SETTLEMENT CONSULTING
Welcome to our settlement consulting blog page! Our team of Synergy experts is dedicated to providing valuable InSights and information on the topic of settlement consulting. Our blogs cover a wide range of subjects related to settlement consulting, including structured settlements, special needs trusts, government benefit preservation, lien resolution, and more. Our goal is to provide you with the knowledge and resources you need to make informed decisions and achieve the best possible outcomes for your clients. We’re passionate about what we do, and we’re excited to share our expertise with you. Check back often for new blog posts and updates!
Synergy creates holistic settlement plans that meet our client’s needs while presenting the least possible amount of risk. We work tireless for our clients, helping attorneys and their seriously injured clients to plan for their post settlement future by attending mediations and helping navigate through the complexities that arise at settlement. The majority of financial products in the settlement industry are fixed income or fixed interest products. Fixed rate products will be discussed herein, focusing on Internal Rate of Return (IRR) and how it impacts your client’s settlement.
Commonly asked questions about fixed interest products, such as structured settlement annuities are usually centered around the rate. That question, “what is the rate” is hard to explain because it’s not always comparing apples to apples when you look at investment returns among different products. I took the most commonly used terms in the financial industry and went to www.investopedia.com for definitions. Below are the simple form definitions from that site:
Yield:
The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value.
Nominal Rate of Return:
The amount of money generated by an investment before expenses such as compounding periods, taxes, investment fees and inflation are factored in.
Effective Rate of Return:
An investment’s annual rate of interest when compounding occurs more often than once a year.
Internal Rate of Return (IRR):
The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero.
Tax Equivalent Yield (TEY):
The equivalent yield on a taxable investment when an investor’s tax rate is considered. (The higher your tax bracket the more this will impact your rate.)
Pretty simple right? To make matters worse, structured settlement annuities typically have both guaranteed and expected returns listed on the proposals. The Internal Rate of Return (IRR) which is shown on the proposal is based on life expectancy. Different life companies use different life tables to determine life expectancy. As a result, the exact same proposal from two different life companies could show two different internal rates of return. It is important to know that the IRR shown on a structured settlement quote is a composite rate. It takes into consideration that short payments receive less interest than the longer payments.
What should you do? First, recognize that the rate is not necessarily as important as creating a plan that meets your needs. Second, find an expert that will take the time to thoroughly explain these issues and assist you in arriving at an educated decision. There are many options in terms of managing monies recovered as a result of a personal physical injury. Knowing the options and focusing on solutions rather than rates will result in a plan that ultimately meets the primary objective of having a good investment solution which also meets critical life needs post settlement.
Synergy provides comprehensive settlement planning and consulting services. We offer unique solutions to meet the needs of our clients. Contact us today for all of your settlement planning needs.
An update on Meaghan | It has been two years since we first told you Meaghan’s story. Her big question was “How am I going to deal with my finances for the rest of my life?” Meaghan’s question is one that plagues many injury victims at settlement. She was facing extraordinary liens, potential loss of public benefits and an uncertain financial future. “Synergy was able to sit down with me and put me at ease, make me feel comfortable about where I am today and where I can see myself in the future.” Recently, she sat down with us to talk about the positive impact Synergy had on her life after the accident. See Meaghan’s transition from litigation to life.
Watch “Meaghan’s Story” »June 16, 2014 | Performing as a stand-up comic is one of the most daunting challenges a first timer can face. As comedian John Oliver explains: “Stand-up comedy seems like a terrifying thing. Before anyone has done it, it seems like one of the most frightening things you could conceive, and there’s just no shortcut – you just have to do it.” When Synergy client, Meaghan Jones* took the stage to perform her first ever comedy routine in early 2010, she had already faced and conquered far greater challenges as she became a C-6/7 quadriplegic as a result of an automobile accident five years earlier.
Meaghan’s story is an excellent example of a Synergy client successfully transitioning from litigation into life so she can achieve her dreams. Prior to the accident, she had just begun her exploration of a career in the arts. She was regularly performing as a hostess/singer at a local comedy club and was pursuing a full time career in singing and acting. In fact, just prior to the accident, she had been placed on a short list for acceptance to Julliard. Out of over 400 prospective applicants who performed, Meaghan’s dramatic monologues made her one of only twelve that received a call back.
