CAOC Forum, July/August, 2018 – Patrick Farber and Alejandra (Ali) Mendiola
Bringing two parties to the mediation table in a personal injury case is often a substantial feat. It shows a willingness to negotiate and even to compromise on both sides. Much discussion and agreement needs to happen before reaching the “demands and offers” and eventual settlement phase. Knowing in advance how much an injured client needs to help with medical and living expenses is critical, especially if the injury is severe. No attorney wants to see a client run out of funds from a settlement that was supposed to last a lifetime.
When discussing a settlement in mediation, money is obviously a primary issue, but just as important is how settlement funds will be distributed. That’s where a structured settlement broker can help. Early on in the process, a broker can be brought in to offer suggestions on how to devise a settlement that addresses the unique financial needs of the injured party and family, taking into consideration current and future medical costs, loss of earnings, loss of retirement contributions and other expenses.
Before Mediation Begins
Most personal injury claimants choose to receive their settlement in a lump sum. While this may make sense in some cases (very small settlement amounts), the decision to receive the settlement as an upfront, lump sum is usually made because plaintiffs are unfamiliar with structured settlements, settlement tax or government benefits issues or they feel they can better invest the proceeds on their own. Prior to mediation, plaintiffs’ attorneys typically bring in a broker in cases where structuring the settlement seems appropriate.
The broker can talk with injured parties about their financial and life care needs – medical and living expenses, what to expect now and in the future and whether Medicare Set-Asides and Special Needs Trusts are necessary. The broker can explain the structure options including upfront cash with scheduled payments for the remaining funds, designated lump funds at specified future dates and inflation-adjusted settlements. The broker can show comparisons between receiving all funds upfront versus receiving tax-free, compounded income over time. Ultimately, of course, it is up to the plaintiff to decide whether a structured settlement is the right option.
Finding out in advance how much the injured plaintiff requires to meet current and long-term living expenses can give the attorney a clearer picture of the client’s needs.
During mediation, brokers obviously cannot be part of the discussions on the legal issues of a case, but they can assess how settlement offers would impact the current and long-term financial requirements of the plaintiff.
The injured party’s quality of life and life expectancy often depend on the amount of the settlement. Brokers, with the assistance of life care planners, create a life care plan that lays out the plaintiff’s life expectancy data, medical and living necessities and the associated costs. This plan enables all parties to understand the costs involved in specific life care situations and what is needed to provide the best quality of life to the injured party.
Once a settlement amount is determined and the plaintiff decides that a structured settlement is the best way to go, brokers work with the defendant or the issuing insurance company to ensure that all language in the settlement agreement and release is worded properly and the proceeds will be received tax-free.
Settlement Distribution Options
Structured settlements have the flexibility to fit the specific circumstances of the injured party. Here are some of the most common scenarios.
In this option, the injured plaintiff may have high current expenses or specific future costs – but still needs a long-term, steady stream of income. These expenses can include medical costs, home remodeling to accommodate wheelchair access, college education for the plaintiff or children or a new car purchase/car modification.
For example, assume that a nine-yearold girl was catastrophically injured when a drunk driver slammed his car into her family’s vehicle. It is determined she will require around the clock medical care for the rest of her life, future surgeries and assisted housing in her later years. The drunk driver’s insurance company agreed to a payout in excess of $10 million. Because of her injuries, her life expectancy is about 50 years.
With the help of the settlement broker and life care planner, a payment plan is devised where the girl receives several million dollars upfront to pay for medical bills, construction to the family home to accommodate the girl’s medical equipment and to hire a nurse’s aide. In addition, the family will receive $20,000 per month with a 25-year guarantee, but paid throughout the girl’s life. She will receive lump sums timed to pay for required surgeries and then later when she needs to move into assisted living. The net settlement amount to the plaintiff will compound tax free at 3 percent per year so the actual expected payout during the girl’s life will be in excess of $55 million.
Structured settlements in conjunction with a Special Needs Trust (SNT) can help assure that an injured individual can maintain eligibility for current or future Medicaid and SSI while still receiving settlement payments. Settlement funds can be used for needs not covered by government programs. These can include in-home care, day-to-day living expenses and new vehicles or residences. If the structure is not prepared correctly, government benefits can be denied. The combination of settlement and government benefits can greatly enhance the injured individual’s quality of life and longevity.
