SETTLEMENT CONSULTING

November 17, 2020

What do you do when you settle a case like this where your client is on public assistance, there are allocation issues, settlement planning issues must be addressed, and there are liens to negotiate? Where can you “park” the money while you set up any necessary public benefit preservation trusts, determine allocation of the proceeds, figure out a financial plan, and negotiate the liens? How can you get the money from the defendant immediately without ruining the client’s available settlement planning options?

For more information, read this excerpt from Synergy’s CEO, Jason D. Lazarus‘ book ‘The Art of Settlement.’

November 10, 2020

Mrs. Smith was moved to the ICU and no neurologic monitoring was performed that evening after being moved from the surgical suite. The next morning, Mrs. Smith was found to be quadriparetic. A suit was brought against multiple defendants with a significant seven-figure recovery secured. Mrs. Smith and her family had Medicaid coverage and SSI. She had also applied for Social Security Disability Income (SSDI). At the time of settlement, there was no Medicare eligibility, since she had not been approved for SSDI and she wasn’t sixty-five.

In the confusing landscape of public benefits and planning issues that arise today for trial lawyers when settling catastrophic injury cases, finding your way can be a daunting task. In the paragraphs that follow, I’ll use Mrs. Smith’s real-world example to identify six key considerations to look out for when you’re settling a case for a catastrophically injured client.

For more information, read this excerpt from Synergy’s CEO, Jason D. Lazarus‘ book ‘The Art of Settlement.’

Suffering even a moderate personal physical injury can create difficult challenges both financially and emotionally for even the strongest among us. However, what happens when someone suffers a serious or catastrophic personal physical injury? Do they get the proper counsel regarding the form of the settlement to protect their current assets, preserve public benefits, and safeguard the physical injury recovery? Will the recovery be enough to pay for all the victim’s future medical needs without public assistance? Can they recover physically? Can they recover emotionally?

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July 7, 2020

By Jason D. Lazarus, J.D., LL.M., MSCC, CSSC

In a recent Washington Post article, an egregious story of embezzlement was detailed involving personal injury settlements for children whose parents had died due to medical malpractice.  The settlements stemmed from cases against the federal government who in turn had hired the Pension Company, a structured settlement firm, to purchase annuities for the settlements.  These annuities, called structured settlements, were set up to make future periodic payments to the minor children for their damages.  The problem was that it was a fraudulent scheme by the Chief Executive of the Pension Company to take the money and convert it to his own use instead of purchasing structured settlement annuities for the minor children.  To further complicate things, Pension Company, was one of the country’s largest structured settlement firms and was a trusted provider for the government until this story was uncovered.  This is a sad situation that could have easily been prevented had there been a plaintiff-based settlement planner engaged to protect the plaintiff’s interests.  It is often overlooked, but the importance of making sure the plaintiff has adequate protections when it comes to a structured settlement transaction is highlighted by this case.  Before discussing how a plaintiff based-settlement planner can help, first it is important to understand the basics about structured settlements.

Understanding Structured Settlements

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]  The second option, receiving “periodic payments,” is known as a structured settlement[4].   A structured settlement’s investment gains are never taxed.[5] Using a structured settlement offers spendthrift protection[6] and the money has enhanced protection against creditor claims as well as judgments.[7]

Structured settlements utilizing life insurance annuities as their funding mechanism have been around for four decades.  Over half a million injury victims receive benefits from structured settlement annuities.  Each year, life insurance companies that provide structured settlements receive more than $6 billion to fund new structured settlement arrangements and an estimated $156 billion has been paid in total to fund structured settlements in force since the seventies.[8]  Since 1976, in excess of 880,000 cases were settled using a structured settlement for all or part of the settlement with an average annuity premium of just over $177,000.00.[9]

Structured settlements are utilized in the settlement of tort claims because of the advantages they offer like income tax-free payments,[10] fixed low-risk competitive returns, guaranteed lifetime income, no-cost financial management, spendthrift protection, creditor protection and avoidance of guardianship requirements in certain cases.  Structured settlements offer the unsophisticated investor the ability to make a one-time, simple investment decision that will provide competitive returns with no market risk and no taxation.[11]  Similarly, sophisticated investors can use the annuity as a funding mechanism for other investments using a dollar cost averaging approach.[12]  For the injury victim, a low-risk, fixed and income tax-free vehicle that can provide guaranteed income is very attractive and appropriate.  In addition, a structured settlement can be a tool to pass wealth on to the next generation avoiding income tax on any of the income generated.[13]