Meaghan refused to allow her accident or resulting challenges to get in the way of her dreams. Not only does she continue to perform regularly as a comic at a number of local comedy clubs, she also directs theater. In 2006, less than a year after her accident, she directed a play at a local theater where she had performed previously as an actor. Since that time she has directed thirteen additional productions and plans to continue and pursue direction. Meaghan has successfully overcome many challenges in her life but still recalls the fear of performing as a comic for the first time and loves the challenges of facing her fears and vulnerability. She sees it as the perfect blend of directing, writing, acting and performing all at once.
Synergy first became involved with Meaghan as she neared the close of litigation regarding her accident at the request of her dedicated trial attorneys, Ariel Furst and Todd Stabinski. She was very well represented in the case and the settlement created some unique issues that needed to be addressed. Synergy was able to successfully utilize our Settlement Asset Management Special Needs Trust as a financial/public benefit solution in her case. Not only is the trust set up in a fashion that protects needs based benefits, it also provides a combination of income and growth that will help with her immediate living expenses as well as long term needs.
Meaghan continues to work closely with Anthony F. Prieto, Jr. CFP® at Synergy. Anthony is a Certified Financial PlannerTM and has worked with Meaghan since the resolution of her case. Never one to shy from a challenge, Meaghan has enjoyed learning about finance and investing as well as being involved in the planning process. Additionally, our lien resolution department has been working with Meghan and her aforementioned trial attorneys on resolving the outstanding Medicaid lien asserted at the close of litigation as a significant part of maximizing her settlement is not only providing sound financial advice but also ensuring that all outstanding health care liens are reduced and resolved as well. Our comprehensive approach has been helpful in achieving these goals.
We consider ourselves lucky to work with a client like Meaghan and pride ourselves on effectively working with clients as they transition from litigation into life. There is no better example of mastering this transition than Meaghan. We look forward to her continued successes as a comic and director, and know there will be plenty of future successes to celebrate!
*Client name has been changed to protect privacy.
By Daniel J. Alvarez, J.D., Vice President & General Counsel
As has been well publicized, it was revealed last week on healthcare.gov that fewer than 27,000 people signed up for private health insurance last month in the 36 states relying on a problem-filled federal website. States running their own enrollment systems signed up more than 79,000, for a total enrollment of just over 100,000.
Even more concerning then the technological challenges with the system, is whether consumers have the necessary knowledge of health insurance to be making these decisions by January 1, 2014. According to poll results released in August 2013 by the American Institute of CPAs, more than half of Americans are not equipped with the rudimentary knowledge of health insurance concepts and definitions to understand the basics of health insurance plans. http://www.aicpa.org/press/pressreleases/2013/pages/us-adults-fail-health-insurance-101-aicpa-survey.aspx
Findings of the poll include the following:
- 51 percent of adults surveyed could not accurately identify at least one of the three most common health insurance terms present in insurance contracts: premium, deductible, or copay.
- 34 percent thought a premium was an expense at the time of receiving medical service or a prescription.
- 27 percent thought a copay was the cost of obtaining insurance.
- 12 percent did not know a deductible is the money one pays before an insurance company makes payments.
- 41 percent of those surveyed were not knowledgeable about the ACA.
- 48 percent of young adults ages 18 to 34 having no knowledge of the change in health care laws.
For personal injury victims, an accurate understanding of these issues is even more critical as they attempt to make insurance coverage decisions that will affect them for the rest of their lives. For example, the question as to whether it is better to enter the exchanges versus using planning techniques to remain eligible for public benefits need to be thought through and addressed. The impact of the ACA on personal injury victims could be dramatic from not only a planning perspective, but also in terms of limiting future damages. It has been argued by legal commentators that future medical damages will be limited in lawsuits to the cost of providing health insurance through the exchanges. Time will tell whether the collateral source rules will be altered once the ACA’s coverage is in place for a period of time. See http://college.holycross.edu/RePEc/hcx/Matheson-Congdon_ACATortAwards.pdf
When navigating the transition from litigation into life, plaintiffs must seek out a knowledgeable partner to assist in making these complex determinations. At Synergy, we have worked with plaintiffs for years in navigating the intersection of public benefits, private insurance and settlement planning. We will continue to be closely tracking the implementation of the ACA and its impact on settlement planning.
As has been well publicized, it was revealed last week on healthcare.gov that fewer than 27,000 people signed up for private health insurance last month in the 36 states relying on a problem-filled federal website. States running their own enrollment systems signed up more than 79,000, for a total enrollment of just over 100,000.
