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January 13, 2022
Structured settlement annuities have long been recommended to aid those with catastrophic personal injuries in planning for their future. Using IRC Section 130 0F[i] periodic payments from a structured settlement annuity to fund Medicare Set-Asides and life care plans is common, but it isn’t the only type of settlement that can benefit from a tax-free investment vehicle. Using a structured settlement for a minor’s settlement is also a perfect type of case to settle with an annuity.
It is a parent’s worst nightmare to have their minor child injured in an accident. But what happens when a minor is injured and settles a personal injury claim? In 2019, more than 180,000 children were treated and released for injuries sustained in motor vehicle crashes, over 89,000 children were treated and released for nonfatal dog bites, and over 18,000 children were treated and released for pedestrian injuries.1F[ii] Damage are still present and can be significant. While many of these settlements may not be categorized as catastrophic, there still needs to be consideration related to how to best protect the minor’s recovery.
In most states, statute dictates what can be done with a minor’s proceeds from a personal injury settlement. In certain states, net proceeds under a certain dollar limit may be given to the parent or natural guardian of the minor child. For settlements over that limit, the proceeds must be preserved for the benefit of the minor in a way that isn’t managed by a parent or guardian. Some options include restricted guardianship accounts, conservatorship accounts, preservation trusts, or special needs trusts. Another option that is widely used for a minor’s settlement proceeds is a structured settlement annuity. Parents should, with the aid of their attorney, seek guidance on how to protect the minor’s settlement and maximize the recovery.
A structured settlement annuity is an arrangement that provides tax-free periodic payments in the future. The parents or guardian typically make decisions about the plan for the future payments, although in certain jurisdictions a judge may order a specific payment schedule. Using a structured settlement annuity can alleviate concern about the balance of proceeds being issued to the minor as soon as they reach the age of majority, like in a guardianship. For parents, guardians, or counsel that are concerned about a minor receiving a lump sum of money, a well devised structured settlement payment plan can be the solution. The payment plan is specific to each minor and can be tailored for their future needs. Options may include annual or semi-annual payments for college, monthly payments for support during their 20’s, or lump sum distributions starting at age 18. The decisions regarding the payment plan are critical as once the structured settlement annuity is established and the contract issued, the payments cannot be changed, deferred, accelerated, increased, or decreased.
Working with an experienced settlement planner, such as those at Synergy Settlements, is key. The purpose of the settlement plan is to consider the future needs of the minor and devise a payment schedule to meet those needs. For most minors, the goal is to defer payments until the age of majority. Deferring payments for younger children (under age 10) to the age of 18 will result in cumulative payments that exceed the original net. For older minors (over age 14), a structured settlement annuity can still be beneficial but may require a longer deferral of payments to realize positive gain. In any event, the goal is to preserve the proceeds for the minor and devise a payment plan that will benefit them after the age of majority.
In some states, if a minor has immediate needs, a structured settlement annuity can provide guaranteed payments to a guardianship, guardian or parent to support the minor. Depending on the size of the settlement, a structured settlement annuity may only be part of the settlement plan for the minor. For example, a structured settlement annuities may be combined with other settlement options when having access to funds to support the minor while they are young is necessary. Another example would be if a minor is entitled to needs based benefits, or the potential exists that they may be entitled in the future, a structured settlement annuity combined with a special needs trust may be considered as part of the overall plan. A settlement management trust, which provides assistance with managing the settlement proceeds through a fiduciary, can also be combined with a structured settlement annuity. A structured settlement annuity can also be combined with a guardianship or conservatorship account. The combination allows for some funds to be available from the guardianship or conservatorship account to support the minor before age of majority and provide guaranteed payments from the structured settlement annuity directly to the minor after the age of majority. All of these combinations can create the flexibility and protection needed for most any minor’s settlement.
For options that include a combination of a trust, guardianship account, or conservatorship account, structured settlement annuity payments are made to the trust or dedicated account for the minor child. Funds are then available and can be disbursed to the parent or guardian to pay for immediate needs. When combined with a trust, whether a settlement management or a special needs trust, the settlement proceeds are divided between the trust and the structured settlement annuity. The initial deposit of cash in the trust is available to take care of immediate needs of the minor child and the structured settlement annuity payments are arranged to replenish the trust according to a prescribed payment schedule. The trust becomes the payee of the structured settlement annuity for the benefit of the minor and depending on the circumstances may also be the beneficiary to handle distributions after death.
For any minor’s settlement, a structured settlement annuity should be a consideration. For most minors’ settlements, the structured settlement annuity can allow preservation of the settlement proceeds for the minor until they reach the age of majority. For catastrophically injured minors, a structured settlement annuity can allow for parents or guardians to adequately plan for care of the minor child. A structured settlement professional, such as those at Synergy Settlements, can help by creating a unique and comprehensive settlement plan. Our settlement consulting team assists injury victims and their attorneys in creating innovative settlement plans for those that are injured. No settlement is ever too small for a structure so before a decision is made that a settlement for a minor isn’t worth bothering with a structured settlement, talk to us. We can help with options no matter the size of the settlement.
