STRUCTURED SETTLEMENTS

By: Joanna Wynes, J.D., Partner Planner

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.

Case Studies:

                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.

Conclusion

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

Samantha Webster

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?

    1. 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?

    1. 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.

    1. 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.[1] 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.

[1] 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

Josh Pettingill, MBA, MS, MSCC

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:

September 9, 2021

Samantha Webster

Structured settlements may be used to fund a Workers’ Compensation Medicare Set-Aside (WCMSA). Samantha Webster, Synergy’s Director of Case Management, addresses two common questions that come up about funding of a WCMSA with a structured settlement annuity.

Question #1:

“Are there different structured settlement options to fund a Medicare Set-Aside and what is the difference?”

Yes, there are different types of structured settlement payment plans that can fund a Medicare Set-Aside.  After an initial cash deposit is made to start the Medicare Set-Aside account (seed), a structured settlement will make annual payments to replenish/ add to the account.  The most common structured settlement option offered by the carrier is a temporary life payment stream.  With a temporary life payment stream, the annual payments to the MSA account are payable only as long as the injury victim is alive and for a maximum number of years (the life expectancy used for the MSA allocation).  If the injury victim dies before reaching the maximum number of years, the payments stop. There are no structured settlement payments payable to their beneficiaries.  A great alternative, but higher cost, is a period certain payment stream.  With a period certain payment stream, the annual payments to the MSA account are paid for a certain number of years (generally the life expectancy used for the MSA allocation).  Every payment is “guaranteed,” which means that in the event of the injury victim’s death before all payments are made, the remaining payments would go to designated death beneficiaries or the injury victim’s estate.  While there are other options, these are the two most common.

Question #2:

“My client’s CMS-approved MSA is being funded with a structured settlement, but the payments do not add up to the total on the CMS approval, is that acceptable?”

CMS will provide parameters for the funding of an approved MSA using a structured settlement.  In providing the initial seed amount and the annual payments, CMS rounds the numbers down.  In doing so, the initial seed/deposit and the sum of all annual payments may be less than the total amount approved.  If an MSA is funded with a structured settlement and the proposal follows the recommendation of CMS with regard to the initial seed/deposit and the annual payment amount, CMS will consider the MSA as being fully funded.  If you or your client are concerned about the discrepancy, you can add the difference to the seed or ask your settlement planning professional to include the difference in the annual structured settlement payment stream.  Both options will allow your client to match the total CMS-approved MSA amount.

Example:

CMS Approved MSA                $345,687.00

Initial seed/deposit                 $48,549.00

Annual Payments                    $14,149.00

Duration per CMS                   21 years

In this case, the seed/deposit plus the annual payments equals $345,679 which is $9 less than the CMS-approved MSA.  To relieve any concerns, $9 can be added to the seed/deposit or the annual payments can be increased to $14,149.43.

 

 

November 10, 2020

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

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

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

October 8, 2020

ABLE accounts, named for the Achieving a Better Life Experience Act, have been around since 2014 but remain underutilized across the country despite offering a way for people with disabilities and public benefits to save money without jeopardizing their public benefits eligibility. [1]  The reasons why are likely a combination of the limitations that apply to ABLE accounts and a lack of awareness, but for those who qualify and understand how to use them, ABLE accounts can make a world of difference.

Public Benefits

Before delving into the intricacies of ABLE accounts and how they can help your client, you should first understand the problem they were created to solve. Those with means-tested benefits, such as Supplemental Security Income (SSI), Medicaid, housing benefits, or Supplemental Nutrition Assistance Program (SNAP) benefits, must keep their income and resources below a certain threshold (usually around $2,000) or risk losing their benefits. [2]  This threshold varies by program and by state, so it is important to understand exactly which benefits a client has. There are many assets which are exempt (not counted), such as a home, vehicle, and household effects; but a personal injury recovery, while not taxable, is countable by nearly every public benefit program (the exception is assistance provided by the Department of Housing and Urban Development (HUD)). If you write a check to your client for their net recovery and they have one of the benefits above, they will have an obligation to report it to the agency which oversees their benefit and will likely lose the benefit until they spend the money or deposit the funds in a special needs trust or an ABLE account. [3]

