SETTLEMENT CONSULTING

By Jason D. Lazarus, Esq.

Introduction

Assume you just settled a personal injury case for John Doe who is married to Jane.  John has a significant brain injury and there are questions of competency.  John was injured on the job but had a product liability claim which is the part of the case you resolved.  He receives both Medicaid and Medicare benefits.  Medicare and Medicaid both have substantial liens along with the Workers’ Compensation carrier.  Jane has a consortium claim and there are issues of allocation of the settlement to resolve.  A Medicare Set Aside may be necessary and a Special Needs Trust is a must to preserve his Medicaid eligibility.  A structured settlement is being considered for part of the settlement proceeds.  You, as plaintiff counsel, would like to defer taxation of your fees using a deferred compensation mechanism like an attorney fee structure.

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?  The answer to all of these questions is to use a Qualified Settlement Fund (“QSF” or “468B QSF”).

What is a QSF and Why Use One?

A QSF is a temporary trust established to receive settlement proceeds from a defendant or group of defendants.  Its primary purpose is to allocate the monies deposited into it amongst various claimants and disburse the funds based upon agreement of the parties or court order, if required.  Upon disbursing all of the monies the QSF ceases to exist.

There are many reasons to use a QSF in a complicated settlement.  First and foremost, they are quite easy to establish.  There are only three requirements for establishing a QSF.  It must be created by a court order with continuing jurisdiction over the QSF.[1]  The trust is set up to resolve tort or other legal claims prescribed by the Treasury regulations.[2]  Finally, it must be a trust under applicable state law.[3]  Any court, with or without jurisdiction over the matter, may sign the order creating the QSF and exert continuing jurisdiction over the trust.

The QSF is a temporary holding tank for the litigation settlement proceeds.  It does not exist in perpetuity and is not meant to be a support trust for claimants.  Instead, it exists for as long as there are allocation issues between the parties or planning that needs to be done prior to disbursement.  It can exist for weeks, months or years sometimes.  There is no limit on the duration of a QSF.

A QSF may hold benefits for all parties as it relates to taxes, timing of income and settlement planning needs.  A tax-free structured settlement and a tax-deferred attorney fee structure can be properly created through the use of a QSF.  The parties can influence timing of income through the use of a QSF.  QSF claimants are typically not taxed on funds in the QSF until those funds are distributed (assuming the damages are taxable).  A QSF also gives some extra time and flexibility for claimants to make decisions related to settlement planning issues.

The defendant receives an immediate tax deduction upon contributing the agreed-upon amount to the QSF and is typically permanently released.[4]  This is a large benefit to the defendant as normally they can’t claim a deduction until the funds are received by the claimant which can be delayed in a complicated settlement.  An important point is that the tax deduction for the defendant is not impacted by when distributions actually flow out of the QSF.

The tax treatment of QSFs is uncomplicated.  A QSF is assigned its own Employer Identification Number from the IRS.  A QSF is taxed on its modified gross income[5] (which does not include the initial deposit of money), at a maximum rate of 35%.  Thus, it is taxed on accumulations to the principal from interest or dividends less deductions[6] available which include administrative expenses.

Brief Legislative History

Qualified Settlement Funds grew out of Internal Revenue Code (IRC) Section 468B.  IRC Section 468B was added to the Code by Congress as part of the Tax Reform Act of 1986[7] and created Designated Settlement Funds (DSF).  A DSF can be funded by two or more defendants to make settlement payments to tort claimants.  The DSF was fairly limited in the way it could be utilized and in 1993 passed regulations creating a new type of fund, Qualified Settlement Funds.  There are fewer requirements to create a QSF than DSF, and a QSF can address a broader range of legal claims with increased flexibility.

The DSF and QSF were originally created for use in mass tort litigation enabling a defendant to settle a claim by depositing money into a central fund that could then settle the claims with each individual plaintiff.  The defendant could walk away from the settlement fund after its creation and funding, taking a deduction for the entire settlement amount in the year it was deposited.

However, the QSF is not limited to situations involving mass torts.  A Qualified Settlement Fund can be used to settle cases of any value involving multiple plaintiffs including cases involving the personal injury victim with a derivatively injured spouse, child or parent.  It can arguably be used in single-plaintiff cases based upon the plain language of the Treasury Regulations implementing QSFs.

How it Works

Using a 468B Qualified Settlement Fund settlement proceeds can be placed into a QSF trust preserving the right to do a structured settlement and protecting public benefit eligibility temporarily.  While the money is in the QSF, a financial settlement plan can be designed and liens can be negotiated.  Additionally, if the settlement recipient is on public benefits the QSF avoids issues with receipt of the settlement, which could trigger a loss of public benefits.  While the funds are in the QSF, there is time to create public benefit preservation trusts for the settlement recipient.  A structured settlement or other financial products can then be set up to work in concert with a special needs trust or Medicare Set Aside so that the injured victim does not lose their public benefits.