Legal Protections of Structured Settlements

There are a variety of legal protections offered by structured settlements.  A particularly important set of legal protections will be explored in the following paragraphs.  First, annuities in general have significant protections against loss due to insolvency of the life insurance company (the only way to lose money with a fixed annuity).  There are several layers of protection against insolvency or in case of insolvency.  The first layer of protection is that annuity providers are overseen by state insurance commissions.  The second layer of protection is that state law imposes reserve and surplus requirements on life insurance companies.  The third layer of protection is that every state has a state guaranty association which guarantees annuities.  The final layer of protection is careful selection of the highest quality annuity providers to provide structured settlements.

Oftentimes the protection that structured settlement annuities are afforded under the law in terms of judgments and creditor claims is overlooked when analyzing whether to implement one; however, this feature is very important for injury victims who need to protect their recovery.  Injury victims only get one opportunity to recover compensation for their injuries.  If someone who recovers compensation for their injuries is subsequently involved in an accident where they injure someone else or someone is injured on their property, bank accounts and most investments are exposed to claims.  In addition, if an injury victim gets into debt and has creditors making claims, their assets could be exposed to these claims.

However, many states have either common law or statutes that protect annuities from legal process.  For example, in Florida there is a statute[14] that completely exempts annuities from creditors and judgments.  This statute gives injury victims an option to completely protect their settlement proceeds from judgments or creditor claims by entering into a structured settlement annuity as part of their settlement.  That statute has been interpreted by Florida courts[15] to defeat judgment creditor claims against structured settlement annuities.

In addition, structured settlements offer enhanced protection under the law in case of divorce or bankruptcy.  Structured settlements are not owned by the injury victim.  Instead, the injury victim is the payee and the life insurance company’s assignment company owns the annuity.  When a structured settlement is created as part of a settlement, an assignment occurs.  The assignment is done to transfer ownership of the annuity from the purchaser (the defendant) to the life company assignment corporation.  The assignment corporation takes on the obligation to make the future periodic payments and purchases an annuity from the annuity issuer.  Because of this legal arrangement, structured settlement annuities are not an asset owned by an injury victim.  Consequently, it is not an asset that can generally be divided in the case of divorce.[16]  The income that it produces can be considered in determining alimony, but the asset itself usually is not divided.[17]  Similarly, a structured settlement annuity is not an asset generally reachable in cases of bankruptcy.[18]

Gargan & Woodyard Embezzlement:  Don’t throw the baby out with the bathwater

As detailed above, there are many great reasons to enter into structured settlements.  They are a powerful planning tool for injury victims.  Obviously care and thought should be given to how to construct a structured settlement plan for an injury victim.  Diversification and creating overlapping income streams with different companies may be advisable depending on the circumstances.  Careful analysis regarding the financial strength of the life insurance companies proposed for an injury victim is also of paramount importance.  Developing a sound settlement plan based upon the client’s future financial needs is also critical.  All of this needs to be done by someone independent of the defendant.  This brings me back to the Loudon man, Joseph Gargan.  Mr. Gargan was retained by the defendant, the government, as a “defense structure broker” to put together structured settlements for injury victims.  Had the plaintiffs had their own settlement planner in place to develop a plan and address the financial strength of the life insurance companies, this would never had occurred.  This is so because the plaintiff’s planner would have gotten a copy of not only the payment of the premium to the life company to purchase the annuity but also gotten a copy of the contract directly from them to document the annuity policy was put into place.   Without those protections, this type of situation can happen.