For more information on structuring a settlement, contact us now.
[i] 26 U.S. Code § 130
[ii] Centers for Disease Control and Prevention (CDC). Web-based Injury Statistics Query and Reporting System [online]. Atlanta, GA: U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, 2020. Available at http://www.cdc.gov/injury/wisqars
January 10, 2022
When any physical injury victim recovers money either by settlement or by verdict, the question of the tax treatment of said recovery arises. As long as it is compensation for personal physical injuries it is tax-free under Section 104(a)(2) of the Internal Revenue Code.1 Section 104(a)(2) of the Internal Revenue Code states that “gross income does not include . . . the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness.”2 Section 104(a)(2) gives the personal injury victim two different financial options for their recovery, lump sum or periodic payments.3 For more information, read this excerpt from my book ‘The Art of Settlement‘.
December 6, 2021
In HMS Holdings LLC v Ted A Greve & Associates P.A. et al, 2021 WL 5163308, an ERISA self-funded health plan was denied a temporary restraining order (TRO) on settlement funds., The court found that the health plan did not present sufficient evidence to satisfy all necessary requirements to issue a TRO, including that the TRO was required to prevent irreparable harm. This was mostly due to the fact that the health plan delayed in bringing the action and that nine-month delay in bringing suit supported the conclusion that irreparable harm will not be suffered in lieu of a temporary restraining order.
The injured party was in an automobile accident and the ERISA health plan paid over $100,000 in medical benefits. The settlement was limited to $100,000. The injured party notified the health plan of their pursuit of a claim against the tortfeasor and asked the plan to prove its self-funded status as otherwise the plan would not have a right to a recovery under North Carolina law.
The ERISA plan filed the ERISA action asking for the TRO and preliminary injunction to restrain the injured party from “wasting, disbursing, spending, converting or comingling” the settlement funds. The ERISA plan expressed concern that if the injured party dissipated settlement funds on non-traceable items, then the health plan would be deprived on its right of recovery. The ERISA plan cited the US Supreme Court’s Montanile case as its support. Montanile v. Bd. of Trustees of Nat’l Elevator Indus. Health Benefit Plan, 136 S.Ct. 651 (2016).
The court noted that when evaluating a request for a TRO, the plaintiff must demonstrate that: (1) it is likely to succeed on the merits; (2) it will likely suffer irreparable harm absent an injunction; (3) the balance of hardships weighs in its favor; and (4) the injunction is in the public interest. The ERISA plan argued that it would suffer irreparable harm because under Montanile, it can only obtain equitable relief against identifiable proceeds. The ERISA plan argued that if the court did not issue an order preventing the firm / injured party from transferring or comingling funds then their pursuit of a recovery would be out of the reach of an ERISA action.
The court stated that irreparable harm was not apparent because the ERISA plan’s injury could be remedied in the ordinary course of litigation. This was especially the case because the health plan had pled multiple alternative causes of action in its Complaint that did not rely on ERISA and those theories of liability did not appear to be limited to equitable relief.
The court also stated that the ERISA plan’s delay in bringing a lawsuit and/or the TRO may indicate the absence of irreparable harm. Although the ERISA plan claimed that it was doing what the Supreme Court required them to do, they were not immediately suing to enforce its lien as the Court required. The court noted that more than 9 months had passed from when the injured party notified the ERISA plan of the settlement. A long delay in pursuing their claim indicated that speedy action, in the form of a TRO, was not required to protect the health plan’s rights.
Interestingly, the court said that it is hesitant to issue a decision that could be interpreted to require such parties to delay distribution of personal injury lawsuit proceeds for months on end to preserve the viability of potential subrogation/reimbursement claims under ERISA, thereby appearing to have sympathy for the injured party and a delayed disbursement of settlement proceeds. Shortly thereafter, the court expressed sympathy for the health plan because if there is a wrongful double recovery to the injured person then it would be a miscarriage of justice. The court acknowledged that the health plan is in a difficult position with ERISA requiring the request of equitable relief by filing suit immediately or risking loss of the ERISA claim. In the end, the ERISA plan did not obtain the TRO and will be forced to decide whether it pursues its claim in another manner.
The primary goal of a plaintiff’s attorney in a personal injury or workers’ compensation action is to achieve the greatest possible financial recovery given the facts and circumstances of the case. Once there is an agreement on the amount to settle the case for the injury victim or workers’ compensation claimant, there is a one-time opportunity for the plaintiff to invest a portion of the recovery in a structured settlement annuity. The decision to purchase a structured settlement with a portion or all of a victim’s settlement must be made before receipt of the proceeds.
What is a Structured Settlement and Why is it Used?
A structured settlement is an investment vehicle where the settlement proceeds are paid as a periodic stream of payments instead of a lump sum payment or in addition to a lump sum.
