STRUCTURED SETTLEMENTS
March 16, 2022
Anthony F. Prieto, Jr., CFP® & Samantha Webster
Since 1983, structured settlements have become a frequently employed solution to protect personal injury settlements for the benefit of injury victims and their families. Over time as structures became more prevalent, the plaintiff bar realized that for a structured settlement to have maximum benefit for the injury victim, it was necessary to have experts involved in the planning process for their clients. A settlement planning professional that works directly with the plaintiff can make sure that a plan is developed to meet the needs of the injury victim.
Structured settlements allow a personal injury victim to utilize an annuity to receive part or all of their recovery over time, instead of as a lump sum. There are many benefits of utilizing a structured settlement, including:
- Tax-free gains/interest
- Creditor/judgment protection
- Highly customizable payment plans
- Fixed and guaranteed future payments
- Cost of living adjustments (increasing payments)
Structured settlements also have some downsides, including:
- The payments are locked in and cannot be changed.
- The interest rate (rate of return) is locked and does not change.
- A court order is required to change or alter certain terms.
Over the first 30 years of the use of structured settlements, there was little to no change in the types of structured settlement annuities offered to an injury victim, and there were very few product enhancements or changes brought to market. In recent years, however, there have been some new innovative products and enhancements brought to the market. The remainder of this blog post will summarize a few of those offerings.
Index-Linked Annuity Payment Adjustment Rider
The first change was implemented by Pacific Life in 2014. Pacific Life created a index rider to a traditional structured settlement. The Index-Linked Annuity Payment Adjustment Rider, or ILAPA, is used to create a market-based cost of living adjustment (COLA) each year. Prior to this rider, a COLA was chosen at that the inception of the contract and did not change. A client could select to have a set increase on their payment. The percentage change was locked in and fixed over the duration of the periodic payments stream. For example, the injury victim could choose a 3% COLA. Each year on the anniversary date, the payment would increase by the specified percentage, compounded each term. The percentage would be locked and the future payments would be known. ILAPA offers another option for the increase. If the client chooses this option, the annual COLA is determined by the performance of an index. With Pacific Life, the index is the S&P 500. Each year the payment increases by the COLA or may stay level based on the performance of the index. By tying the increase to the performance of the index, it allows the injury victim to have a higher payment increase if the market returns allow for it. In a given year, the increase in the payment can range from 0% and is capped at a high of 5%. This rider gives the injury victim more upside in years when the index performs well and can potentially match inflation in a more unified way. There is no downside. In years when the index is negative, the payment would just remain constant. Using the ILAPA rider is one way to limit the interest rate risk.
In 2022, Independent Life introduced a new product called iStructure. iStructure Annuity™ is the first uncapped, index-linked structured settlement annuity and is designed to provide the opportunity for growth in payout amounts with the same flexibility and tax benefits of traditional structured settlements. iStructure is linked to the Franklin BofA World Index™, powered by the quantitative insights of Franklin Templeton and Bank of America, with the objective of capturing long-term growth. This is accomplished, in part, by the index systematically allocating to companies around the world with the potential for high profitability. iStructure can be used for a variety of situations including personal injury cases, structured attorney fees, structured installment sales and taxable settlements. The benefits for clients include tax-free and tax-efficient income, the potential for increasing income, customizable payment options, market-downside protection, and protection against inflation.
Estate Tax Liability and Trust Shortfall Medicaid Payback Commutation Options
Commutation of payments is an option provided by most life insurance companies. Commutation provides payment of any remaining guaranteed payments under the annuity policy in a one-time lump sum upon death. Before 2021, the standard commutation option was to pay a single lump sum calculated using a discounted present value of the remaining guaranteed payments. In 2021, Berkshire Hathaway introduced options on commuting payments that do not require commuting all payments or selling them upon death to help create liquidity for probate. Traditionally, commutation was an all or nothing selection done at the time of policy issue. Berkshire’s new options for commutation do not require all remaining guaranteed payments to be commuted, but only enough to satisfy an estate tax liability or a Medicaid payback requirement. This change will have a large impact for structured settlements that pay into a special needs trust or pooled special needs trust. A client can decide at the onset to only commute the amount needed to cover estate taxes or the Medicaid lien. This allows the secondary beneficiary to potentially receive more payments in the future.
Conclusion
Considering the long history of structured settlements in the market, all of the product evolution has come about in a very short time. It is our hope that other companies will continue to introduce innovative options for settlements to implement for the benefit of injury victims we serve. New products and services could create more competition and ultimately provide better options and rates to help families. With more innovative solutions, families can choose what is right for their personal wants and needs when settling their personal injury case.