This is not the first time a scheme like this has unfolded.  Back in 2016, a Ringler structured settlement broker was indicted in Dallas for a scheme to defraud Ace European Insurance Company out of more than $4.6 million dollars over the period from 2002 through 2013 related to failing to send premium to purchase structured settlement annuities.  In the lawsuit, it is alleged that a broker for Ringler Associates, Michael Woodyard of Texas, stole structured settlement premiums from insurers and converted them to his own use.  Upon investigation, it was discovered that annuities in certain cases had never been purchased.  Instead, Woodyard allegedly converted those funds to his own private use.  Woodyard had, according to the complaint, set up a typical Ponzi scheme where he had been, for a period, making annuity payments to injury victims from his own funds until the scheme collapsed.  He had even issued fraudulent annuity certificates to his clients to hide the fraud and made “lulling” payments to cover up.  He was ultimately sentenced to 87 months in federal prison and ordered to pay $3.9 million in restitution.  This type of scheme was so easily preventable had the plaintiff employed their own planner in these transactions.  When a planner is involved in these transactions, they get a copy of the premium check issued by the insurer to fund the structured settlement and have direct contact with the life insurance company issuing the annuity contract.  Therefore, it would have been easily discovered that in fact no annuities were purchased had a plaintiff settlement planner been engaged by the personal injury attorneys whose clients had structured settlements “placed” by Ringler and Mr. Woodyard.

Why you need a plaintiff-based settlement planner

Protecting the plaintiff is not the goal or responsibility of the defense broker, their allegiance is to their client, the defendant insurance company.  In the course of discovery regarding the Woodyard/Ringler matter, Ringler denied in a court filing that it “owed plaintiffs a duty to exercise reasonable care.”  Since a “defense structure broker” has no duty to the plaintiff, it is critical to engage your own plaintiff-based settlement planner.  It is a must to have a credentialed expert assisting with what will be the most important financial transaction of the injury victim’s life.  A settlement is meant to last the remainder of that person’s life.  Making sure all options are explored is critical.  Additionally, making sure that client is properly protected in any transaction involving the insurance company and a structured settlement is imperative.  Equally as important, protecting yourself from liability in these transactions is necessary as they are complex and highly specialized.  Having an experienced plaintiff-based planner to guide you through the issues and make sure you do not have malpractice exposure is critical.

Conclusion

The question of how to best to manage the net proceeds presents an important question that must not be overlooked.  Should the settlement be structured?  Should a trust be utilized?  Are there public benefit preservation issues that will determine what type of trust needs to be created?  Frequently these questions are overlooked because the defendant comes to mediation with a “structured settlement broker” who offers the solution to all of these issues, a structured settlement annuity.  Structured settlement annuities are the cornerstone of a strong settlement plan but there are many issues that need to be explored.  An experienced settlement planner can help with these issues and protect your client from fraud as well as protect your law firm from liability with these complicated transactions.

Contact us today to see how Synergy’s Settlement Planning team can protect the recovery, improve client satisfaction and give you a trusted partner to provide holistic solutions including structured settlements, public benefit preservation solutions, and trusts.  We are your expert settlement advocates that will drive a better outcome in every case with a guarantee that the plaintiff is ALWAYS better off as a result of our involvement.

[1] I.R.C. § 104(a)(2) (2007).

[2] Id.

[3] Id.

[4] A structured settlement is a single premium fixed annuity used to provide future periodic payments to personal physical injury victims.  The interest earned is not taxable under Section 104(a)(2) and a series of revenue rulings that provide the basis for structured settlements.

[5] See I.R.C. § 104(a)(2) (2007).  See also Rev. Rul. 79-220 (1979) (holding recipient may exclude the full amount of the single premium annuity payments received as part of a personal injury settlement from gross income under section 104(a)(2) of the code).

[6] Structured settlements cannot be accelerated, deferred, anticipated or encumbered.  The payments are made pursuant to the terms of the contract with the life insurance company.  Thus, a personal injury victim is protected from spending the money too quickly.  However, there are “factoring” companies that will purchase structured settlement annuities and provide a lump sum payment.  These transactions are now regulated by IRC 5891 and many states have enacted provisions to protect structured settlement recipients from unfair transactions.  IRC 5891 requires a finding that the sale is in the best interest of the annuitant and requires judicial approval.  IRC 5891

[7] Many states offer protection by statute for annuities.  For example, in Florida, annuities have immunity from legal process as long as they are not set up to defraud creditors.  See generally Fla. Stat. § 222.14 (2007).

[8] Daniel W. Hindert & Craig H. Ulman, Transfers of Structured Settlement Payment Rights:  What Judges Should Know About Structured Settlement Protection Acts, 44 NO. 2 Judges’ J. 19 (2005); see also https://s2kmblog.typepad.com/rethinking_structured_set/2017/02/structured-settlement-2016-annuity-sales.html

[9] https://s2kmblog.typepad.com/rethinking_structured_set/2017/02/structured-settlement-2016-annuity-sales.html

[10] See I.R.C. §104(a) (2008).  See also Rev. Rul. 79-220 (July 1979) (payments are income tax-free to injury victim and all subsequent payees)

[11] Richard B. Risk, Jr., Structured Settlements: The Ongoing Evolution from a Liability Insurer’s Ploy to an Injury Victim’s Boon, 36 Tulsa L. J. 865 (2001).