IRS Code § 468B and Income Tax Regulations found at § 1.468B control the use of a QSF.  These provisions provide that a defendant can make a qualifying payment to the QSF and economic performance would be accomplished, crucial for tax reasons to the defendant.  Thus the QSF trustee can receive settlement proceeds allowing the defendant a current year deduction releasing them from the case.  The QSF trustee can, after receiving the settlement proceeds, agree to pay a plaintiff future periodic payments, assign that obligation to a third party, and allow the plaintiff to receive tax-free payments under IRC § 104(a) (the provision excluding from gross income periodic payments from a structure).[8]  The transaction works exactly the same as it normally would when you have the defendant involved in the structured settlement transaction.

There are only three requirements under 468B to establish a QSF trust.  First, the fund must be established pursuant to an order of a court and is subject to the continuing jurisdiction of the court.  Second, it must be established to resolve one or more contested claims arising out of a tort.  Third, the fund, account, or trust must be a trust under applicable state law.

As for the first requirement, any court may create a QSF by court order and exercise continuing jurisdiction.  It can be the court that the underlying litigation is being heard by, but it does not have to be that court.  It is not required that the court have jurisdiction over the tort action to establish the QSF.  A QSF is “established” once a court signs the order creating it and not before.  Thus, a QSF can’t be funded until it is properly established.

The Treasury Regulations implementing 468B require a QSF to be established to satisfy one or more claims arising out of a tort.[9]  However, Workers’ Compensation claims are specifically excluded from being the basis for establishing a QSF.  As long as the QSF is established to resolve a claim involving a physical injury, other than a Workers’ Compensation claim, this requirement is easily established.  The last requirement of the fund being a trust under applicable state law is simply satisfied by proper drafting of a trust and approval by the court.

In terms of the mechanics, it is easy to establish a QSF.  First, a court must be petitioned to establish the QSF.  The court is provided with the QSF trust document and an order to establish the trust.  Once the order is signed, the defendant is instructed to make a check payable to the QSF and the defendant is given a cash release in return for the payment.  The consideration for the release with the defendant is payment into the QSF; thus, the consideration recital should reflect payment to the QSF and not the injury victim.

As for timing of distributions from a QSF, that is dependent on the agreement amongst claimants or as ordered by a court.  For example, if the case involves minor or incompetents the necessary court approvals would need to be obtained prior to disbursement of fund from the QSF just like they would if no QSF was involved.  The QSF can provide a lump sum payment to the claimant(s); fund an SNT or MSA, pay liens and fund a structured settlement/attorney fee structure.  If a structured settlement or an attorney fee structure is funded, the QSF replaces the defendant and the transaction is consummated just as any other structured settlement would be if a defendant were involved.  Upon distribution of funds from the QSF, the trustee will obtain a release from the claimants for the distributions from the QSF evidencing the fact that the distribution resolved or satisfied the claimant’s claims against the QSF.

Once all funds have been distributed, the QSF ceases to exist.  A court order is obtained closing the QSF and terminating the court’s jurisdiction over the QSF.

Advantages of a QSF from the Plaintiff’s Perspective

There are several advantages to utilizing a QSF from the plaintiff’s perspective.  First, funding the QSF removes the defendant and defense counsel from the settlement process.  It is very much like an all cash settlement in the eyes of the defendant.  Once the Trustee receives the settlement money, economic performance has occurred and the defendant is out of the case. Second, the attorney’s fees and other expenses can be paid immediately from the 468B fund.  Third, the 468B trust removes the defendant from process of allocating the settlement amounts between the various plaintiffs.  Finally and probably most importantly, the time crunch is alleviated with regards to the lien negotiations, allocations, and probate proceedings.  The plaintiffs can take their time, carefully considering the various financial decisions they must make and addressing public benefit preservation issues.

Conclusion

The end of a personal injury case is typically a rush to settlement which I call the “settlement time crunch.”  There is enormous pressure to wrap up the case quickly to get the client compensated for their injuries.  However, in the rush to finalize the settlement things may be overlooked or important settlement planning issues may be missed.  A Qualified Settlement Fund can be created to receive the settlement proceeds thereby giving everyone the time necessary to carefully plan for the future.  Plaintiff counsel can get his or her fees and costs quickly.  The funds are obtained from the defendant, they are released and the client’s settlement dollars can be procured quickly.  The liens can be negotiated, allocation decisions can be made, public benefit preservation trusts can be implemented and settlement planning issues, including structured settlements, can be considered.  The attorney’s option to structure his or her attorney fees is also preserved.  The QSF is an important tool for trial lawyers to consider using.

 

[1] Treas. Reg. §1.468B-1(c)(1).

[2] Treas. Reg. §1.468B-1(c)(2).

[3] Treas. Reg. §1.468B-1(c)(3).