The list above includes the common means-tested benefits, but this is not an exhaustive list. There are also entitlement benefits which are not means-tested; therefore, they are not affected by income or assets. Social Security Disability (SSDI) and Medicare are the most common, but some forms of Medicaid are not means-tested. Many clients do not fully understand which benefits they have, so the best practice is to get copies of their award letters. Sometimes you can make an educated guess based on the amount they receive—SSI pays a maximum of $783 in 2020, so if the client is receiving $1,200, then they do not have SSI. If they are receiving $700, it could be either SSI or SSDI. The only way to know for sure is to review the award letter.

ABLE Accounts

The Achieving a Better Life Experience Act is a federal law allowing individuals who are disabled to create a tax-advantaged savings account which is exempt from being a countable asset by the major public benefits programs. This allows them to save and invest or spend funds on “qualified disability expenses” (QDE). QDEs are broadly defined to include virtually anything used to support the health and wellness of the account holder.

The Bad News

ABLE accounts are only available to people whose onset of disability occurred prior to turning age 26. The client does not need to have been diagnosed before age 26, but they must be able to certify that their condition presented before that age. This limitation was likely imposed by Congress to limit the number of people who could take advantage of the tax savings. The fact that ABLE accounts have not been utilized as expected, coupled with the many reasons a person can become disabled at any age, has spurred several attempts to raise the age to 46 through the ABLE Age Adjustment Act, but as of the time of this post no changes have been made in that regard.

The other limitation, and the reason ABLE accounts are not the go-to solution for personal injury recoveries, is that only $15,000 can be contributed per calendar year and only one account can be created. An account holder who is working can contribute an additional $12,140 (more in some states) in earnings. This additional amount will grow tax-free but is not sheltered for public benefit purposes. The account balance can continue to grow year after year, up to a maximum set by the state (most are $270,000). If the person has SSI, the account balance must stay under $100,000 or the excess will be counted as income.

The Good News

There are many benefits to having an ABLE account. A big one is the tax advantage. The funds are invested (some offer different portfolio options to choose from) and grow tax-free. Distributions are also tax-free so long as the funds are used on QDEs.

How is this different from a Special Needs Trust?

The exemption from income and asset-counting rules is similar to a special needs trust (SNT) but with two big differences. One difference is that ABLE accounts have fewer restrictions. SNTs are meant to supplement, not replace, public benefit programs. For this reason, SNTs cannot disburse funds for things that are provided by other benefits. For example, if someone has SSI and their SNT disburses funds for food or shelter expenses, the individual’s SSI check will be reduced by up to a third. This is because SSI is meant to provide funds for food and shelter expenses (which includes rent), so the trust would be “replacing” that benefit by expending funds for that purpose. ABLE accounts, because they can be used on qualified disability expenses, can be used for food and shelter expenses. This is an area where SNTs and ABLE accounts can work together. A common workaround is to fund the SNT with the full amount of the net recovery and ask the trustee to disburse funds into the ABLE account each month so the beneficiary can pay for rent, groceries, and utilities. This allows the client to use their settlement recovery for all their needs and protect their benefits.

The other way in which an SNT is different from an ABLE account is that an SNT is a legal document, so it must be drafted by an attorney and distribution decisions will be made by a trustee. An SNT beneficiary cannot compel or have control over the distributions (this lack of control is why the trust is not a countable resource). ABLE accounts, in contrast, are controlled by the client or their representative and require no attorney assistance. All one needs to do is find an ABLE account provider which accepts people in their state.[4] Most have options to sign up online, which can be done in minutes. Further, all decisions about what gets paid are made by the account holder.

