By Jason D. Lazarus, J.D., LL.M., MSCC, CSSC
Catastrophically injured individuals have unique needs when it comes time to resolve their cases. A one size fits all approach doesn’t work given today’s complexities upon resolution of a personal injury law suit. Consideration of how healthcare will be obtained has 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 to best to manage the net proceeds presents an important question that can’t 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 good tool 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 or when it is mandated by an insurer such as AIG that the structure be done 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 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 explain the importance of 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. Recent news events involving structured settlements have highlighted this particular issue. 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.
Over the last several years there have been numerous stories in the insurance industry involving the insolvency of a single life insurance company who offered structured settlement annuities, in addition to other life insurance products. The insolvency has led to lawsuits over the use of this company’s structured settlement annuities in personal injury settlements by defense based structured settlement firms which dominated the market at that time. While very little has been lost due to insurance guaranty funds, the unfortunate valuable lesson learned is not to put all of your eggs in one basket. A simple fix to default risk with structured settlements is diversification. Split funding annuities with multiple providers and having other products in the mix is a very easy way to avoid having an injury victim’s financial future destroyed by a life insurance company insolvency. While the risk of insolvency is very small with life insurance companies, this singular company’s failure provides an important warning. Don’t rely on one company and don’t let the defendant control where the money goes at settlement. It is also important to point out that during the same time frame and during the recent credit crisis, many well established financial institutions and banks went bankrupt. The important point is that while structured settlements are exceedingly safe, having multiple life companies involved with split funding and using other tools is further protection for the injury victim.
A very recent legal matter that has been reported further reinforces the need to have your own expert settlement planner involved to protect the plaintiff. In the lawsuit, it is alleged that a broker for Ringler Associates, Michael Woodyard of Texas, stole structured settlement premiums from insurers and converted them to his own use. Upon investigation, it was discovered that annuities in certain cases had never been purchased. Instead, Woodyard allegedly converted those funds to his own private use. Moreover, those funds were gone. Woodyard had, according to the complaint, set up a typical Ponzi scheme where he had been for a period of time making annuity payments to injury victims from his own funds until the scheme collapsed. He had even issued fraudulent annuity certificates to his clients to hide the fraud. This type of scheme was so easily preventable had the plaintiff employed their own planner in these transactions. When a planner is involved in these transactions, they get a copy of the premium check issued by the insurer to fund the structured settlement and have direct contact with the life insurance company issuing the annuity contract. Therefore, it would have been easily discovered that in fact no annuities were purchased had a plaintiff settlement planner been engaged by the personal injury attorneys whose clients had structured settlements “placed” by Ringler and Mr. Woodyard.
The “defense” side of the settlement industry headed up by the National Structured Settlement Trade Association advocates on behalf of structured settlement firms such as Ringler and EPS. EPS is the second largest “defense” structured settlement firm in the country. They advocate against the use of Qualified Settlement Funds (QSF) which are a legitimate temporary trust that can be used to avoid constructive receipt by taking receipt of settlement monies without defense involvement. It allows for the purchase of a structured settlement without the defendant’s involvement. Their members continue to push “approved lists” for structured settlements. For example, AIG doesn’t have the highest rated life insurance company that offers structured settlements, Berkshire Hathaway, on their approved list. That doesn’t make sense and is anti-competitive. Lastly, their membership pushes internal programs such as AIG’s program of last right of refusal of its life company, American General on all structured settlements offered in an AIG case. This forces clients to accept a structure from an A rated carrier instead of an A+ or A++. The takeaway is that defense structured settlement brokers are primarily concerned with protecting their client, not the plaintiff or the plaintiff attorney. Protecting the plaintiff is not the goal or responsibility of the defense broker, their allegiance is to their client, the defendant insurance company. In the course of discovery regarding the Woodyard/Ringler matter, Ringler denied in a court filing that it “owed plaintiffs a duty to exercise reasonable care.” This is why it is so important to engage your own plaintiff based settlement planner.