[4] See Treas. Reg. §1.468B-3(c).

[5] Treas. Reg. §1.468B-2(b)(1).

[6] Treas. Reg. §1.468B-2(b)(2).

[7] Tax Reform Act of 1986, Pub. L. No. 99-514; I.R.C. §1087(a)(7)(A), 100 Stat. 2085 (1986); I.R.C. §468B.

[8] I.R.C. §104(a).  Section 104(a) excludes from gross income personal physical injury recoveries paid in a lump sum or via future periodic payments.  It excludes personal injury recoveries under 104(a)(2); Workers’ Compensation recoveries at 104(a)(1) and disability recoveries under 104(a)(3).

[9] Treas. Reg. §1.468B-1(c)(2).  There are other claims besides torts that a QSF may be used to resolve.  According to the Treasury regulations, it can be used for CERCLA claims, breach of contract, violation of law or any other claims the Commissioner of the Internal Revenue service designates in a Revenue ruling or Revenue procedure.  Id.

 

To learn more about Qualified Settlement Funds (QSF) watch our educational video below.

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

If you are confused by the myriad of government benefit programs that many clients receive as a result of being a personal injury victim, don’t worry as you are not alone.  Most times personal injury victims are not sure either about the benefits they receive and can confuse the different programs.  This is not surprising as the acronyms for the programs are similar and governed by the same or similar government agencies.  For example, a disabled client might get Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI).  While similar in terms of who qualifies and both provided by the Social Security Administration, how you qualify for each are vastly different.  Another example is Medicare and Medicaid.  Both involve the same agency, Centers for Medicare & Medicaid Services; however, Medicare is an entitlement that is administered entirely federally while Medicaid is income/asset sensitive and is administered mostly at the state level.  All of these benefits have unique issues and different planning solutions must be employed.

The goal of this post is to clarify the information and make it easy to understand.

The following chart is a good starting point to understanding public benefits:

To understand the table, you should know a few acronyms.

  • While the SS in SSDI and SSI stand for different things, you can use these first two letters as an easy way to remember that both are offered by the Social Security Administration.
  • VA stands for Veterans Administration.
  • SNT and PSNT stand for Special Needs Trust and Pooled Special Needs Trust, respectively.
  • MSA stands for Medicare Set-Aside.
  • There is no such thing as a Medicaid Set-Aside and there are many differences between how SNTs and MSAs operate.

Many times there is confusion about the proper planning solutions a client might need but by the time you are done reading this post, it should be much clearer.

Understanding Public Assistance Programs

There are two primary public benefit programs that are available to those who are injured and disabled.  The first is the Medicaid program and the intertwined Supplemental Security Income benefit (“SSI”).  The second is the Medicare program and the related Social Security Disability Income/Retirement benefit (“SSDI”).  Both programs can be adversely impacted by an injury victim’s receipt of a personal injury recovery.  Understanding the basics of these programs and their differences is imperative to protecting the client’s eligibility for these benefits.

Medicaid and Supplemental Security Income (hereinafter SSI) are income and asset sensitive public benefits that require special planning to preserve.  In many states, one dollar of SSI benefits automatically provides Medicaid coverage.  This is very important, as it is imperative in most situations to preserve some level of SSI benefits if Medicaid coverage is needed in the future.  SSI is a cash assistance program administered by the Social Security Administration.  It provides financial assistance to needy, aged, blind, or disabled individuals.  To receive SSI, the individual must be aged (sixty-five or older), blind or disabled, and be a U.S. citizen.  The recipient must also meet the financial eligibility requirements. Medicaid provides basic health care coverage for those who cannot afford it.  It is a state and federally funded program run differently in each state.  Eligibility requirements and services available vary by state.  Medicaid can be used to supplement Medicare coverage if the client is eligible for both programs (“dual eligible”).  For example, Medicaid can pay for prescription drugs as well as Medicare co-payments or deductibles.  Because Medicaid and SSI are income and asset sensitive, creation of a special needs trust and/or ABLE account may be necessary, which is discussed in greater detail below.

Some other benefits that are needs-based are Food Stamps, Supplemental Nutritional Assistance Program (SNAP), Section 8 (housing) and some Veterans Administration benefits (non-service connected).  Since these benefits are not necessarily protected by the use of traditional planning tools like an SNT, these are more complex to protect.  In many instances, it makes more sense to lose these benefits and allow an SNT to pay for these needs or use an ABLE account to pay for those types of expenses.  What complicates the payment of some of these types of benefits is the SSI restriction on paying for food & shelter.  That is where an ABLE account can come in handy since it is exempt from such rules (but there are limitations on who can create an ABLE account).   There are also some other financial-based planning techniques to try and preserve these benefits, but it does vary by program so consulting with an expert is imperative to help with the planning.