[12] Id.

[13] While structured settlements are income tax-free even to subsequent payees, they are not estate tax-free.  The present value of the remaining guaranteed payments is includable in the injury victim’s gross estate.

[14] “The cash surrender values of life insurance policies issued upon the lives of citizens or residents of the state and the proceeds of annuity contracts issued to citizens or residents of the state, upon whatever form, shall not in any case be liable to attachment, garnishment or legal process in favor of any creditor of the person whose life is so insured or of any creditor of the person who is the beneficiary of such annuity contract, unless the insurance policy or annuity contract was effected for the benefit of such creditor.” Fla. Stat. § 222.14 (2008).

[15] See Windsor-Thomas Group Inc. v. Parker, 782 So.2d 478 (Fla. 2d DCA 2001).  Judgment creditor brought an action to garnish an annuity that funded structured settlement of a tort case in favor of the judgment debtor. The issuer moved to quash the writ based on the statutory prohibition that annuity contracts are not liable to attachment, garnishment, or legal process in favor of any creditor. The Circuit Court dissolved the writ. Creditor appealed. The District Court of Appeal held that the issuer had standing to raise the statutory prohibition against garnishment.

[16] See generally Krebs v. Krebs, 435 N.W.2d 240 (Wis. 1989)

[17] See generally Ihlenfeldt v. Ihlenfeldt, 549 N.W.2d 791 (Wis. App. 1996)

[18] See In re McCollam, 612 So.2d 572 (Fla. 1993).  Annuity was exempt under Florida Statute 222.14 from creditor claims in bankruptcy action.  See also In re Orso, 283 F.3d 686 (5th Cir. 2002) (holding structured settlement “annuity contracts under which payments were owed came within scope of Louisiana statute exempting such contracts from the claims of creditors”); In re Belue, 238 B.R. 218  (S.D. Fla. 1999) (holding “debtor who was named, as payee and intended beneficiary, under annuity purchased by insurance company to fund its obligations under structured settlement agreement was entitled to claim annuity payments as exempt under special Florida exemption for proceeds of any annuity contracts issued to citizens or residents of state . . . .”); In re Alexander, 227 B.R. 658 (N.D. TX 1998) (holding structured settlement annuity paid to debtors following the death of their children in automobile accident was entitled to exemption as an annuity under Texas law).

March 24, 2020

Now, more than ever, proper settlement planning is critical for disabled clients.  Protecting their recovery should be top of mind and a high priority given the turbulence in our global markets.  There are always going to be ups and downs in the financial markets.  The real estate market has crashed.  The tech market has crashed.  The oil markets have crashed.  There will be ups and downs in everyone’s personal financial situation.  You need a new car, roof or the AC goes out.  Now we have a virus that is creating an economic and social shutdown of our way of life for the foreseeable future.

Our current financial crisis illustrates how critical it is for you to bring in a settlement planner to speak with your clients.  Your clients do not have to plan for their settlement, but they do deserve to speak with someone that has the education, experience, and knowledge to show them the options.  Education about ways to protect the recovery from rapid dissipation and insulation from the market are exceedingly important.

If you have a client that settles their case, they need to know the ramifications of their financial decisions.  The two questions that always need to be addressed immediately before accepting any settlement are:

  1. Can I take any portion of my settlement in cash or will that impact my public benefits?
  2. Can I utilize a structured settlement for a portion of my settlement?

Those two questions have to be asked and answered on every case before anything is finalized.  The answers to those questions will dictate the form of the settlement and set the stage for proper planning.  Not asking those questions, could cause irreparable harm to the client.

As part of the planning process, it is important to meet with a qualified settlement planner to help your client create a visual picture of their future.  They need to do some basic budgeting.  Questions need to be asked like: How much do I NEED now and ongoing?  What do I WANT now and ongoing? What public benefits are necessary for my future?