With structure “brokers” typically there is an emphasis on structured settlements being the only possible solution to managing a 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 and needs. It looks at financial issues, future wants/needs, available healthcare options and management of the client’s future care well into the future. It could involve some combination of 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/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 don’t have its 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. So for the foregoing reasons, a tax-free structured settlement is typically going to be part of the ultimate settlement plan for the injury victim. Frequently they are the cornerstone of the plan.
In writing this article, I solicited comments from both sides of the structured settlement industry. The National Structured Settlement Trade Association (NSSTA) is primarily controlled by the larger defense based structured settlement firms such as Ringler, EPS and SFA. NSSTA’s current President is Michael Goodman from NFP Structured Settlements. Mr. Goodman refused to provide commentary for this article.
The Society of Settlement Planners (SSP) is a plaintiff based planners association. Their current President, Neil Johnson was willing to provide comments for the writing of this article. I asked him a series of questions and those appear below with the answers.
Author: How does SSP intend to prevent the Woodyard issue in the future?
Neil: “The SSP is the “plaintiff bar” of the settlement industry. We bleed plaintiff. We preach plaintiff. We are all about the best interest of the plaintiff. If we really believe that, and if we really practice what we preach, the Woodyard scheme couldn’t get off the ground. Even as the author suggests, the plaintiff settlement planner has both the duty and opportunity to verify the purchase of the annuity. That’s basic. There were red flags all over the place that should have alerted both annuity carriers and other broker/planners…especially plaintiff planners. We will educate our members and hopefully the entire industry to get back to basics.”
Author: Does SSP think the involvement of a planner on the plaintiff side would have helped prevent the issue?
Neil: “Certainly, but let me follow that trail a little further. Settlement brokers and brokerages who practice on both sides of the table have an unavoidable conflict of interest. It is virtually impossible to represent both plaintiff and casualty insurer without compromising the best interest of one or the other. Plaintiffs need to be aware when the loyalty of their “broker” or his/her settlement company is divided…and seldom is there a voluntary disclosure. There should be…and we, the SSP, need to do a better job educating plaintiff attorneys and the public of the significant value of a non-conflicted settlement planner…and the significant danger of not having one.”
Author: Is there someone at SSP that actively meets with the Life Markets to review their financial strength and long term plan for the product?
Neil: “What a great question…and what an indicting answer! The short answer is “No”. The follow up is that you have lit the fire, and the SSP Board will take it up. Having said that, I remind you that there are watchdog agencies, companies, rating bureaus and highly qualified experts watching insurers, looking for signs of financial weakness… and in the case of ELIC and ELNY it didn’t prevent the disaster. Malcomb Forbes exposed and decried Fred Carr, Michael Milken and others, for their “reckless” use of junk bonds and leveraged buyouts…and no one listened…not even A.M. Best…not even the settlement industry…not even plaintiff attorneys. Let’s hope we learned something…even if it was the hard way.”
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 QSFs and having a firm command of the types of settlement trusts that can be deployed (from SNTs to pooled trust 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.
Let’s consider a real-world example. Jan Smith, in her early 40s, decided to have elective back surgery for degenerative disc disease. A problem developed while she was being intubated, and the procedure was cancelled. She was moved to the ICU, and no neurologic monitoring was performed that evening. The next morning she was found to be quadriparetic, and her condition was irreversible.
Smith sued multiple defendants for medical malpractice and received a substantial settlement offer. She and her family had Medicaid coverage since the injury and she received Supplemental Security Income (SSI) as the result of her disability, as well as having applied for Social Security Disability Income (SSDI). At the time, she was not yet eligible for Medicare. As her lawyer, how do you protect her eligibility for public benefits and that of her family? Is that the right thing to do? Should ACA coverage be considered? How should the settlement proceeds be protected? Although our example is a settlement, these same issues should be considered with a judgment or trial award.
An important question is whether it makes sense for Smith to give up her needs-based benefits completely by taking the settlement in a lump sum and becoming privately insured through coverage under the Affordable Care Act. This isn’t a question that can be answered with a simple yes or no. There are multiple issues to consider, including whether the case involves needs that aren’t covered by plans under the ACA, such as in-home skilled attendant care or long-term facility care. These services can be costly and may be covered by Medicaid in many states but are not covered by ACA plans.