March 14, 2022
Rasa Fumagalli JD, MSCC, CMSP-F & Samantha Webster
Many Medicare Set-Aside (MSA) arrangements today are funded with structured settlements. There are some very good reasons for doing so, which are discussed below. However, it is critical to understand the different ways a set aside can be funded so your client can make the best decision possible of how to fund it if a structured settlement will be utilized. According to CMS, an MSA may be funded by either a lump sum payment or by a structured settlement. Although a lump sum MSA may be simpler to administer, there are several benefits to funding an MSA with a structured settlement annuity. One primary benefit is cost savings: it is not uncommon to see a 20-30% cost savings by using a structured settlement to fund an MSA as opposed to a lump sum. Another benefit is that rated ages, used for structured settlements, also reduce funding cost as well as the total amount needed to be set aside as rated ages are accepted as evidence of reduced life expectancy by CMS. Lastly, and probably most importantly, a structured settlement typically funds the set-aside on an annual basis which acts as a yearly deductible that once temporarily exhausted triggers Medicare to pay in that calendar year (assuming seed is exhausted as well). Contrast this with lump sum funding which requires total exhaustion of the entire set-aside amount before Medicare ever pays for any injury related care.
CMS Guidance on MSA Funding
The Workers’ Compensation Medicare Set-Aside Arrangement (WCMSA) Reference Guide, Version 3.5 (1/10/2022) discusses structured WCMSAs in several areas. Section 5.0 of the Reference Guide explains that in a structured WCMSA, the initial seed deposit should cover the first surgery or procedure for each body part and /or replacement along with the first two years of annual payments. This means that if the WCMSA includes projections for surgeries to three different body parts, the seed must cover the cost of these three surgeries along with the first two years of annual payments. The greater the initial seed deposit, the smaller the cost savings to be gained through annuity funding although they may still be significant.
It is important for practitioners to review the type of funding that is being proposed in the WCMSA submission to the Centers for Medicare & Medicaid Services (CMS). This information will appear on the CMS submission cover letter. Since Section 10.2 of the Reference Guide requires the claimant/beneficiary to confirm their review and understanding of the submission package, practitioners should be provided with these documents by the defense. If the WCMSA proposal cover letter seeks CMS approval of a lump sum, when the intention was to fund through a structure, the submitter will have to seek a revised CMS determination letter that changes the funding to a structure. This may result in an unnecessary delay.
CMS determinations that provide for funding of the WCMSA via a structure, will list the initial seed deposit and the annual payments. If the seed deposit that is recommended by CMS is within 5% of the seed that was proposed in the WCMSA submission, CMS will approve the seed in the submission. CMS determinations will also use the claimant’s life expectancy from the submission, if properly calculated, to identify the number of years that will require an annual payout. If a person lives longer than the number of years that are identified in the CMS determination, the annual payments will cease after the specific number of years has expired.
Funding a WCMSA with an annuity is like having an account for the claimant’s insurance deductible. Each year a payment is made from the structured settlement annuity into WCMSA; that payment, plus any carryover from prior years, must be spent down before Medicare will pay for accident-related services in any given year.[1] Section 19.3 of the Reference Guide addresses the administration of the WMSA when it is funded through a structure. When a WCMSA proposal is funded through a structure, the deposited funds if not properly exhausted, are carried forward in the WCMSA account. The entire amount of the funds available in the WCMSA must be properly spent before Medicare is presented with any injury related Medicare covered bills. If the WCMSA funds temporarily deplete before the next annual payment, Medicare will pay as the primary payer for additional injury related medical expenses until the account is funded again. This concept is called “temporary exhaustion.” The claimant does not need to postpone care, as a temporary exhaustion of the WCMSA account obligates Medicare to potentially pay something towards injury related care each year.
Structured Settlement Funding Considerations for MSAs
Because structured settlement annuities are tax-free and reduce the amount needed to fund the set-aside substantially, they should be considered as the funding mechanism for nearly every set aside arrangement. Once the parties to a settlement agree to fund a WCMSA with a structured settlement, they must agree on the type of structured settlement annuity to use. There are several structured settlement annuity options available for funding a WCMSA, and the option chosen will depend on several factors including agreement by defense, the cost, and the preference of the claimant.
Traditionally, the defense will propose a specific type of structured settlement to fund the WCMSA known as a temporary life annuity. A temporary life annuity provides payments only if the claimant is living and only for a certain number of years. The number of years required is tied to the claimant’s life expectancy and expressed in the MSA allocation report or the CMS determination. The rationale for using a temporary life annuity stream is two-fold. First is the cost. Using a temporary life annuity is the least expensive annuity option for funding a WCMSA. Second, the annual payments to the WCMSA are intended to cover the injury related care that normally would be covered by Medicare which would end upon the death of the claimant. When a claimant dies there is no reason to replenish the WCMSA so no additional payments should be made. With the temporary life annuity, payments cease upon the death of the claimant.