If a settlement planner can get a picture of the client’s needs and wants, solutions can be created to provide for as much of those as possible.  By making sure critical questions get asked and simple budgeting is done, creating a rock-solid settlement plan becomes much easier.  There are many benefits to crating a settlement plan which includes a structured settlement and public benefit preservation vehicles.

Structured Settlement Benefits

  • Peace of mind (Guarantee and Fixed): The periodic payment schedule is outlined in the settlement documents and does not change with the market fluctuations.
  • Creditor Protection: Future periodic payments are not subject to creditors.
  • Lifetime Income: Annuities are one of the only financial services products that will pay you for the rest of your life (regardless of how long you live).
  • Tax-Free Payments: All payments received from a traditional structured settlement are tax-free.
  • Dollar-Cost Averaging Tool: A structure can create monthly, quarterly or annual income payable to you over a period certain.  These funds can be used to invest in other asset classes over time to lower the risk of a single investment date.

Public Benefit Preservation Benefits

Income:  Public Benefit programs from Social Security can continue to provide income for your lifetime.

Medical Coverage:  Programs through Medicaid and Medicare can provide health insurance benefits at no or a lower cost vs private coverage.

Years upon years of settlement planning experience teaches us inevitably there are clients who need and would benefit from a structured settlement and/or trust to preserve benefits.  All too frequently clients decide to take a cash settlement only to regret their decisions and want to go back on their public benefits they lost.  At the same time, clients can structure too much of their settlement and need cash.  It is critical to make sure that clients have the right allocation of their settlement to upfront cash, structured settlement, and trust.  This blend, crafted at the time of settlement, is a critical foundation for their future.  Proper settlement planning will impact how easily a disabled client transitions from litigation to life.

By Jason D. Lazarus

Introduction

Catastrophically injured individuals have unique needs when it comes time to settle their cases.  A one-size-fits-all approach does not work given the complexities that are faced today upon resolution of a personal injury lawsuit. Consideration of how healthcare will be obtained have become much more complicated with the Affordable Care Act (ACA). An analysis is needed, in many cases, of whether to keep public benefits, such as Medicaid, in place for healthcare or go into the exchanges. In some cases, future Medicare eligibility may be jeopardized if proper planning is not done. Moreover, the question of how best to manage the net proceeds presents an important question that cannot be overlooked. Should the settlement be structured?  Should a trust be utilized?  Are there public benefit preservation issues that will determine what type of trust needs to be created?

Frequently these questions are overlooked because the defendant comes to mediation with a “structured settlement broker” who offers the solution to all of these issues, a structured settlement annuity.  Structured settlement annuities are a great planning device and certainly have their place in the resolution of a personal injury settlement. The problem becomes when it is touted as the solution to every issue and it is mandated by an insurer through their own captive life insurance company. The purpose of this article is to educate attorneys about the many issues that should be considered before accepting a settlement plan and an argument about why it is imperative to have an experienced “settlement planner” work directly with the personal injury victim.

Why You Need a Plaintiff “Settlement Planner”

Before talking about the planning-related issues that have become so important in today’s settlement landscape, I wanted to engage in a discussion and argument related to the importance to having a plaintiff-based “settlement planner” working with your client.  First and foremost, it is vitally important to have a credentialed expert assisting with what will be the most important financial transaction of the injury victim’s life.  A settlement is meant to last the remainder of that person’s life.  Making sure all options are explored is critical.  Secondly, making sure that client is properly protected in any transaction involving the insurance company and a structured settlement is imperative.  Protecting yourself from liability in these transactions is exceedingly important as they are complex and highly specialized.  Having an experienced team to guide you through the issues and make sure you don’t have malpractice exposure is critical.

I say that not to bash the other side, but to illustrate that their allegiance and concerns lie with their clients, the defendant insurance companies.  Typically, there is an emphasis on structured settlements being the only possible solution to managing the client’s settlement proceeds.  This is not limited to “brokers” that work for defendants.  There are also plaintiff “brokers” who only offer annuities as a funding solution.  However, a plaintiff-based settlement planner will rarely take this viewpoint.  Instead, the settlement planner will offer options and solutions based upon the needs of the client.  It is a needs-based planning approach that takes into consideration all of the factors that come into play for that particular client’s future plans.  It looks at financial issues, future wants/needs, available healthcare options and management of the client’s future care well into the future.  It typically will involve trusts, structured settlement annuities, life insurance, Affordable Care Act health insurance programs and other financial products.  An analysis of preservation of needs-based government benefits programs is typically undertaken to help clients decide whether it is right for them to stay eligible for benefits such as Medicaid and SSI.  It is a totally different perspective from those that are “structure brokers” for the defense that exclusively offer annuity-based solutions.  A settlement planner’s goal is to guard against the personal injury plaintiff from being victimized a second time by poorly crafted solutions or, worse yet, a one-product-fits-all approach.

