By Jason D. Lazarus
Catastrophically injured individuals have unique needs when it comes time to settle their cases. A one-size-fits-all approach does not work given the complexities that are faced today upon resolution of a personal injury lawsuit. Consideration of how healthcare will be obtained have become much more complicated with the Affordable Care Act (ACA). An analysis is needed, in many cases, of whether to keep public benefits, such as Medicaid, in place for healthcare or go into the exchanges. In some cases, future Medicare eligibility may be jeopardized if proper planning is not done. Moreover, the question of how best to manage the net proceeds presents an important question that cannot be overlooked. Should the settlement be structured? Should a trust be utilized? Are there public benefit preservation issues that will determine what type of trust needs to be created?
Frequently these questions are overlooked because the defendant comes to mediation with a “structured settlement broker” who offers the solution to all of these issues, a structured settlement annuity. Structured settlement annuities are a great planning device and certainly have their place in the resolution of a personal injury settlement. The problem becomes when it is touted as the solution to every issue and it is mandated by an insurer through their own captive life insurance company. The purpose of this article is to educate attorneys about the many issues that should be considered before accepting a settlement plan and an argument about why it is imperative to have an experienced “settlement planner” work directly with the personal injury victim.
Why You Need a Plaintiff “Settlement Planner”
Before talking about the planning-related issues that have become so important in today’s settlement landscape, I wanted to engage in a discussion and argument related to the importance to having a plaintiff-based “settlement planner” working with your client. First and foremost, it is vitally important to have a credentialed expert assisting with what will be the most important financial transaction of the injury victim’s life. A settlement is meant to last the remainder of that person’s life. Making sure all options are explored is critical. Secondly, making sure that client is properly protected in any transaction involving the insurance company and a structured settlement is imperative. Protecting yourself from liability in these transactions is exceedingly important as they are complex and highly specialized. Having an experienced team to guide you through the issues and make sure you don’t have malpractice exposure is critical.
I say that not to bash the other side, but to illustrate that their allegiance and concerns lie with their clients, the defendant insurance companies. Typically, there is an emphasis on structured settlements being the only possible solution to managing the client’s settlement proceeds. This is not limited to “brokers” that work for defendants. There are also plaintiff “brokers” who only offer annuities as a funding solution. However, a plaintiff-based settlement planner will rarely take this viewpoint. Instead, the settlement planner will offer options and solutions based upon the needs of the client. It is a needs-based planning approach that takes into consideration all of the factors that come into play for that particular client’s future plans. It looks at financial issues, future wants/needs, available healthcare options and management of the client’s future care well into the future. It typically will involve trusts, structured settlement annuities, life insurance, Affordable Care Act health insurance programs and other financial products. An analysis of preservation of needs-based government benefits programs is typically undertaken to help clients decide whether it is right for them to stay eligible for benefits such as Medicaid and SSI. It is a totally different perspective from those that are “structure brokers” for the defense that exclusively offer annuity-based solutions. A settlement planner’s goal is to guard against the personal injury plaintiff from being victimized a second time by poorly crafted solutions or, worse yet, a one-product-fits-all approach.
This is not to say that structured settlements do not have their virtues. They are an excellent choice for funding future quantifiable needs. A properly crafted structured settlement provides guaranteed income tax-free payment streams for the injury victim. A structure is also income tax-free to the death beneficiaries should something happen to the original annuitant (the injury victim). They also enjoy certain protections from creditors and judgments. There are no ongoing fees and costs associated with managing a structured settlement. The injury victim can transfer the risk of outliving the settlement dollars to a well-capitalized, highly-rated life insurance company. The tax-free returns, while conservative, are competitive with other fixed income products available in the marketplace. For the foregoing reasons, a tax-free structured settlement is frequently going to be part of the ultimate settlement plan for the injury victim. Frequently they are the cornerstone of the plan.
What Separates a “Settlement Planner” from the Rest?
Having the depth of knowledge to address all of the planning related issues at settlement is what separates a “settlement planner” from a “broker”. Things like understanding how the ACA works and its intersection with Medicaid/Medicare; being able to navigate thru Medicare Secondary Payer compliance issues and preservation of needs based public benefits; addressing the use of Qualified Settlement Funds (QSFs) and having a firm command of the types of settlement trusts that can be deployed (from SNTs to pooled trusts to Settlement Asset Management Trusts to ACA-optimized trusts). These are the cornerstone of the planner’s arsenal and are vital to proper planning in a catastrophic injury case. Below, I will address these issues in greater detail.
When you represent a catastrophically injured client who receives a large monetary settlement or award, many questions arise. Should the client seek Social Security Disability benefits and become Medicare-eligible? Should he or she create a Medicare set-aside? What if the client receives needs-based benefits such as Medicaid and Supplemental Security Income? Is coverage under the Patient Protection and Affordable Care Act a better or even an available option? How should the recovery be managed from a financial perspective? Is a trust appropriate, or a structured settlement? There are no easy answers to these questions, but here are some guidelines for navigating the terrain and advising your client.
You need to understand the basics of public benefit programs and their differences to protect your client’s eligibility for them and plan for their recovery. Two primary public benefit programs are available to the injured and disabled: Medicaid with the intertwined Supplemental Security Income (SSI), and Medicare with the related Social Security Disability Income (SSDI). Receipt of a personal injury recovery can jeopardize a client’s eligibility for both programs.