Even more concerning then the technological challenges with the system, is whether consumers have the necessary knowledge of health insurance to be making these decisions by January 1, 2014. According to poll results released in August 2013 by the American Institute of CPAs, more than half of Americans are not equipped with the rudimentary knowledge of health insurance concepts and definitions to understand the basics of health insurance plans. Read more ....
Synergy allows trial lawyers to focus on what they do best. Our entire team is made up of experts who can help resolve the most complicated issues at settlement. Synergy’s executive team brings an unparalleled amount of experience to assist you at settlement. Jason Lazarus, Synergy’s CEO, is a former trial attorney practicing in the areas of workers’ compensation and medical malpractice. He has an LL.M. in Elder Law as well as multiple professional certifications including Medicare Set Aside Consultant Certified. To view Jason’s full bio click HERE. Anthony Prieto, Synergy’s President, is a Certified Financial Planner with 15 years of financial services experience. Anthony oversees Synergy’s settlement asset management group. To view Anthony’s full bio click HERE. Dan Alvarez, Synergy’s Vice President and General Counsel, is a former state attorney and plaintiff personal injury lawyer. Dan has developed significant expertise in Medicare Secondary Payer compliance. To view Dan’s full bio click HERE. Josh Pettingill, Synergy’s Vice President of Medicare Secondary Payer compliance has an MBA and is a PHD candidate in Economics. Josh’ oversees Synergy’s Medicare Secondary Payer compliance group and brings the unique insight of his certification as a Medicare Set Aside consultant. To view Josh’s full Bio click HERE. Dave Place, Synergy’s Director of Lien Resolution, is a former lead attorney for one of the largest ERISA recovery contractors in the United States. Dave’s experience allows him to provide invaluable advice and guidance regarding tough lien resolution issues. To view Dave’s full bio click HERE. Rodd Santomauro, Synergy’s Chief Operations Officer, is a former plaintiff personal injury attorney and Executive Director of a national non-profit. Rodd’s personal experience as a trial lawyer gives Synergy clients one more resource with spot on insight regarding the needs at settlement. To view Rodd’s full Bio click HERE. When the time comes, be prepared with a settlement services partner that can give you the edge you need.
Synergy allows trial lawyers to focus on what they do best. Our entire team is made up of experts who can help resolve the most complicated issues at settlement. Synergy’s executive team brings an unparalleled amount of experience to assist you at settlement.
By Jason D. Lazarus, J.D., LL.M., MSCC, CSCC
Some individuals are “dual eligible” meaning they qualify for both Medicaid and Medicare. In certain cases, a Medicare Set Aside/Special Needs Trust or Pooled Trust Sub-Account may be necessary to preserve the client’s dual eligibility. Medicare Set Asides (“MSA”) are a device used to preserver future Medicare eligibility. When settlement a case it may be prudent to consider setting an MSA when the injury victim is a Medicare beneficiary or reasonably expected to become Medicare eligible within 30 months. A Special Needs Trust or Pooled Special Needs Trust is appropriate for clients receiving Supplemental Security Income (“SSI”) and/or Medicaid benefits. Federal law allows creation of either an SNT or Pooled Special Needs Trust to preserve eligibility for needs based benefits, such as SSI and Medicaid, post settlement of a personal injury claim.
Dual eligibility is not extremely common, but there is a subset of the injury population who will be dual eligible. Understanding who qualifies for both Medicaid and Medicare is vitally important for the personal injury practitioner to insure the injury victim’s benefits are adequately protected. By CMS’s definition, dual eligible clients are those that qualify for Medicare Part A and/or Part B and also qualify for Medicaid programs as well. Medicare coverage can be obtained prior to age 65 if an injury victim qualifies for Social Security Disability. It takes a total of 30 months for someone that is disabled to qualify for Medicare (Medicare coverage begins 24 months after the first SSDI check is received which takes 5 months and includes the month of receipt, so plus 1 month).
Some Medicare beneficiaries have so little income or assets that they also qualify for state programs through Medicaid that pay for certain out of pocket expenses not covered by the Medicare program. There are several different programs that injury victims who qualify for Medicaid may be entitled to that help with expenses not covered by Medicare. In addition, there are services that Medicare does not pay for that can be covered by state Medicaid programs. For example, Medicare does not cover nursing home care beyond one hundred days yet Medicaid does, if one qualifies, cover that care.