Medicare and Social Security Disability Income (hereinafter SSDI) benefits are an entitlement and are not income or asset sensitive.  Clients who meet Social Security’s definition of disability and have paid in enough quarters into the system can receive disability benefits without regard to their financial situation.  The SSDI benefit program is funded by the workforce’s contribution into FICA (social security) or self-employment taxes.  Workers earn credits based on their work history and a worker must have enough credits to get SSDI benefits should they become disabled.  Medicare is a federal health insurance program.  Medicare entitlement commences at age 65 or two years after becoming disabled under Social Security’s definition of disability.  Medicare coverage is available again without regard to the injury victim’s financial situation.  Accordingly, a special needs trust is not necessary to protect eligibility for these benefits.  However, the MSP may necessitate the use of a Medicare Set Aside discussed in greater detail below.

Planning Tools for Public Benefit Recipients

Medicaid/SSI

For those that receive needs-based public benefits such as SSI/Medicaid, there are planning devices that can be utilized to preserve eligibility for disabled injury victims. A special needs trust can be created to hold the recovery and preserve public benefit eligibility since assets held within a special needs trust are not a countable resource for purposes of Medicaid or SSI eligibility.  The creation of a special needs trusts is authorized by Federal law. Trusts commonly referred to as (d)(4)(a) special needs trusts, named after the Federal code section which authorizes their creation, are for those under the age of 65. Another type of trust is authorized under by Federal law with no age restriction and it is called a pooled trust, commonly referred to as a (d)(4)(c) trust.

The 1396p provisions in the United States Code governs the creation and requirements for such trusts.  First and foremost, a client must be disabled in order to create an SNT.  There are two primary types of trusts that may be created to hold a personal injury recovery each with its own requirements and restrictions.  First is the (d)(4)(A) special needs trust which can be established only for those who are disabled and are under age 65.  This trust is established with the personal injury victim’s recovery and is established for the victim’s own benefit.  It can be established by the injury victim themselves, a parent, grandparent, guardian or court order.  Second is a (d)(4)(C) trust typically called a pooled trust that may be established with the disabled victim’s funds without regard to age.  A pooled trust can be established by the injury victim and others just like a (d)(4)(A).  Both trusts operate identically and provide for the special needs of a client.  The primary restrictions on use of the money are that it must be for the sole benefit of the trust beneficiary, the trust cannot provide cash and it cannot be used for food or shelter (for those that receive SSI).  Other than that, it can provide for nearly anything that improves the trust beneficiary’s quality of life.

Oftentimes, an ABLE account can be used in conjunction with an SNT or instead of an SNT.  An ABLE account is a tax-advantaged savings account for disabled individuals.  An ABLE account can pay for any “qualified disability expense” which is quite broad and does not impose restrictions on food/shelter payments.   An ABLE account can only be established by someone who is disabled and whose onset of disability occurred prior to turning 26 years of age.  An ABLE account can only be funded up to a maximum amount of $15,000 annually and only the first $100,000 in funding is exempt from the SSI asset/resource test.  ABLE accounts remain a limited option and only makes sense in certain circumstances.

Medicare/SSDI

A client who is a current Medicare beneficiary or reasonably expected to become one within 30 months should concern every trial lawyer because of the implications of the Medicare Secondary Payer Act (“MSP”).  Since under the MSP Medicare is not supposed to pay for future medical expenses covered by a liability or Workers’ Compensation settlement, judgment or award, CMS recommends that injury victims set aside a sufficient amount to cover future medical expenses that are Medicare covered.  CMS’ recommended way to protect an injury victim’s future Medicare benefit eligibility is establishment of a Medicare Set-Aside (“MSA”) to pay for injury-related care until exhaustion.

In certain cases, a Medicare Set-Aside may be advisable in order to preserve future eligibility for Medicare coverage. A Medicare Set-Aside allows an injury victim to preserve Medicare benefits by setting aside a portion of the settlement money in a segregated account to pay for future Medicare covered healthcare. The funds in the set-aside can only be used for Medicare covered expenses for the client’s injury-related care. Once the set-aside account is exhausted, the client gets full Medicare coverage without Medicare ever looking to their remaining settlement dollars to provide for any Medicare covered health care. In certain circumstances, Medicare approves the amount to be set aside in writing and agrees to be responsible for all future expenses once the set-aside funds are depleted.

The problem is that MSAs are not required by a federal statute even in Workers’ Compensation cases where they are commonplace.  There are no regulations, at this time, related to MSAs either.  Instead, CMS has intricate “guidelines” and “FAQs” on their website for nearly every aspect of set-asides from submission to administration.  There are only limited guidelines for liability settlements involving Medicare beneficiaries.  While there is no legal requirement that an MSA be created, the failure to do so may result in Medicare refusing to pay for future medical expenses related to the injury until the entire settlement is exhausted.  There has been a slow progression towards a CMS “policy” of creating set-asides in liability settlements over the last seven years as a result of the Medicare Medicaid SCHIP Extension Act’s passage.  All of the uncertainty surrounding set-asides creates a difficult situation for Medicare beneficiary-injury victims and contingent liability for legal practitioners as well as other parties involved in litigation involving Medicare beneficiaries.  There do appear to be regulations on the horizon for set-asides based upon Medicare’s renewed focus on it for 2019.  For the time being, a set-aside analysis should be considered for settlements or judgments involving current Medicare beneficiaries.