There are two types of SNTs: the traditional individual Special Needs Trust (SNT) or a Pooled Special Needs Trust (PSNT) run by a non-profit or charitable organization.
An individual SNT may only be used if the client is under age 65 and disabled. A Pooled SNT comes without an age restriction or limits on the size of the settlement so it can be used for any plaintiff age 65 or over.
For injured individuals age 65 or older, in addition to the SNT or PSNT, which allows a plaintiff to receive their settlement monies without the loss of government benefits, the annuity can also be used to pay for a private health policy. Because of the Affordable Care Act brought forward by then-President Obama, health insurance companies can no longer surcharge for pre-existing conditions. The blending of an annuity and SNT, coupled with ACA rules, enables the seriously-injured plaintiff to purchase reasonably priced, comprehensive health coverage.
If an injured party qualifies for Medicare (must be 65 or older, on SSDI for at least 24 months or have end-stage renal failure), a portion of the settlement must be set aside, separate from other settlement monies, to pay for future medical bills incurred because of the injury or illness. By law, these Medicare Set-Aside accounts (MSAs) have to pay medical expenses first and be depleted before Medicare will pay for any additional expenses.
Injured parties can manage the MSA account themselves or hire someone to do it for them. An MSA administrator would pay the injured plaintiff’s medical expenses and makes sure all MSA government reporting requirements are fulfilled.
In one example, a 71-year-old woman was injured in a slip and fall at her local grocery store. The fall resulted in a fractured hip and shoulder. The settlement amount was in excess of $2 million. With the help of a SNT specialist, the settlement was set up so that the claimant received over $100,000 cash up front. Another $50,000 was placed in a MSA as seed money and $103,000 went in a MSA annual supplement so the claimant would receive $13,250 annually. She received $8,500 a month for life for assisted living, $30,000 for non-Medicare covered items and the rest went to attorney fees. With the funds compounding tax-free at a 3 percent annual return on the balance, the actual expected payout is in excess of $3 million.
SNT cases are much more complicated than a traditional personal injury case. The broker would be part of a team of advisors that includes a trust and estate attorney (knowledgeable in state-specific requirements, special-needs law updates and how to obtain additional benefits), an accountant, life care planner, SNT trustee and MSA administrator. While the life care planner assesses the injuries of the plaintiff and determines future medical costs, the structured settlement broker works with the SNT trustee ensuring that the SNT and the structured settlement properly interface. The SNT trustee manages the trust assets, distributes the income and principal for qualified purposes, pays bills, keeps accurate records and helps with trust tax return preparation The MSA administrator does the same with MSA funds. The goal is to create a plan that will help protect the injured party and his or her family’s assets and provide resources to improve the injured party’s quality of life while not affecting government benefit eligibility.
Lump sum-only payouts often makes sense when there is not a need for the settlement funds to last over a lengthy period. Another reason is that the plaintiff’s injuries may not have long-term consequences, enabling the plaintiff to return to work or fully recover so as to not require a continued stream of income. Unfortunately, if plaintiffs are not disciplined or financially knowledgeable, it is not unusual for those who receive all their settlement funds up front to spend the money much faster than anticipated.
Safety of Structures
A typical structured settlement involves purchasing an annuity by the defendant from a highly rated life insurance company. A component can be added so that payouts are adjusted for inflation. State and federal solvency standards and regulations keep insurers from investing heavily in risky investments.
U.S. Treasury obligations such as government-guaranteed T-bills can be part of the structured settlement for those injured parties looking to diversify their structured settlement portfolio beyond insurance based annuities. They provide the same safety and tax-free advantages.
With a structured settlement, an injured plaintiff and family can take comfort in knowing they will receive a guaranteed amount of income throughout the term or the payment arrangement. Arrangements can be made so that any remaining settlement proceeds can be transferred to a beneficiary upon the claimant’s death.
Mediation and its “hands on” approach to dispute resolution coupled with the flexibility of structured settlements can often be a good combination in personal injury cases.