In Smith’s case, she will need a significant amount of attendant care that can be covered by certain Medicaid programs available in her home state but not by plans under the ACA. So does that mean she should not apply for an ACA policy? Should she create a special-needs trust to protect Medicaid and SSI? The answer lies in analyzing the costs of the plans available under the ACA and the amount of spendable income that results if using a special-needs trust. The complicated details involved are beyond the scope of this article.”
However, such a trust places many restrictions on how settlement monies may be used. So it isn’t a decision that should be made just for financial reasons. You need to carefully analyze all the issues.
For Smith, other considerations outweighed the use of a special-needs trust. She and her family didn’t want the restrictions that come with the special-needs trust. Because monies were allocated to her spouse and their children, all the family’s assets disqualified her for needs-based benefits.
You need to understand the basics of public benefit programs and their differences to protect your client’s eligibility for them and plan for his or her recovery. Two primary public benefit programs are available to the injured and disabled: Medicaid with the intertwined SSI, and Medicare with the related 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 65 or older, blind or disabled, and a U.S. citizen, and he or she must 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 entitlements and not income or asset sensitive. Clients who meet Social Security’s definition of disability and have paid enough credits 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.
Here are some planning techniques to help protect your client’s eligibility for benefits.
Protect Medicaid and SSI eligibility. The primary vehicle for protecting needs-based benefits is a special-needs trust. 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. There are two primary types of trusts, 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. It can be established only by a parent, grandparent, guardian, or court order, not by the injury victim individually. Alternatively, a (d)(4)(C) trust, typically called a pooled trust, may be established with the disabled victim’s funds without regard to age. A pooled trust can be established by the injury victim.
Protect future Medicare coverage. In our case study, Smith has applied for SSDI, so, according to Centers for Medicare and Medicaid Services (CMS), she has a “reasonable expectation of becoming a Medicare beneficiary within 30 months.” For any client who is a current Medicare beneficiary or reasonably expects to become one within 30 months, you must consider the Medicare Secondary Payer Act. 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 potentially a dual 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 can’t 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. 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 certain fixed-income investments and a deferred lifetime annuity via a structured settlement, the client can have guaranteed income for life but sufficient liquidity.
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.
In these cases, you will typically retain outside counsel who is well versed in settlement law and planning to help with these complicated issues. The legal fees for creating the trusts to protect the client’s assets and benefits are normally paid for out of the injury victim’s recovery. Fees can vary, but a normal range is $3,000 to $7,500, depending on the issues’ complexity.
Jan Smith’s Case
In our example case, Smith chose a settlement trust. It has two buckets. One is an immediate fixed-income portfolio of annuities that provides a high-yield stream of periodic payments to the trust that can then provide the client with a monthly income. The high yield fixed-income portfolio is called Enhanced Structured Income or ESI for short. This portfolio was paired with a lifetime structured settlement that was deferred to maximize return but guarantee payments for life. The second bucket is a cash reserve that is professionally managed but can be accessed when the need arises or circumstances change. This gives Smith the guaranteed income she needs coupled with the flexibility injury victims require when unforeseen needs arise.
Even though this option made her ineligible for needs-based benefits, that did not mean she could never become eligible in the future. Because she might need needs-based means-tested benefits such as Medicaid/SSI in the future and could become a Medicare beneficiary at some point as well, a trust with provisions that would protect these benefits was created.
Smith’s settlement trust had provisions that would allow the trustee to move money into a “special-needs sub-trust” and a “Medicare set-aside sub-trust.” The set-aside sub-trust was contained within the special-needs sub-trust so that if the client were “dual eligible,” the set-aside wouldn’t cause an eligibility problem for needs-based benefits. Until she needs these public benefits, she could purchase ACA coverage and use the settlement monies without the restrictions that accompany a special-needs trust or set-aside.
It is a win-win solution in today’s complicated planning environment.