Dual Eligibility – Medicare & Medicaid

Clients who receive both Medicaid and Medicare require extra planning to preserve all government benefits.  If it is determined that a Medicare Set-Aside is appropriate, it raises some issues with continued Medicaid eligibility.  A Medicare Set-Aside account is considered an available resource for purposes of needs-based benefits such as SSI/Medicaid.  If the Medicare Set-Aside account is not set up inside a Special Need Trust, the client will lose Medicaid/SSI eligibility.  Therefore, in order for someone with dual eligibility to maintain their Medicaid/SSI benefits the MSA must be put inside a Special Needs Trust.  In this instance, you would have a hybrid trust which addresses both Medicaid and Medicare.  It is a complicated planning tool but one that is essential when you have a client with dual eligibility.

Conclusion – Protect Your Client, Protect Your Firm

Disabled clients need counseling at settlement given the likelihood they will be receiving some type of government benefits.  To prevent being exposed to a malpractice cause of action, the personal injury practitioner should understand the types of public benefits that a disabled client may be eligible for and techniques that are available to preserve those benefits.  Having this knowledge will help the lawyer identify disabled clients they may want to refer for further consultation with other experts.

When a settlement involves the protection of public benefits or settlement assets, outside counsel is typically retained to assist with the trust devices commonly used to protect the client.  Lawyers who are well-versed in “settlement law” or “settlement planning” can be found and relied upon to assist with these difficult and complicated issues.  The legal fees for creation of the trusts to protect the settlement monies or public benefit eligibility are normally paid for out of the injury victim’s recovery.

Companies such as Synergy deal with these issues on a daily basis.  Having a consultant familiar with the planning issues and who has access to the right solutions is imperative.  This is where Synergy’s settlement consulting/planning team really shines and can be an invaluable member of your settlement team.  Having the knowledge of the public benefit programs along with issues such as Affordable Care Act coverage and options is a non-negotiable these days given the complex settlement landscape.

To learn more watch representing clients with government benefits watch our educational video below.

Jason D. Lazarus

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 causing permanent disability?  Do they get the proper counseling 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?  All these issues can be very difficult to face for someone that is seriously injured.  Personal injury practitioners who represent disabled clients should be aware of their obligations to advise these clients properly and understand the hurdles faced by the injury population in terms of recovery both financially as well as physically.  This post addresses issues of major importance when navigating settlement of a personal injury matter involving a disabled client.

Public Assistance Primer

Because most of a lawyer’s malpractice exposure at settlement is related to public benefit preservation, it is important to understand the basics of these benefits.  Ethically, a lawyer must be able to explain these matters sufficiently to allow the client to make educated decisions.  There are two primary public benefit programs that are available to those that are injured and disabled.  The first is the Medicaid program and the connected Supplemental Security Income benefit (SSI).  The second is the Medicare program and the related Social Security Disability Income/Retirement benefit (SSDI).  Both Medicaid and Medicare can be adversely impacted by an injury victim’s receipt of a financial recovery.  Understanding the basics of these programs and their differences is imperative to protecting the client’s eligibility.

Medicaid and Supplemental Security Income (hereinafter SSI) are income and asset sensitive public benefits that require special planning to preserve post settlement.  In many states, one dollar of SSI benefits automatically provides Medicaid coverage.  This is very important, as it is imperative in most situations to preserve some level of SSI benefits if Medicaid coverage is needed in the future.  SSI is a cash assistance program administered by the Social Security Administration.  It provides financial assistance to needy, aged, blind, or disabled individuals.  To receive SSI, the individual must be aged (sixty-five or older), blind, or disabled and be a U.S. citizen.  The recipient must also meet the financial eligibility requirements.  Medicaid provides basic health care coverage for those who cannot afford it.  It is a state and federally funded program with different rules/programs in each state.  Eligibility requirements and services available vary by state.  Because Medicaid and SSI are income and asset sensitive, creation of a special needs trust may be necessary which is discussed in greater detail below.