Since their inception in 1982, structured settlement annuities have been considered one of the safest financial options at settlement for personal injury and workers’ compensation victims. Prior to the creation of structured settlements, plaintiffs could only receive their settlements in the form of a one-time lump sum cash payment. As a result of limited financial expertise and the fact that many plaintiffs receive more funds from a settlement than they have ever had in their lifetime, there is a significant risk of quick dissipation of settlement funds. In fact, there is anecdotal evidence that ninety percent of claimants quickly dissipate lump sums received for personal injuries within five years of receipt of the lump sum. A structured settlement provides financial management for settlement funds and can be designed in various ways to meet a plaintiff’s needs. Depending on the type of structured settlement plan selected, it can ensure that the settlement proceeds will last for the rest of an injury victim’s life.
A structured settlement has many advantages over taking an entire settlement as a lump sum, as discussed in more detail below:
- A structured settlement offers valuable tax incentives: Although personal injury and workers’ compensation settlement proceeds are tax-free, any interest earned on traditional investments is fully taxable. To promote the use of structured settlements, Congress amended the federal tax code to make 100% of every structured settlement payment received on account of personal physical injury or sickness exempt from income taxes.
- A structured settlement helps provide financial security: Traditional investments typically do not offer a guaranteed return. A structured settlement, on the other hand, creates a fixed stream of guaranteed income with a guaranteed rate of return, which allows a personal injury victim the ability to recover without spending time and resources determining investment strategies. Additionally, a structured settlement can help protect funds from creditors, relatives, friends and others seeking money when they learn of a large settlement.
- A structured settlement is flexible in design: A personal injury or workers’ compensation victim can design a structured settlement to provide a monthly check to help pay for basic needs such as food, clothing, transportation and/or housing. Alternatively, it can be used to provide for the future cost of college, retirement funds and/or a down-payment on a home.
- A structured settlement is backed by the highest-rated insurance companies: A structured settlement is contractually guaranteed by a highly rated, well-capitalized life insurance company.
Cases in Which a Structured Settlement Should Be Considered:
Structured settlements are ideally suited for many types of cases including: 1) cases that involve minors or persons found to be incompetent; 2) people with temporary or permanent disabilities; 3) severe injuries necessitating extensive future medical care and income replacement; 4) wrongful death cases where the surviving spouse and/or children need monthly or annual income, or assistance with education expenses; and 5) workers’ compensation cases.
20-Year-Old Female: Anna Parker (name changed for privacy and confidentiality)
Ms. Parker was significantly injured in an automobile accident. Although she was not completely disabled, her injuries significantly diminished her future employment capacity. Ms. Parker’s case settled for policy limits, and after the payment of attorneys’ fees and costs, she was going to net $350,000.00. Ms. Parker elected to take $40,000.00 of her net settlement proceeds in a lump sum at the time of settlement to buy a used car and rent a new apartment. She also elected to invest $310,000.00 in a structured settlement, which would provide her with guaranteed monthly payments of $1,169.27 for thirty years to help her with monthly bills as her earnings capacity was diminished. The contractually guaranteed payments under the plan selected totaled $420,937.20. Accordingly, her structured settlement was guaranteed to earn $110,937.00 of tax-free interest on her investment.
9-Year-Old Female: Lisa McDonald (name changed for privacy and confidentiality)
Lisa McDonald sustained a severe arm fracture as a result of medical negligence as a young child. Her case settled when she was 9 years old for $750,000.00. After attorney’s fees and costs, she was going to net $400,000.00. Because she was a minor at the time of settlement, and not disabled, her parents had two choices for her settlement funds under Maryland law. One option was to place her funds in a statutory “Title 13 Trust.” With this option, her funds would be in a restricted bank account, earning little to no interest until she reached the age of 18. The funds would not be available for use without Court Order prior to the age of 18, and upon age 18, Lisa would be able to withdraw all of her money at any time. The other option was a structured settlement, which could start paying her at or after the age of 18 on a schedule selected by her parents and was guaranteed to earn significant interest. After speaking with her parents, we designed a structured settlement so that Lisa would receive semi-annual payments of $20,000.00 for four years starting in the summer following her 18th birthday, with the intention that those payments would assist with college tuition. Her parents also elected for her to get a guaranteed lump sum of $45,000.00 on her 23rd birthday, $30,000.00 on her 25th birthday and $322,918.47 on her 27th birthday. The contractually guaranteed payments under the plan selected totaled $557,918.00. Accordingly, her structured settlement was guaranteed to earn $157,918 of tax-free interest on her investment.
If you or a family member are anticipating a settlement for personal injury or sickness, speak with your attorney about getting a structured settlement consultant involved to discuss options for your settlement proceeds, and to ensure that a plan is putting in place prior to signing settlement documents and receiving funds. Alternately, reach out to a settlement planner, such as myself, directly, to learn whether a structured settlement might be right for you or your family.
In Episode 22 of Trial Lawyer View, TLV host and Synergy CEO Jason D. Lazarus speaks with Tony Romanucci of Romanucci & Blandin, LLC. They discussed how his Italian immigrant parents instilled in him his passionate work ethic and how his first job with the Cook County Public Defender’s Office shaped his career fighting for social justice in police misconduct cases. They also talk about how the death of Michael Brown led to the creation of AAJ’s Police Misconduct Litigation group, Romancucci’s involvement in the George Floyd case and how he hopes it will change the world.
Learn more here.
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