets for the future. Ask your personal injury attorney for a referral or contact Brian M. Douglas & Associates to learn more about working with an estate planning attorney to create a trust. Give our office a call at (770) 933-9009 and mention the phrase “Personal Injury Settlement Trust.”