The cost of the structured settlement annuity can also be a factor when choosing an option for funding the WCMSA. The cost consideration may depend on whether defense has agreed to fund the WCMSA in addition to or inclusive of the settlement offer. If the WCMSA is in addition to the settlement, defense will focus on the least expensive option which would be the temporary life annuity. If the WCMSA is inclusive of the settlement offer, the claimant may have an opportunity for other options, but would need to consider whether there are enough proceeds to cover any additional annuity funding expenses for guarantees.
While the temporary life annuity option may be preferred by defense or by a claimant looking for the most cost-effective way to fund the WCMSA, there are other options that can benefit the claimant’s family in the event of a premature death. An option that satisfies the funding requirement for the WCMSA and provides the claimant’s family with some additional security is a period certain annuity. The terms are very similar to a temporary life annuity with the added benefit of all payments being guaranteed. A guarantee provides the claimant with an opportunity for their death beneficiaries to receive any remaining payments upon death. This can be an important feature for a claimant concerned about using settlement proceeds to fund a structured settlement annuity that does not benefit their family if they die before all the scheduled payments are made. With a settlement inclusive of the WCMSA funding, using a structured settlement can create cost savings that benefits the claimant. The savings can be used for non-Medicare expenses or replacement of indemnity benefits.[2]
Post Settlement Administration of the MSA
Since the administration of an MSA is complicated, CMS “highly recommends” the use of a professional administrator for their funds. Consideration should be given at the time of settlement to the benefit of professional administration for both sides and who shall be responsible for the cost. At the claimant’s election, professional administration may be chosen and paid for from settlement proceeds. Like funding the set-aside itself, there is also a benefit to funding the professional administration annual expense using a structured settlement. Professional administration benefits the claimant in that the funds in the account are property spent, record keeping and attestations (“annual reporting”) are done correctly and timely, bills paid from the WCMSA are in line with the appropriate workers’ compensation fee schedules or lower, and temporary exhaustion or final depletion of the WCMSA is properly reported. In certain cases, insurance carriers may insist on professional administration and bear the cost on behalf of the claimant. The primary benefit to the insurance carrier is control over any remaining balances in the WCMSA account upon the death of the claimant. Practitioners should be aware that insurance carriers may seek to have any funds that remain in the professionally administered account revert back to the carrier upon death of the claimant. In light of this, it is important to make sure “reversion” is discussed in the settlement negotiations. It should be clearly spelled out in the settlement documents and in the professional administration agreement to avoid any confusion.
Conclusion
Settlements that involve a WCMSA do not have to be complicated. Making the decision to fund the WCMSA with a lump sum or a structured settlement annuity is the first step. If the decision is made to fund with a structured settlement annuity, understanding the different funding options is the next critical step. The defense and the claimant each have priorities, and the parties need to agree on an option for the settlement to proceed. The final consideration is whether the claimant will self-administer the WCMSA or opt for professional administration. While the professional administration may benefit the claimant, the insurance company may insist on it as a means to control the funds remaining in the WCMSA after the death of the claimant. Each of the items mentioned should be considered by the parties to the settlement and be outlined in the settlement documents. For practitioners, it is important to find a strategic partner to help guide you through the process and provide guidance on each of these critical steps for a WCMSA.
[1] and [2] Lazarus, Jason D. and Pettingill, B. Joshua, “WCMSA Funding Mechanisms: Maximizing Recovery & Cost Savings,” Legal News by Jason D. Lazarus, Esq. A legal examiner Affiliate, 6 July 2020.
February 17, 2022
Samantha Webster & Teresa Kenyon
Synergy has successfully reduced the lien asserted against your client’s settlement. It is great news! Because Synergy has reduced the lien, the injured party will net more money from their settlement than they originally expected. So, what should they do with the savings? Reduction or elimination of a lien presents the perfect opportunity for an injured party to consider settlement planning options.
In any case, an injured party settling their case needs time to consult with experts regarding the options available to them. These options include establishing a special needs or management trusts, funding options for a Medicare Set-Aside, lump sum versus periodic payment options, and income tax-free structured settlements or other tax deferred/taxable annuity options for proceeds. Whether the settlement proceeds have already been released to counsel’s trust account or the proceeds are being held by the insurer pending resolution of the lien, both scenarios still offer the injured party options for planning purposes.