This is not to say that structured settlements do not have their virtues.  They are an excellent choice for funding future quantifiable needs.  A properly crafted structured settlement provides guaranteed income tax-free payment streams for the injury victim.  A structure is also income tax-free to the death beneficiaries should something happen to the original annuitant (the injury victim).  They also enjoy certain protections from creditors and judgments.  There are no ongoing fees and costs associated with managing a structured settlement.  The injury victim can transfer the risk of outliving the settlement dollars to a well-capitalized, highly-rated life insurance company.  The tax-free returns, while conservative, are competitive with other fixed income products available in the marketplace.  For the foregoing reasons, a tax-free structured settlement is frequently going to be part of the ultimate settlement plan for the injury victim.  Frequently they are the cornerstone of the plan.

What Separates a “Settlement Planner” from the Rest? 

Having the depth of knowledge to address all of the planning related issues at settlement is what separates a “settlement planner” from a “broker”.  Things like understanding how the ACA works and its intersection with Medicaid/Medicare; being able to navigate thru Medicare Secondary Payer compliance issues and preservation of needs based public benefits; addressing the use of Qualified Settlement Funds (QSFs) and having a firm command of the types of settlement trusts that can be deployed (from SNTs to pooled trusts to Settlement Asset Management Trusts to ACA-optimized trusts).  These are the cornerstone of the planner’s arsenal and are vital to proper planning in a catastrophic injury case.  Below, I will address these issues in greater detail.

When you represent a catastrophically injured client who receives a large monetary settlement or award, many questions arise. Should the client seek Social Security Disability benefits and become Medicare-eligible? Should he or she create a Medicare set-aside? What if the client receives needs-based benefits such as Medicaid and Supplemental Security Income? Is coverage under the Patient Protection and Affordable Care Act a better or even an available option? How should the recovery be managed from a financial perspective? Is a trust appropriate, or a structured settlement? There are no easy answers to these questions, but here are some guidelines for navigating the terrain and advising your client.

Public Benefits

You need to understand the basics of public benefit programs and their differences to protect your client’s eligibility for them and plan for their recovery. Two primary public benefit programs are available to the injured and disabled: Medicaid with the intertwined Supplemental Security Income (SSI), and Medicare with the related Social Security Disability Income (SSDI). Receipt of a personal injury recovery can jeopardize a client’s eligibility for both programs.

Medicaid and SSI.  SSI is a need-based cash assistance program administered by the Social Security Administration. To receive SSI, the person must be either 65 or older, or blind or disabled, plus he or she must be a U.S. citizen and meet the financial eligibility requirements. In many states, one dollar of SSI benefits automatically provides Medicaid coverage. It is imperative in most situations to preserve some level of SSI benefits if Medicaid will be needed in the future. Medicaid provides basic health care coverage for those who cannot afford it. The state and federally funded program is run differently in each state, so eligibility requirements and available services vary. Because Medicaid and SSI depend on income and assets, a special needs trust may be necessary to preserve eligibility.

Medicare and SSDI.  These are entitlement benefits and are not income or asset sensitive. Clients who meet Social Security’s definition of disability and have paid enough into the system can receive disability benefits regardless of their financial situation. SSDI is funded by payroll contributions to Federal Insurance Contributions Act (FICA) and self-employment taxes. Workers earn credits based on their work history. Medicare is a federal health insurance program, and benefits begin at age 65 or two years after becoming disabled. Medicaid can supplement Medicare coverage if the client is eligible for both programs. For example, Medicaid can pay for prescription drugs as well as Medicare copayments or deductibles. A special needs trust is not necessary to protect eligibility for Medicare benefits; however, the Medicare Secondary Payer Act may necessitate use of a Medicare set-aside.

