January 13, 2022
Structured settlement annuities have long been recommended to aid those with catastrophic personal injuries in planning for their future. Using IRC Section 130 0F[i] periodic payments from a structured settlement annuity to fund Medicare Set-Asides and life care plans is common, but it isn’t the only type of settlement that can benefit from a tax-free investment vehicle. Using a structured settlement for a minor’s settlement is also a perfect type of case to settle with an annuity.
It is a parent’s worst nightmare to have their minor child injured in an accident. But what happens when a minor is injured and settles a personal injury claim? In 2019, more than 180,000 children were treated and released for injuries sustained in motor vehicle crashes, over 89,000 children were treated and released for nonfatal dog bites, and over 18,000 children were treated and released for pedestrian injuries.1F[ii] Damage are still present and can be significant. While many of these settlements may not be categorized as catastrophic, there still needs to be consideration related to how to best protect the minor’s recovery.
In most states, statute dictates what can be done with a minor’s proceeds from a personal injury settlement. In certain states, net proceeds under a certain dollar limit may be given to the parent or natural guardian of the minor child. For settlements over that limit, the proceeds must be preserved for the benefit of the minor in a way that isn’t managed by a parent or guardian. Some options include restricted guardianship accounts, conservatorship accounts, preservation trusts, or special needs trusts. Another option that is widely used for a minor’s settlement proceeds is a structured settlement annuity. Parents should, with the aid of their attorney, seek guidance on how to protect the minor’s settlement and maximize the recovery.
A structured settlement annuity is an arrangement that provides tax-free periodic payments in the future. The parents or guardian typically make decisions about the plan for the future payments, although in certain jurisdictions a judge may order a specific payment schedule. Using a structured settlement annuity can alleviate concern about the balance of proceeds being issued to the minor as soon as they reach the age of majority, like in a guardianship. For parents, guardians, or counsel that are concerned about a minor receiving a lump sum of money, a well devised structured settlement payment plan can be the solution. The payment plan is specific to each minor and can be tailored for their future needs. Options may include annual or semi-annual payments for college, monthly payments for support during their 20’s, or lump sum distributions starting at age 18. The decisions regarding the payment plan are critical as once the structured settlement annuity is established and the contract issued, the payments cannot be changed, deferred, accelerated, increased, or decreased.
Working with an experienced settlement planner, such as those at Synergy Settlements, is key. The purpose of the settlement plan is to consider the future needs of the minor and devise a payment schedule to meet those needs. For most minors, the goal is to defer payments until the age of majority. Deferring payments for younger children (under age 10) to the age of 18 will result in cumulative payments that exceed the original net. For older minors (over age 14), a structured settlement annuity can still be beneficial but may require a longer deferral of payments to realize positive gain. In any event, the goal is to preserve the proceeds for the minor and devise a payment plan that will benefit them after the age of majority.
In some states, if a minor has immediate needs, a structured settlement annuity can provide guaranteed payments to a guardianship, guardian or parent to support the minor. Depending on the size of the settlement, a structured settlement annuity may only be part of the settlement plan for the minor. For example, a structured settlement annuities may be combined with other settlement options when having access to funds to support the minor while they are young is necessary. Another example would be if a minor is entitled to needs based benefits, or the potential exists that they may be entitled in the future, a structured settlement annuity combined with a special needs trust may be considered as part of the overall plan. A settlement management trust, which provides assistance with managing the settlement proceeds through a fiduciary, can also be combined with a structured settlement annuity. A structured settlement annuity can also be combined with a guardianship or conservatorship account. The combination allows for some funds to be available from the guardianship or conservatorship account to support the minor before age of majority and provide guaranteed payments from the structured settlement annuity directly to the minor after the age of majority. All of these combinations can create the flexibility and protection needed for most any minor’s settlement.
For options that include a combination of a trust, guardianship account, or conservatorship account, structured settlement annuity payments are made to the trust or dedicated account for the minor child. Funds are then available and can be disbursed to the parent or guardian to pay for immediate needs. When combined with a trust, whether a settlement management or a special needs trust, the settlement proceeds are divided between the trust and the structured settlement annuity. The initial deposit of cash in the trust is available to take care of immediate needs of the minor child and the structured settlement annuity payments are arranged to replenish the trust according to a prescribed payment schedule. The trust becomes the payee of the structured settlement annuity for the benefit of the minor and depending on the circumstances may also be the beneficiary to handle distributions after death.
