A settlement trust is a management tool that saves money received as a settlement. The trust increases the value of the assets within the beneficiaries. The money in the trust is usually related to a court settlement. The settlement trust is a way to guarantee that the beneficiary receives income long after the settlement has been disbursed to them.

The two main types of settlement trusts are a special needs trust and a settlement protection trust. A special needs settlement trust is one that parents set up for their children and for individuals who are disabled receiving Medicaid or SSI (Social Security Income).

Whether a child or an adult, the person does not technically own the assets in the fund. Instead, the money is in an account such as interest on lawyer trust accounts (IOLTA). Because the beneficiary does not own the account, the person can receive government benefits. The beneficiary typically receives disbursements from the trust if it has funding. In the case of an adult with a disability, the person gets funding until they are no longer disabled.

The benefit of setting up a special needs trust is that the beneficiary, and in the case of children, the parents choose the trustee. The trustee is the person who oversees the assets in the trust. Another benefit is the trustee acts in the best interests of the beneficiary. Finally, the person can use the funding to cover out-of-pocket healthcare costs (medical or dental, personal caregiver costs, rehabilitation services, education, home and vehicle repairs, and other bills).

The other type is the settlement protection trust. This type of trust is created when no children are involved in many cases. Like the special needs trust, a trustee manages the funds within the account. The funds are also in an interesting bearing account and, usually, are disbursed to beneficiaries through an IOLTA account. Furthermore, the person does not have to worry about being made ineligible to receive government benefits.

These trust funds make saving and growing income in the account convenient for the person, which is why some people opt for this type of account. The person can access the funds for any reason, whether it is to purchase a home or a car. Furthermore, the trustee helps the person manage and invest assets in the fund.

One of the main reasons a person might want to go with a settlement protection trust is that it protects the person against predation. With news of the settlement, unsavory friends, creditors, and relatives are prone to take advantage of the beneficiary. The trust acts as a wall protecting the person from being taken advantage of because the person must request funding from the trustee to access the funds.

The inability to directly access funding reduces the likelihood the person becomes vulnerable to any schemes. Finally, the trustee is a third party who can also be someone the beneficiary bounces ideas off related to investing advice so the money lasts far into the future.

While choosing the trustee is entirely up to the beneficiary, legal experts suggest sitting down with an attorney when making this decision. Not only will the attorney help the client with determining whether a family member or a third-party professional company is the best choice, but they also make sure the beneficiary understands the trustee's role in managing the account, for example, covering topics such as disadvantages and advantages of using a professional company over a family member.