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The cents and sensibility of settlement trusts

It is rare that pay-outs to road accident victims sustain them throughout life. A settlement trust, or carefully selected investment vehicle, could change that reality.

Injuries sustained during a motor vehicle accident or because of medical malpractice often have life-altering consequences. Many rightfully seek financial restitution via the courts in an effort to sustain them and their families - whether due to loss of earnings or ongoing medical expenses.

However, it is rare that pay-outs sustain victims of medical malpractice and road accidents throughout their lives.

Once a settlement agreement is made via an order of the court, a lump sum must be paid to the claimant. When the claimant or beneficiary is deemed incapable of managing the funds appropriately or is unable to execute their duty of care of a minor, the court may mandate that the money be paid into a settlement trust.

"However, it is more common that lump sum settlements are paid directly to claimants. In these cases, it can be difficult for them to adequately manage such a large lump sum amount and ensure the money fulfils its intended purposes, be it ongoing medical care or to replace the loss of income," says Walter van der Merwe, CEO at Fedgroup Life.

It's also not uncommon for the relatives and acquaintances of a claimant to ask for financial assistance. "The threat that settlement money is squandered, and the claimant is left with nothing, is relatively high," he adds.

As such, even when a court does not order the establishment of a settlement trust, it is often a prudent option for attorneys to suggest that their clients voluntarily invest most of the funds received for the long-term management and protection of the money.

"After using a portion of the funds to pay off any debt, suitable options include:

1. A fixed-period investment that secures capital and allows claimants to draw an income over the investment term, or2. A settlement trust, even if the establishment of the trust is not mandated by an order of the court."

According to Van der Merwe, settlement trusts are an effective financial instrument that will ensure the funds meet their intended mandate. "Once in a settlement trust, funds are diligently administered by professionals on behalf of a claimant in a manner that ensures fund protection and that the intended benefit of the pay-out is fully derived."

He adds that there can often be lengthy delays between the issuance of a court order and the actual court-mandated pay-out. "Claimants or their beneficiaries often wait for months before they receive any financial support or benefit. However, there are now settlement trusts available that ensure funds are made available to meet the basic everyday needs of the claimant soon after the court order is issued, even before the lump sum payment is made or the settlement trust registered."

As such, Van der Merwe believes that attorneys who consider and recommend settlement trusts outside of court-mandated options will greatly benefit their clients in the long run. "These highly effective financial instruments offer financial protection and ongoing support to claimants while significantly reducing the administrative burden placed on attorneys when dealing with these delicate matters," he concludes.