For any minor’s settlement, a structured settlement annuity should be a consideration. For most minors’ settlements, the structured settlement annuity can allow preservation of the settlement proceeds for the minor until they reach the age of majority. For catastrophically injured minors, a structured settlement annuity can allow for parents or guardians to adequately plan for care of the minor child. A structured settlement professional, such as those at Synergy Settlements, can help by creating a unique and comprehensive settlement plan. Our settlement consulting team assists injury victims and their attorneys in creating innovative settlement plans for those that are injured. No settlement is ever too small for a structure so before a decision is made that a settlement for a minor isn’t worth bothering with a structured settlement, talk to us. We can help with options no matter the size of the settlement.
For more information on structuring a settlement, contact us now.
[i] 26 U.S. Code § 130
[ii] Centers for Disease Control and Prevention (CDC). Web-based Injury Statistics Query and Reporting System [online]. Atlanta, GA: U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, 2020. Available at http://www.cdc.gov/injury/wisqars
January 10, 2022
When any physical injury victim recovers money either by settlement or by verdict, the question of the tax treatment of said recovery arises. As long as it is compensation for personal physical injuries it is tax-free under Section 104(a)(2) of the Internal Revenue Code.1 Section 104(a)(2) of the Internal Revenue Code states that “gross income does not include . . . the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness.”2 Section 104(a)(2) gives the personal injury victim two different financial options for their recovery, lump sum or periodic payments.3 For more information, read this excerpt from my book ‘The Art of Settlement‘.
The primary goal of a plaintiff’s attorney in a personal injury or workers’ compensation action is to achieve the greatest possible financial recovery given the facts and circumstances of the case. Once there is an agreement on the amount to settle the case for the injury victim or workers’ compensation claimant, there is a one-time opportunity for the plaintiff to invest a portion of the recovery in a structured settlement annuity. The decision to purchase a structured settlement with a portion or all of a victim’s settlement must be made before receipt of the proceeds.
What is a Structured Settlement and Why is it Used?
A structured settlement is an investment vehicle where the settlement proceeds are paid as a periodic stream of payments instead of a lump sum payment or in addition to a lump sum.
Since their inception in 1982, structured settlement annuities have been considered one of the safest financial options at settlement for personal injury and workers’ compensation victims. Prior to the creation of structured settlements, plaintiffs could only receive their settlements in the form of a one-time lump sum cash payment. As a result of limited financial expertise and the fact that many plaintiffs receive more funds from a settlement than they have ever had in their lifetime, there is a significant risk of quick dissipation of settlement funds. In fact, there is anecdotal evidence that ninety percent of claimants quickly dissipate lump sums received for personal injuries within five years of receipt of the lump sum. A structured settlement provides financial management for settlement funds and can be designed in various ways to meet a plaintiff’s needs. Depending on the type of structured settlement plan selected, it can ensure that the settlement proceeds will last for the rest of an injury victim’s life.
A structured settlement has many advantages over taking an entire settlement as a lump sum, as discussed in more detail below:
- A structured settlement offers valuable tax incentives: Although personal injury and workers’ compensation settlement proceeds are tax-free, any interest earned on traditional investments is fully taxable. To promote the use of structured settlements, Congress amended the federal tax code to make 100% of every structured settlement payment received on account of personal physical injury or sickness exempt from income taxes.
- A structured settlement helps provide financial security: Traditional investments typically do not offer a guaranteed return. A structured settlement, on the other hand, creates a fixed stream of guaranteed income with a guaranteed rate of return, which allows a personal injury victim the ability to recover without spending time and resources determining investment strategies. Additionally, a structured settlement can help protect funds from creditors, relatives, friends and others seeking money when they learn of a large settlement.
- A structured settlement is flexible in design: A personal injury or workers’ compensation victim can design a structured settlement to provide a monthly check to help pay for basic needs such as food, clothing, transportation and/or housing. Alternatively, it can be used to provide for the future cost of college, retirement funds and/or a down-payment on a home.
- A structured settlement is backed by the highest-rated insurance companies: A structured settlement is contractually guaranteed by a highly rated, well-capitalized life insurance company.
Cases in Which a Structured Settlement Should Be Considered:
Structured settlements are ideally suited for many types of cases including: 1) cases that involve minors or persons found to be incompetent; 2) people with temporary or permanent disabilities; 3) severe injuries necessitating extensive future medical care and income replacement; 4) wrongful death cases where the surviving spouse and/or children need monthly or annual income, or assistance with education expenses; and 5) workers’ compensation cases.