Discussing options for an injured party’s proceeds before settlement or even after the fact when there are additional proceeds from lien savings can be invaluable to the injury victim. This is particularly so and important when needs-based benefits are being received. When an injured party is the recipient of these benefits, such as Medicaid and/or Supplemental Security Income (SSI) from the Social Security Administration, a common planning decision is to utilize a special needs trust or pooled special needs trust to preserve the entitlement to those benefits. Otherwise, after receipt of a settlement, the recipient is at risk of losing those benefits. Any savings on a Medicaid lien can be deposited into the special needs trust or be placed into a structured settlement with the payments providing a replenishment of funds into the trust for the benefit of the injured party.
Savings from all other types of liens can also provide an opportunity for an injured party to plan for the future. If a settlement preservation trust was established, the lien savings can be placed into the same trust. Lien savings can also be placed into a structured settlement or an annuity to provide payments to the injured party over time. Lien savings present an ideal time to assess the opportunity to cover future needs. Structured settlement or periodic payments can be deferred to cover any number of future items such as the replacement of durable medical items that wear out over time. A good example would be wheelchair replacement cost every 3-5 years.
Medicare, ERISA, FEHBA, military, private insurance, or hospital lien savings can create additional proceeds that an injured party was not expecting, allowing the injured party to develop a unique plan to maximize the additional settlement dollars that they will have available to them. For example, an injured party with a $500,000 lien, realizing a 60% savings, can provide the injured party with an additional $300,000 in settlement proceeds. Using a structured settlement, the injured party can choose from an infinite number of options, including:
- Receiving regular, timely monthly payments for years after their settlement.
- Creating payment streams to offset college expenses for the injured party’s children.
- Choosing regular, timely annual payments immediately after settlement to help with the injured party’s regular expenses.
- Planning for replacement of vehicles or durable medical equipment that may not be covered by insurance.
- Deferring payments until retirement age (depending on the age of the injury victim).
Lien savings does not need to be in the hundreds of thousands to make an impact, though. Planning for future payments using a modest lien savings of $25,000 can also provide a tremendous benefit to the injured party. A series of lump sum or annual payments can be scheduled to allow the injured party time to plan for their future. Savings can also be turned into deferred payments that will cover future needs or wants for the injured party. Even if the injured party did not structure any portion of the settlement proceeds before the lien was reduced, this does not preclude them from structuring the lien savings. The injured party has a wonderful opportunity with lien savings to plan for their future.
The most important thing to understand is that not all lien savings can be placed into a tax-free structured settlement for the benefit of the injured party. The determining factor is whether the settlement proceeds have been received by the injured party’s counsel while pending resolution of the lien or if the proceeds have not been released by the defendant or the insurer. Settlement proceeds in the trust account of the injured party’s counsel are considered constructively received by the injured party. To be income tax-free, a structured settlement annuity must be funded directly from the insurer or the defendant; however, constructive receipt of proceeds does not mean there are not other options for the injured party. The injured party can still opt for periodic payments through a taxable non-qualified structured settlement or even a fixed indexed annuity. The latter two options remove the tax-free nature of the entire payment but can be tax-deferred and retain the protection from creditors or judgments that are afforded to an injured party with an income tax-free structured settlement. All the options, though, present an opportunity for the injured party to ultimately protect their recovery and plan for their future.
It is never too early for an injured party to communicate with a Synergy settlement planner to discuss their options. The most important consideration is consulting with someone before settlement proceeds are released to the injured party’s counsel. If an injured party waits to consult with a settlement planner regarding their options after the settlement offer is made, they may feel rushed to make a decision or may not be fully informed on all the options available to them. Options are always available to the injured party before the settlement, during the negotiations or at mediation, or even once an offer of settlement has been accepted. Knowing the needs of the injured party and what options are available for the specific injured party is the key. Synergy Settlement Services serves as a vital member of a settlement planning team that can advise the injured party and their counsel about cutting edge settlement planning strategies including financial options at settlement. Working with Synergy’s team of expert planners, your client can develop a unique plan which maximizes each post-settlement dollar and allows the injured party to transition from litigation to life.
For more information about settlement planning, visit here.
January 13, 2022
Samantha Webster
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‘.
November 11, 2021
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. Many
questions come up such as should the client seek Social Security Disability (SSDI) benefits and become Medicare eligible? Doesn’t that trigger the need for a Medicare Set-Aside? What if the
client is receiving needs-based benefits such as Medicaid and/or Supplemental Security Income (SSI)? Is coverage under the Affordable Care Act (ACA) a better or even an available option?
How should the recovery be managed from a financial perspective? Is a trust appropriate? Should a structured settlement be considered?
Learn the answers to all of these complex questions by downloading this case study written by Synergy’s CEO, Jason D. Lazarus, J.D., LL.M., MSCC, CSSC:
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