Medicare and Social Security Disability Income (SSDI) benefits are an entitlement and are not income or asset sensitive.  Clients who meet Social Security’s definition of disability and have paid enough quarters into the system can receive disability benefits without regard to their financial situation.  The SSDI benefit program is funded by the workforce’s contribution into FICA (social security) or self-employment taxes.  Workers earn credits based on their work history and a worker must have enough credits to get SSDI benefits should they become disabled.  Medicare is a federal health insurance program.  Medicare entitlement commences at age sixty-five or two years after becoming disabled under Social Security’s regulations.  Since Medicare is an entitlement, a special needs trust is not necessary to protect eligibility for these benefits.  However, the Medicare Secondary Payer Act (MSP) may necessitate the use of a Medicare Set Aside discussed in more detail below.

Laws that Impact Eligibility for Public Benefits

There are important federal laws that can impact a client’s eligibility for public benefits post settlement that must be explained.  Below, I will discuss these issues in more detail with a focus on the ethical and malpractice issues raised in discussing the form of a personal injury settlement.

Public Assistance

42 U.S.C. 1396p(d)(4)

The receipt of a settlement or financial recovery by someone seriously injured can cause ineligibility for needs based government benefit programs (Medicaid & SSI).  Even as little as $2,000.00 could cause a problem.  However, there are planning devices that can be utilized to preserve eligibility for disabled injury victims. A special needs trust can be created to hold the recovery and preserve public benefit eligibility since assets held within a special needs trust are not a countable resource for purposes of Medicaid or SSI eligibility.  The creation of a special needs trust is authorized by the Federal law.

The 1396p provisions in the United States Code govern the creation and requirements for such trusts.  First and foremost, a client must be disabled to create a SNT.  There are two primary types of trusts that may be created to hold a personal injury recovery each with its own requirements and restrictions.  First is the (d)(4)(A) special needs trust which can be established only for those who are disabled and are under age 65.  This trust is established with the personal injury victim’s recovery and is established for the victim’s own benefit.  Second is a (d)(4)(C) trust typically called a Pooled Trust that may be established with the disabled victim’s funds without regard to age.

The Medicare Secondary Payer Act

A client who is a current Medicare beneficiary or reasonably expected to become one within 30 months should concern every trial lawyer because of the implications of the Medicare Secondary Payer Act (MSP).  The MSP is a series of statutory provisions enacted in 1980 as part of the Omnibus Reconciliation Act with the goal of reducing federal health care costs.  The MSP provides that if a primary payer exists, Medicare only pays for medical treatment relating to an injury to the extent that the primary payer does not pay.  The regulations that implement the MSP provide “[s]ection 1862(b)(2)(A)(ii) of the Act precludes Medicare payments for services to the extent that payment has been made or can reasonably be expected to be made promptly under any of the following” (i) Workers’ compensation; (ii) Liability insurance; (iii) No-fault insurance.

There are two issues that arise when dealing with the application of the MSP: (1) Medicare payments made prior to the date of settlement (conditional payments) which is beyond the scope of this post and (2) future Medicare payments for covered services (Medicare set asides).  Since Medicare is not the proper payer of future medical expenses covered by a liability or Workers’ Compensation settlement, judgment or award, CMS recommends that injury victims set aside enough to cover future medical expenses that are Medicare covered.  CMS’ recommended way to protect an injury victim’s future Medicare benefit eligibility is establishment of a Medicare Set Aside (MSA) to pay for injury related care until exhaustion.

In certain cases, a Medicare Set Aside may be advisable to preserve future eligibility for Medicare coverage. A Medicare set aside allows an injury victim to preserve Medicare benefits by setting aside a portion of the settlement money in a segregated account to pay for future Medicare covered health care. The funds in the set aside can only be used for Medicare covered expenses for the client’s injury related care. Once the set aside account is exhausted, the client gets full Medicare coverage without Medicare ever looking to their remaining settlement dollars to provide for any Medicare covered health care. In certain circumstances, Medicare approves the amount to be set aside in writing and agrees to be responsible for all future expenses once the set aside funds are depleted.

The problem is that MSAs are not required by a federal statute even in Workers’ Compensation cases where they are commonplace.  There are no regulations, at this time, related to MSAs either.  Instead, CMS has intricate guidelines and FAQs on their website for nearly every aspect of set asides from submission to administration.  There are only limited guidelines for liability settlements involving Medicare beneficiaries.  While there is no legal requirement that an MSA be created, the failure to do so may result in Medicare refusing to pay for future medical expenses related to the injury until the entire settlement is exhausted. There has been a slow progression towards a CMS policy of creating set asides in liability settlements over the last several years because of the Medicare Medicaid SCHIP Extension Act’s passage.  All the uncertainty surrounding set asides creates a difficult situation for Medicare beneficiary-injury victims and contingent liability for legal practitioners as well as other parties involved in litigation involving Medicare beneficiaries.  There do appear to be regulations on the horizon for set asides based upon Medicare’s renewed focus on it for 2018.  For the time being, a set aside analysis should be considered for settlements or judgments involving current Medicare beneficiaries.