20-Year-Old Female: Anna Parker (name changed for privacy and confidentiality)
Ms. Parker was significantly injured in an automobile accident. Although she was not completely disabled, her injuries significantly diminished her future employment capacity. Ms. Parker’s case settled for policy limits, and after the payment of attorneys’ fees and costs, she was going to net $350,000.00. Ms. Parker elected to take $40,000.00 of her net settlement proceeds in a lump sum at the time of settlement to buy a used car and rent a new apartment. She also elected to invest $310,000.00 in a structured settlement, which would provide her with guaranteed monthly payments of $1,169.27 for thirty years to help her with monthly bills as her earnings capacity was diminished. The contractually guaranteed payments under the plan selected totaled $420,937.20. Accordingly, her structured settlement was guaranteed to earn $110,937.00 of tax-free interest on her investment.
9-Year-Old Female: Lisa McDonald (name changed for privacy and confidentiality)
Lisa McDonald sustained a severe arm fracture as a result of medical negligence as a young child. Her case settled when she was 9 years old for $750,000.00. After attorney’s fees and costs, she was going to net $400,000.00. Because she was a minor at the time of settlement, and not disabled, her parents had two choices for her settlement funds under Maryland law. One option was to place her funds in a statutory “Title 13 Trust.” With this option, her funds would be in a restricted bank account, earning little to no interest until she reached the age of 18. The funds would not be available for use without Court Order prior to the age of 18, and upon age 18, Lisa would be able to withdraw all of her money at any time. The other option was a structured settlement, which could start paying her at or after the age of 18 on a schedule selected by her parents and was guaranteed to earn significant interest. After speaking with her parents, we designed a structured settlement so that Lisa would receive semi-annual payments of $20,000.00 for four years starting in the summer following her 18th birthday, with the intention that those payments would assist with college tuition. Her parents also elected for her to get a guaranteed lump sum of $45,000.00 on her 23rd birthday, $30,000.00 on her 25th birthday and $322,918.47 on her 27th birthday. The contractually guaranteed payments under the plan selected totaled $557,918.00. Accordingly, her structured settlement was guaranteed to earn $157,918 of tax-free interest on her investment.
If you or a family member are anticipating a settlement for personal injury or sickness, speak with your attorney about getting a structured settlement consultant involved to discuss options for your settlement proceeds, and to ensure that a plan is putting in place prior to signing settlement documents and receiving funds. Alternately, reach out to a settlement planner, such as myself, directly, to learn whether a structured settlement might be right for you or your family.
October 14, 2021
Settlement – What to Consider for a Medicare Set-Aside (MSA)
When settling a case involving a current Medicare beneficiary and before finalizing, it is important to understand what actions need to be taken to consider Medicare’s interest. What does this all mean and what are the three most important things to consider?
Medicare Set-Aside Decision
The threshold question is whether an MSA needs to be considered or not. That turns on Medicare eligibility. If they are eligible, then the next question is whether future medicals are funded. If the answer to both questions is yes, then a set-aside allocation should be considered. After determining that the injury victim is a current Medicare beneficiary (or even has a reasonable expectation of becoming Medicare eligible within 30 months) and that future medical treatment is needed for their injuries, the question is what is the cost of future injury-related Medicare-covered care. To determine the amount, either the defense or plaintiff need to request preparation of a Medicare Set-Aside allocation report identifying all future injury-related care and expected costs.
Once the decision is made on the amount necessary to cover future injury-related care, the final things to consider are what, if anything will be set aside in a formal MSA; how will the MSA account be funded and how will the MSA be managed?
How is the MSA Account Funded?
Once the MSA allocation is complete and a decision is made to set money aside for future Medicare-covered services, the injury victim has two options to fund the MSA account. The first is a lump sum. From the settlement proceeds, the full specified sum according to the allocation report or the CMS approval is placed into the Medicare Set-Aside account by the injury victim. The full amount of the allocation is placed into the account and available to pay for injury-related care. The benefit of this funding option is all the funds are placed into the MSA account at once. The downside is that the settlement proceeds directly to the injury victim are reduced by the full amount of the allocation, and the funds may sit in the MSA account untouched for years or until appropriate injury-related care is needed. If and when the account is fully exhausted (the balance is taken to zero), Medicare resumes paying for the injury-related care. The biggest downside is that there is fully exhaustion of the entire set-aside amount before Medicare will pay for any future injury-related care instead of annual temporary exhaustion using a structured settlement.