The programs that cover out of pocket expenses provide limited Medicaid benefits to those that qualify. Through these programs, Medicaid will pay Medicare premiums, co-payments and deductibles within prescribed limits. There are two different programs. First, is Qualified Medicare Beneficiaries (“QMB”). The QMB program pays for the recipients Medicare premiums (Parts A and B), Medicare deductibles and Medicare coinsurance within the prescribed limits. QMB recipients also automatically qualify for extra help with the Medicare Part D prescription drug plan costs. The income and asset caps are higher[i] than the normal SSI/Medicaid qualification limits. Second is Special Low-Income Medicare Beneficiary (“SLMB”). The SLMB program pays for Medicare premiums for Part B Medicare benefits. SLMB recipients automatically qualify for extra help with Medicare Part D prescription drug plan costs. Again, the income and asset caps are higher[ii] than the normal SSI/Medicaid qualification limits.
Preservation of Public Benefits for those who are Dual Eligible
For injury victims that are Medicare eligible or reasonably likely to be within 30 months, a trial lawyer must carefully consider compliance with the Medicare Secondary Payer Act (“MSP”). For those injury victims receiving needs based benefits such as SSI and Medicaid, planning is necessary to preserve those benefits. Federal law found at 42 U.S.C. 1396p, allows for the creation of either a special needs trust or pooled special needs trust for those meeting the Social Security definition of disability. Assets placed into one of these trusts do not count for purposes of qualifying for needs based benefits. In the remainder of the article I will cover Medicare Set Asides and Special Needs Trust along with the intersection of these two public benefit preservation devices.
About Medicare and Medicare Set Asides
Medicare and Social Security Disability Income (hereinafter SSDI) benefits are not income or asset sensitive. If a client meets the Social Security’s definition of disability and has paid in enough quarters they can receive disability benefits without regard to their financial situation. SSDI 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 (“fully insured”). Medicare is a federal health insurance program. Medicare entitlement commences 2 years after receipt of the first disability payment from Social Security. Medicare coverage is available without regard to a client’s financial situation.
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 MSP. The MSP is a series of statutory provisions enacted during the 1980s 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.
In certain cases a Medicare Set Aside may be advisable in order to preserve future eligibility for Medicare coverage. A Medicare set aside is a tool that 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, primarily in workers’ compensation settlements, 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.
While there is no requirement to establish a liability Medicare Set Aside, there is ample reason for evaluating whether one should be established. There are currently no guidelines, polices or procedures for Medicare Set Asides in non-Workers’ Compensation cases. Nevertheless, there are ways to insure that Medicare’s interests were addressed when settling with a Medicare beneficiary. The only known sure fire way to do this is with a Medicare Set Aside.
Planning for Medicaid or SSI Recipients
Unlike SSDI and Medicare, Supplemental Security Income (SSI) and Medicaid are income and asset sensitive public benefits that require planning to preserve. In Florida (and most states), one dollar of SSI benefits automatically brings Medicaid coverage. This is very important, as it is imperative 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 (65 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 has both programs. For example, Medicaid can pay for prescription drugs as well as Medicare co-payments or deductibles.
A special needs trust (SNT) is required if the client is receiving Supplemental Security Income (SSI) or Medicaid. A SNT is a trust whose corpus or any assets held in the trust do not count as resources for purposes of qualifying for Medicaid or SSI. Thus a personal injury settlement can be placed into a SNT so that the victim can continue to qualify for SSI and Medicaid. Federal law authorizes and regulates the creation of a SNT. 42 U.S.C. §1396p(d)(4)(A)-(C) governs the creation and requirements for such trusts. First and foremost, a client must be disabled in order to create a SNT.
There are 3 primary types of trusts. First is the (d)(4)(A) trust which can only be established for those who are disabled and are under age 65. This trust is established with the personal injury victim’s settlement funds and is established for the victim’s own benefit. Second is a third party SNT which is established and funded by someone other than the personal injury victim (i.e., parent, grandparent, donations, etc. . .) for the benefit of the personal injury victim. The victim still must meet the definition of disability. Third is a (d)(4)(c) trust typically called a pooled trust that may be established by the injury victim with their own funds without regard to age restriction.
The Intersection of Medicare and Medicaid – SNT/MSA
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 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 those with dual eligibility.