Dual Eligibility: The Intersection of Medicare and Medicaid – Special Needs Trust/Medicare Set-Aside

If you have a client that is a Medicaid and Medicare recipient, extra planning may be in order.  If it is determined that a Medicare Set-Aside is appropriate, it raises some issues with continued Medicaid eligibility.  A Medicare Set-Aside account is considered an available resource for purposes of needs-based benefits such as Medicaid/SSI.  If the Medicare Set-Aside account is not set up inside a Special Need Trust, the client will lose Medicaid/SSI eligibility.  Accordingly, for someone with dual eligibility to maintain their Medicaid/SSI benefits the MSA must be put inside a Special Needs Trust.  In this instance you would have a hybrid trust which addresses both Medicaid and Medicare.  It is a complicated planning tool but one that is essential when you have a client with dual eligibility.

Click here to get more information on this topic or watch our educational video below.

B. Josh Pettingill

The feeling can be overwhelming for any claimant who receives a large windfall of settlement money, but more so for an unbanked, undocumented worker who is unfamiliar with common banking laws in the United States. There is a large contingent of undocumented workers living in the US, most notably from Mexico and Guatemala. The reality for many of these foreign-born claimants is that they have never had savings or checking account. It is common practice that many of these undocumented workers financially support their families in their home countries but live from hand to mouth while working in the United States.

Accordingly, it can be a daunting task to establish a US bank account on behalf of an undocumented worker. There are many intricacies involved in doing so; this is especially true for claimants who have minimal forms of identification. However, it is possible for an attorney to establish a US bank account for an undocumented worker if they have the time and patience to do so. For example, Miami, Florida is home to many international consulates, including Mexico, Guatemala, and Brazil. An undocumented worker can obtain two forms of identification from the consulate: 1. Matricula Consular card or 2. Passport. For most banks in the United States, these are the two required forms of identification needed to open a bank account. Another requirement of most banks is to show proof of a US address. One recommendation is to have the claimant provide the bank a letter from the attorney’s law firm addressed to him or her; also, any bill, such as a phone bill or cable bill can suffice as proof of address.

Once the claimant has settled their lawsuit, they often seek to return to their home country. The settlement funds should be housed in a US-based bank and if the claimant decides to move back home, he or she can set up an account in their home country and continue to make periodic withdrawals from their US bank account. Internet wire transfers make it increasingly easier to transfer funds internationally from one account to another. However, it is vital for the claimant to establish a relationship with a US-based banker/contact that speaks the foreign national’s language who can oversee any international transactions. The average cost of an international transaction is $45.00. It is important to note; the claimant can also use an ATM card to make withdrawals from any bank that has an ATM available. For a nominal transaction fee and exchange rate fee, the claimant can withdraw up to $500.00 US dollars per day, which is a substantial amount of money in a lot of these countries.

A greater difficulty than establishing a US bank account for an undocumented worker is finding a reputable banking institution in the home country of the client. In recent years, nationalization and unregulated banks have made it increasingly difficult to locate a reliable bank the claimant can conduct banking transactions. All major US banking institutions have correspondent banking relationships with many foreign banks. There are websites for major US banks and lists of these correspondent banks for each country. Alternatively, a qualified settlement consultant can provide this information, including information on lesser known cities situated in these foreign countries.

Another layer of financial protection for any claimant, including undocumented workers, is a structured settlement. A structured settlement can be established to provide a guaranteed source of tax-free income. An undocumented worker can take full advantage of the benefits of a structured settlement. The claimant can receive periodic payments for any length of time, including over the individual’s estimated lifespan. In addition, there may be a death benefit paid to the individual’s named beneficiary. A qualified settlement consultant can set up the structure payments to direct deposit into the claimant’s US bank account.

Once a case has settled, an attorney should do everything to financially protect their clients. The same ethical standards apply to all claimants. As an attorney, one goal after the settlement is to ensure the safety and accountability of the money for the client. Clients appreciate an attorney who goes above and beyond the norm to care for them. Ultimately, you can rest assured knowing your client’s best interests are protected. Call us today ((877) 242-0022 to show you how we can help increase the value of the case, protect your firm/your client and assist in getting catastrophic claims to the finish line expeditiously when dealing with an undocumented worker.

In this two-part article, we are discussing the most common types of mass tort cases. By design, mass tort cases help trial attorneys consolidate the best interest of several people (claimants) who suffered damages into a civil action against the entity that caused this occurrence (the defendant). Because this is an extremely tedious and time-consuming process for an attorney, hiring a specialized professional to assist with the settlement process can be greatly beneficial. As the attorney focuses on the legal nuances of the case, our experts maximize the value of the settlement while also providing settlement planning services that protect those assets long-term.

In the first section of this two-part series, we discussed mass tort cases that involve pharmaceutical drugs. Whether it’s a defective drug that was manufactured and sold, there were unknown side effects associated with the drug, or the drug was poorly marketed, these are common cases. Here are four other common types of incidents that affect several people and can result in a mass tort case.

