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Settlement Planning Opportunities: When Liens are Reduced or Eliminated, Don’t Forget to Explore Options for the Savings

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.

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