Medicaid and SSI. SSI is a need-based cash assistance program administered by the Social Security Administration. To receive SSI, the person must be either 65 or older, or blind or disabled, plus he or she must be a U.S. citizen and meet the financial eligibility requirements. In many states, one dollar of SSI benefits automatically provides Medicaid coverage. It is imperative in most situations to preserve some level of SSI benefits if Medicaid will be needed in the future. Medicaid provides basic health care coverage for those who cannot afford it. The state and federally funded program is run differently in each state, so eligibility requirements and available services vary. Because Medicaid and SSI depend on income and assets, a special needs trust may be necessary to preserve eligibility.
Medicare and SSDI. These are entitlement benefits and are not income or asset sensitive. Clients who meet Social Security’s definition of disability and have paid enough into the system can receive disability benefits regardless of their financial situation. SSDI is funded by payroll contributions to Federal Insurance Contributions Act (FICA) and self-employment taxes. Workers earn credits based on their work history. Medicare is a federal health insurance program, and benefits begin at age 65 or two years after becoming disabled. Medicaid can supplement Medicare coverage if the client is eligible for both programs. For example, Medicaid can pay for prescription drugs as well as Medicare copayments or deductibles. A special needs trust is not necessary to protect eligibility for Medicare benefits; however, the Medicare Secondary Payer Act may necessitate use of a Medicare set-aside.
Planning Techniques for Government Benefit Preservation
Protect Medicaid and SSI eligibility. The primary vehicle for protecting needs-based benefits is a special needs trust (SNT). Assets held in a special needs trust are not countable for purposes of Medicaid or SSI eligibility. Federal law governs the creation of and requirements for such trusts. First and foremost, a client must be disabled to create an SNT. There are two primary types of SNTs, each with its own requirements and restrictions. The (d)(4)(A) special needs trust is only for those who are under 65. This trust holds the personal injury victim’s recovery and is for the victim’s own benefit. Alternatively, a (d)(4)(C) trust, typically called a pooled trust, may be established with the disabled victim’s funds without regard to age. Both types of SNTs can be established by the injury victim, a parent, grandparent, guardian, or court order.
Protect future Medicare coverage. For any client who is a current Medicare beneficiary or reasonably expects to become one within 30 months, the Medicare Secondary Payer Act is implicated. According to CMS’s interpretation of this law, Medicare is not supposed to pay for future injury-related medical expenses covered by a liability or workers’ compensation settlement or award. In certain cases, a Medicare set-aside may be advisable to preserve future eligibility for Medicare coverage. A portion of the settlement is put into a segregated account and can be used only for the client’s injury-related care that would otherwise be covered by Medicare. Once the set-aside funds are exhausted, the client gets full Medicare coverage without Medicare seeking further contribution, reimbursement or subrogation. In certain circumstances, Medicare signs off on the amount to be set aside and agrees to be responsible for all future expenses once those funds are depleted.
Dual eligibility. If a client is a Medicaid and Medicare recipient, extra planning is in order. A Medicare set-aside can affect eligibility for needs-based benefits such as Medicaid and SSI, if it is not set up inside a special needs trust. Therefore, to maintain the client’s full benefits, the set-aside must be put inside an appropriate trust. A hybrid trust that addresses both Medicaid and Medicare is a complicated planning tool but one that is essential when you have a client with dual eligibility.
After protecting public benefits, you should also consider how to best manage a client’s financial recovery. Should part of it be a structured settlement? Does the client need ongoing management of financial affairs or help from a fiduciary such as a corporate trustee? There are no right or wrong answers to these questions. Here are some options to consider to help your client make an informed decision.
One is to take the whole personal injury recovery in a lump sum. This lump sum is not taxable, but any investment gains are. This option does not provide any spendthrift protection and leaves the funds at risk for creditor claims, judgments, and waste. Also, the injured client has the sole burden of managing the money to cover future needs such as lost wages or medical expenses. As discussed above, the client would lose any needs-based public benefits.
The second option is a structured settlement to provide fixed periodic payments. A structured settlement’s investment gains are never taxed, it offers spendthrift protection, and the money has enhanced protection against creditor claims and judgments. A structured settlement recipient can avoid disqualification from public assistance if he or she also implements an appropriate trust, as discussed above.
A third option, which should always be considered, is a settlement trust. These are typically managed by a professional trustee and can also contain provisions to help preserve needs-based benefits. Settlement trusts provide liquidity and flexibility that a structured settlement cannot offer, and at the same time protect the recovery. The investment options become limitless and the trust can always be paired with a traditional structured settlement. It also protects the structured settlement from being sold to a factoring company (i.e., J.G. Wentworth). Having a professional trustee in place that has a fiduciary duty to the client provides security and a trusted resource for life and financial management issues. In certain cases, this solution makes a lot of sense because of its ability to adapt to changing circumstances. When a disabled injury victim has needs that are not easily quantifiable or predictable, the settlement trust can adjust to the client’s needs. When a settlement trust is paired with a structured settlement, the client can have guaranteed income for life and sufficient liquidity.
Conclusion – Identify Clients Who Need Planning
You must establish a method of screening your files to identify clients who are sufficiently disabled to warrant further planning and determine whether you should consult outside experts. The easiest way to remember the process is the acronym CAD:
- C—consult with competent experts who can help deal with these complicated issues.
- A—advise the client about the available planning vehicles or have an outside expert do so.
- D—document your efforts to protect your client.
If the client declines any type of planning, document the advice and education provided and have the client sign an acknowledgement. If he or she elects a settlement plan, hire skilled experts to put the plan together so they can help you document your file properly to close it compliantly.
Disabled clients especially need counseling given the likelihood they will be receiving some type of public benefits. To prevent being exposed to a malpractice suit, you should understand the types of public benefits for a disabled client and techniques for preserving them.