Planning Techniques for Government Benefit Preservation

Protect Medicaid and SSI eligibility. The primary vehicle for protecting needs-based benefits is a special needs trust (SNT). Assets held in a special needs trust are not countable for purposes of Medicaid or SSI eligibility.  Federal law governs the creation of and requirements for such trusts.  First and foremost, a client must be disabled to create an SNT. There are two primary types of SNTs, each with its own requirements and restrictions. The (d)(4)(A) special needs trust is only for those who are under 65. This trust holds the personal injury victim’s recovery and is for the victim’s own benefit. Alternatively, a (d)(4)(C) trust, typically called a pooled trust,  may be established with the disabled victim’s funds without regard to age.  Both types of SNTs can be established by the injury victim, a parent, grandparent, guardian, or court order.

Protect future Medicare coverage.   For any client who is a current Medicare beneficiary or reasonably expects to become one within 30 months, the Medicare Secondary Payer Act is implicated. According to CMS’s interpretation of this law, Medicare is not supposed to pay for future injury-related medical expenses covered by a liability or workers’ compensation settlement or award. In certain cases, a Medicare set-aside may be advisable to preserve future eligibility for Medicare coverage. A portion of the settlement is put into a segregated account and can be used only for the client’s injury-related care that would otherwise be covered by Medicare. Once the set-aside funds are exhausted, the client gets full Medicare coverage without Medicare seeking further contribution, reimbursement or subrogation.  In certain circumstances, Medicare signs off on the amount to be set aside and agrees to be responsible for all future expenses once those funds are depleted.

Dual eligibility.  If a client is a Medicaid and Medicare recipient, extra planning is in order. A Medicare set-aside can affect eligibility for needs-based benefits such as Medicaid and SSI, if it is not set up inside a special needs trust. Therefore, to maintain the client’s full benefits, the set-aside must be put inside an appropriate trust. A hybrid trust that addresses both Medicaid and Medicare is a complicated planning tool but one that is essential when you have a client with dual eligibility.

Financial Planning

After protecting public benefits, you should also consider how to best manage a client’s financial recovery. Should part of it be a structured settlement? Does the client need ongoing management of financial affairs or help from a fiduciary such as a corporate trustee? There are no right or wrong answers to these questions. Here are some options to consider to help your client make an informed decision.

One is to take the whole personal injury recovery in a lump sum. This lump sum is not taxable, but any investment gains are.  This option does not provide any spendthrift protection and leaves the funds at risk for creditor claims, judgments, and waste.  Also, the injured client has the sole burden of managing the money to cover future needs such as lost wages or medical expenses. As discussed above, the client would lose any needs-based public benefits.

The second option is a structured settlement to provide fixed periodic payments. A structured settlement’s investment gains are never taxed, it offers spendthrift protection, and the money has enhanced protection against creditor claims and judgments. A structured settlement recipient can avoid disqualification from public assistance if he or she also implements an appropriate trust, as discussed above.

A third option, which should always be considered, is a settlement trust. These are typically managed by a professional trustee and can also contain provisions to help preserve needs-based benefits. Settlement trusts provide liquidity and flexibility that a structured settlement cannot offer, and at the same time protect the recovery. The investment options become limitless and the trust can always be paired with a traditional structured settlement. It also protects the structured settlement from being sold to a factoring company (i.e., J.G. Wentworth).  Having a professional trustee in place that has a fiduciary duty to the client provides security and a trusted resource for life and financial management issues. In certain cases, this solution makes a lot of sense because of its ability to adapt to changing circumstances. When a disabled injury victim has needs that are not easily quantifiable or predictable, the settlement trust can adjust to the client’s needs. When a settlement trust is paired with a structured settlement, the client can have guaranteed income for life and sufficient liquidity.

Conclusion – Identify Clients Who Need Planning

You must establish a method of screening your files to identify clients who are sufficiently disabled to warrant further planning and determine whether you should consult outside experts. The easiest way to remember the process is the acronym CAD:

  • C—consult with competent experts who can help deal with these complicated issues.
  • A—advise the client about the available planning vehicles or have an outside expert do so.
  • D—document your efforts to protect your client.

If the client declines any type of planning, document the advice and education provided and have the client sign an acknowledgement. If he or she elects a settlement plan, hire skilled experts to put the plan together so they can help you document your file properly to close it compliantly.

Disabled clients especially need counseling given the likelihood they will be receiving some type of public benefits. To prevent being exposed to a malpractice suit, you should understand the types of public benefits for a disabled client and techniques for preserving them.

 

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