Medical Devices

Similar to pharmaceutical drugs, another serious issue in the medical field is injuries that occur after a medical procedure. Unfortunately, the medical device industry is poorly regulated and in many cases, devices that are utilized do not undergo significant testing before they are applied. If a defective device is implanted in a patient, this can seriously impact their health and wellness in a variety of ways.

Product Liability

Many people suffer damages because they utilized a defective or harmful product. Whether the manufacturer was at fault, the design of the product was inherently dangerous, or the product failed to provide the consumer with proper instructions or warnings, these negative experiences can lead to a mass tort case. Product liability claims can span from the automotive industry to retail products to the medical industry.  

Environmental and Toxic Contamination

There are a variety of ways that the environment and chemical exposure can damage the health of public bystanders. Here are some examples of toxic or environmental contamination mass torts:

  • Asbestos, silica, mold, chemical, and fumes exposure
  • Contaminated natural resources like soil, water, and air
  • Long-term pollution in a redeveloped toxic area
  • Failure to mitigate emergency contamination accidents

Large Scale Catastrophe

When a disaster happens, like when a fire occurs in an apartment complex or manufacturing plant, this tragic occurrence can be consolidated into a mass tort. During a large scale catastrophe, a variety of injuries occur that can uniquely impact each victim.

For more information about settlement planning services or to schedule a consultation, please submit our contact request form.

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

For catastrophically injured clients, cash requirements which are immediate, as well as those in the future, need to be considered when devising the settlement plan.  This is so because without taking it into account, many settlement plans are devised with insufficient liquid assets to properly address the needs without significant market losses.  Investopedia defines liquidity as the degree to which an asset or security can be quickly bought or sold in the market without affecting the assets price.  Cash is usually considered the most liquid asset.  In the settlement context, liquid assets are necessary to meet ongoing and emergency needs without needing to liquidate variable investments to pay for them.  A checking account would be the most liquid of assets (aside from cash), to meet these needs.  On the other hand, a stock market-based investment account is not as liquid.  If you were to use it to pay for immediate cash needs after settlement or ongoing expenses you could potentially take a loss on your investments each time you made a withdrawal.  The withdrawal requires a conversion to cash.

In the normal family situation, monthly liquidity to pay bills is generated from paychecks.  The funds come in and go out each month to pay expenses.  They will usually maintain an emergency fund or have access to credit for larger cost or unforeseen items that do not occur regularly.  They create current and ongoing liquidity with their paycheck.  In the settlement planning context, it is more common for the plaintiff to have a variety of items that need to come out of their settlement proceeds immediately or within the first 24 months.  They typically do not have sufficient income to create liquidity.  Because of this fact, the settlement plan must be built to address liquidity.

As part of any settlement plan, it is important to review the one time and ongoing expenses that will happen in the first two years and allocate those funds to liquid asset classes within the plan.  In addition, our settlement consulting team typically recommends a second layer of liquidity is allocated as an emergency account.  This is usually between 5 & 10% of the net settlement.  Ongoing liquidity would need to consider the future monthly needs of the plaintiff.

Guardians, Trustees and Investment Advisors need to plan around the future liquidity needs.  It is easy to do the analysis at the beginning of the plan.  You can set the funds aside that will be needed for the first few years. How do you invest the funds that need to be liquid in years 3 and beyond to maximize your rate with minimal risk?  You can:

  1. Stagger CDs that mature in years three through ten.
  2. Stagger Bond Portfolios to mature in years three through ten.
  3. Utilize an annual payment from a structured settlement.
  4. Rebalance Investment Portfolios with the inclusion of liquid assets and a floor. This allows an automatic replenishment of liquid assets when the market is up.

Why is this so important for your client?  They only receive one settlement and have one chance to get the balance right!  All the assets need to be working hard to earn as much as possible.  For every 100k, an additional 1% of interest earns them $1,000 more of spendable dollars each year.  If they do not have liquid assets to pay for a need, they may have to sell something at a loss.  This has an inverse relation to earning more interest.  Selling at a 1% loss takes away $1,000 of spendable income each year.

So how do you make sure your client is protected and is sufficiently liquid?  Engage experienced settlement planners to craft a solid strategy for the recovery.  This is accomplished by taking steps to limit liquidity risks.  Creating recurring liquidity with different investment vehicles is very important.  Planning ahead for major expenses for durable medical equipment needs or medical procedures as well as other major purchases is critical.  Preparing an annual budget that is reviewed annually and adjusted will help to stretch the liquid dollars.  Then reallocating and rebalancing the portfolio when necessary will be the best defense to becoming illiquid.

To learn more about Synergy’s Settlement Consulting team, click HERE

Watch our Third Thursday Webinar on-demand. This month’s webinar is titled: Settlement Planning – Understanding the Concept of Liquidity

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