The Settlement Solutions National Pooled Trust has a sub-account which can be set up as a MSA. This means the assets in the MSA are inside of the pooled special needs trust protecting both Medicaid and Medicare eligibility. There must be a separate non-Medicare pooled special needs trust sub-account which holds monies to pay for the administrative costs and non-Medicare settlement funds. The Medicare Set Aside sub- account can only pay for Medicare covered services related to the injury and can’t be used to pay for any administrative expenses. All administrative expenses must come from the non-Medicare pooled trust sub-account.
To learn more about the Settlement Solutions National Pooled Trust click HERE
To learn more about the MSA sub-account click HERE
[i] Resources must be at or below twice the standard allowed under the Supplemental Security Income (SSI) program and income at or below 100% of the Federal poverty level.
[ii] Resources must be at or below twice the standard allowed under the SSI program and income exceeding the QMB level, but less than 120% of the Federal Poverty Level.
Some individuals are dual eligible. In plain English, this means they qualify for both Medicaid and Medicare. In certain cases, a Medicare Set Aside/Pooled Trust Sub-Account may be necessary to preserve the dual eligibility.
By Jason D. Lazarus, J.D., LL.M., MSCC, CSSC
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 products 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 deal with. 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.
What do you do when you settle a case likes 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 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. Most importantly 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.[i] The trust is set up to resolve tort or other legal claims prescribed by the Treasury regulations.[ii] Finally, it must be a trust under applicable state law.[iii] 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.[iv] 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[v] (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[vi] 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[vii] and created Designated Settlement Funds (“DSF”). A DSF can be funded by 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).[viii] 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. The court does not have to 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[ix]. 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.
In terms of 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 a SNT or MSA, pay liens and fund a structured settlement. 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.
The Single Claimant QSF Question
QSF for single claimant cases has become commonplace today. However, there is some question of doubt whether a QSF can be used in a single claimant case.[x] The basis for the controversy is the assertion by some that money placed into a QSF for a single claimant triggers constructive receipt or economic benefit.[xi] If either of these is triggered, the monies would be attributed to the claimant from a tax perspective defeating one of the main purposes of establishing the QSF (timing of income and funding future periodic payments). The IRS, despite requests, has refused to comment or clarify this issue.
We are therefore left with the plain meaning of “one or more contested or uncontested claims” in the Treasure regulations relating to IRC 468B. The regulations say one or more. The only logical interpretation based upon the meaning of these words would be that it is permissible to establish a QSF for a single claimant.
Nevertheless, defendants may raise this issue in an attempt to prevent the creation of a QSF. This typically happens when future periodic payments will be funded from a QSF and relates frequently to issues over control of structured settlement funding. The bottom line is that if the defendant refuses to cooperate with funding a single claimant QSF for these reasons, it will be impossible to create the QSF unless a court orders a defendant to fund 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 in the appropriate case.
[i] Treas. Reg. §1.468B-1(c)(1).
[ii] Treas. Reg. §1.468B-1(c)(2).
[iii] Treas. Reg. §1.468B-1(c)(3).
[iv] See Treas. Reg. §1.468B-3(c).
[v] Treas. Reg. §1.468B-2(b)(1).
[vi] Treas. Reg. §1.468B-2(b)(2).
[vii] 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.
[viii] 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).
[ix] 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.
[x] See Dick Risk, A Case for the Urgent Need to Clarify Tax Treatment of a Qualified Settlement Fund Created for a Single Claimant, 23 Va. Tax Rev. 639 (2004); Robert Wood, Single-Claimant Qualified (468B) Settlement Funds? Tax Notes (January 5th, 2009).
[xi] Constructive receipt is a tax doctrine which says a taxpayer has income for tax purposes when he has the unfettered vested right to receive funds immediately. Childs v. Commissioner, 103 T.C. 634, 654 (1994), Doc 94-10228, 94 TNT 223015, aff’d, 89 F.3d 856 (11th Cir. 1996), Doc 96-19540, 96 TNT 133-7. According to the IRS, under the “economic benefit doctrine, a taxpayer using the cash receipts and disbursements method of accounting must include in gross income currently any financial or economic benefit derived from the absolute right to receive property in the future that has been irrevocably set aside for the taxpayer in a trust or fund.” IRS.gov, http://www.irs.gov/govt/tribes/article/0,,id=180235,00.html
Qualified Settlement Funds are a great tool for trial lawyers to use when settling cases with complex settlement planning issues. It is a temporary holding tank that does not trigger constructive receipt.
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