The second option is to fund the MSA with a structured settlement. The allocation report or the CMS approval generally will provide specific structured settlement annuity parameters. The parameters include an initial cash deposit made to establish the account (seed) followed by a series of annual payments over time. Periodic payments from a structured settlement annuity replenish the account annually. The duration of the periodic payments is specified in the allocation report or CMS approval and is based on the life expectancy of the injury victim. The benefit of using a structured settlement to fund a Medicare Set-Aside is the cost savings for the injury victim. The savings can result in additional cash from the settlement in the pocket of the injury victim that is available for other uses. There really is no downside to using a structured settlement annuity to fund an MSA. It is all upside since a structured settlement with a rated age means less has to go into the set aside for a shorter duration. Additionally, temporary exhaustion on an annual basis is possible which means Medicare will resume paying for the injury-related care each year after the annual amount is exhausted until the account is replenished with the next structured settlement payment.
How is the MSA Account Managed?
Once the decision is made about how the MSA will be funded, the last critical item to be decided during settlement is how the set-aside will be administered. There are very specific requirements for administration of a Medicare Set-Aside as outlined by the two options available are self-administration and professional administration. With self-administration, the injury victim maintains control of the MSA account but is also responsible for paying all bills, at the correct rate, from their providers for injury-related care, tracking all payments from the MSA account, annual attestations (as required), and reporting depletion or exhaustion of the account. While CMS provides a helpful resource in the form of a Self-Administration Toolkit, the administration of the MSA may be a daunting task for many injury victims. For injury victims who want to maintain control over their MSA account but are uncertain about meeting the requirements for self-administration, there are neutral, third-party companies who can offer some relief in the form of self-administration assistance.
For those injury victims concerned about the many requirements of administration and prefer help, there are numerous companies offering professional administration services. The professional administrator vendor employs a team of professionals to manage the custodial account created on behalf of the injury victim. The vendor has a clear understanding of the requirements for administration of the MSA account including the need to maintain records of every transaction, adequately reporting depletion or exhaustion, and other requirements. Additional benefits provided by the professional administration vendors may include helping injury victims find care, knowing the appropriate Medicare-approved rates for care, and receiving potential discounts on treatment and prescriptions. In certain cases, professional administration using a Medicare Set-Aside trust might be a preferred solution due to the longevity of a trust arrangement and additional legal protections of having a fiduciary. For those injury victims who may be dual-eligible (Medicare and Medicaid eligible), it is necessary to have professional administration through a Special Needs Trust since the MSA needs to be wrapped in an SNT in this situation. The benefit of a trust arrangement for someone on Medicaid and Medicare is keeping both benefits and having the fiduciary duty of the Trustee along with an MSA administrator.
Piecing it All Together
When settling cases involving someone who is a Medicare beneficiary or someone who might be in the near future, it is important to determine whether there is a need to consider Medicare’s interest. If you determine there is a need, then doing an analysis of the future Medicare-covered injury-related care (an allocation) is a recognized method of doing. Once you do an allocation, the next question is whether to fund a formal MSA. If you do, then consideration should be given as to whether it is done with a lump sum versus a structured settlement annuity. Most times, the benefit of funding via a structured settlement will make it the overwhelmingly logical choice. Once funding decisions have been made, then the last question is how the set-aside will be administered. Typically, these are really good reasons to professionally administer an MSA due to the complexities of doing self-administration.
That probably sounds complicated but having an expert on your side makes it a whole lot easier. Synergy’s team of experts can provide guidance on these difficult issues making it a simple decision for your client to make. Synergy can consult with the client about these issues, prepare a Medicare set-aside allocation report, provide funding options and assist with professional administration options. It is part of our MSP 360 suite of services and a way for law firms to have an end-to-end solution for MSP compliance.
 Helpful information regarding self-administration and a link to the Self-Administration Toolkit can be found here: https://www.cms.gov/Medicare/Coordination-of-Benefits-and-Recovery/Workers-Compensation-Medicare-Set-Aside-Arrangements/WCMSA-Self-Administration
September 30, 2021
All structured settlements are not created equal. There is a strong possibility you are leaving money on the table for your client with your existing settlement consultant or worse, relying on the insurance carrier’s structure broker. In this brief article, I will explain some of the methods we employ to obtain the highest payouts on structured settlements.
To read more, download the article below:
READY TO SCHEDULE A CONSULTATION?
The Synergy Settlements team will work diligently to ensure your case gets the attention it deserves. Contact one of our legal experts and get a professional review of your case today.