The funds can generally be accessed by paper check, electronic transfer, or by using a prepaid card which is linked to the account. The client could even transfer funds to their own personal bank account, but they need to be careful about doing this. If they keep the money into the next calendar month, it will become a countable asset. There are tax consequences for not following the rules, and there could be negative consequences to the client’s benefits (although this has yet to be reported). While there is much to be said for the independence of getting to decide how the money is spent, this should not be offered to clients who are likely to abuse or misunderstand it.

One of the biggest complaints about SNTs is the beneficiary’s lack of control. Since the trustee is charged with making disbursements according to the trust’s terms and the client’s best interest, there is room for disagreement between the trustee and the beneficiary. This can be very frustrating for a beneficiary, having just completed years of litigation, who has strong feelings about what they want and need. If the client is likely to butt heads with the trustee, one strategy is to front-load an ABLE account with $15,000 before funding the SNT. The client can use the SNT for most of their needs but will have the ABLE account to use for things the trustee might deny. Some trustees are open to further funding an ABLE account year after year without asking what the funds will be used for, while others apply the same standards as they would apply to any trust disbursement. This is still a grey area in the trust administration world, so it is up to the trustee to determine what happens to funds in the SNT once the deposit is made.

Instead of using an SNT, could I set up a structure to pay $15,000 per year into an ABLE account?

The answer, unfortunately, is unclear. There are no rules or regulations either allowing or prohibiting ABLE accounts from being funded this way. You could set up a structure to pay to the ABLE account, but the risk would be that either it would be prohibited by a later regulation or that the Social Security Administration or another benefit program would decide to make the contribution a countable resource. These scenarios do not seem likely, but they are possible.

Even if it was explicitly permissible, there are some risks that come with funding this way. One is that the $15,000 threshold could be changed, while the annuity would be virtually set in stone. If the maximum contribution went to $14,000 and a $15,000 check arrived, the ABLE provider would deny it, which would create a headache for the client and the life company. Further, if the client was going to save the money long-term, they would need to make sure they did not reach the maximum threshold. A more likely risk would be that the client might deposit their own money (maybe an unexpected gift, for example). Since the ABLE account cannot accept a penny more than $15,000, if a check that arrived would cause the account to exceed this amount, again, they would deny it.

All of that being said, using a structured settlement to fund an ABLE is still a viable planning option.  To have certainty, you would want to fund through a stand-alone or pooled special needs trust.  That way the trustee can move $15,000 annually into an ABLE account.  It also provides the necessary flexibility in case the maximum contribution goes up or down, the trustee would have the ability to contribute less or more with the balance of the structured settlement payment remaining in the SNT.

What happens to remaining funds when the client dies?

The answer to this question depends on the state. Initially, ABLE accounts were treated like SNTs in this regard: when the client died, Medicaid had a right to be reimbursed for services provided (not including those paid at settlement). A growing number of states have changed this and now disburse funds to the client’s estate. Medicaid Estate Recovery will still apply, but instead of money automatically going to Medicaid, statutory protections can be invoked which prevent estate recovery in certain circumstances.

Conclusion

ABLE accounts are still worthwhile for clients who qualify, and they can certainly be part of a well-rounded settlement plan. It is unfortunate that unless the recovery is very small, ABLE accounts cannot be the entire solution. There are some rules to follow and limitations to be mindful of, but the ability to save beyond the income and asset limits while having control over the money cannot be underestimated.

 

 

[1] https://www.cnbc.com/2019/08/24/theres-a-game-changing-way-for-the-disabled-to-save-but-few-use-it.html

[2] Linked here are the rules and exemptions for the major benefit programs: SSI, HUD, and SNAP. For Medicaid exemptions, see your local Medicaid eligibility manual, many of which can be found here.

[3] It is important to note that funds should be used to purchase services or exempt assets so as not to cause ineligibility in a different way. Any purchases need to be at fair market value, which means the money cannot be given away without triggering a transfer penalty.

[4] A list of ABLE account providers can be found here. One to make note of is STABLE, which is based in Ohio, but accepts account holders in every state.

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