Synergy Blog

Sudden Money – How Quickly it Can Be Gone: Don’t Blow a Personal Injury Recovery

By: Jason D. Lazarus, J.D., LL.M., MSCC, CSSC

In a February 11, 2015 article from the Business Insider, Michael Kelly and Pamela Engel detail twenty one lottery winners who blew it all (see http://www.businessinsider.com/lottery-winners-who-lost-everything-2015-2?op=1). In the article, there are details regarding the myriad of ways fortunes were lost. For example, “Lara and Roger Griffiths bought their dream home… and then life fell apart.” Or worse yet, “Bud Post lost $16.2 million within a nightmarish year — his own brother put out a hit on him.” Or the all too common situation of “Sharon Tirabasssi” who “is back in the working class after winning $10 million 11 years ago.”

These stories are eerily similar to many anecdotal statistics frequently disseminated regarding personal injury victims who receive settlements. The statistic normally thrown around is that 90% of injury victims have nothing left within five years. While there are no scientific studies to back up that statistic according to some scholarly pieces written by several authors, it is undeniable that sudden wealth can have catastrophic results. Public benefits that are critical to future needs can be lost. Money can be mismanaged in a way that the injury victim winds up victimized a second time.

When a personal injury case settles there are options available to protect the settlement proceeds. The first option is to take the money in a single lump sum. Of course that presents the trap mentioned at the beginning of this article – rapid dissipation. Trying to figure out how to properly manage a large personal injury recovery can be a daunting task for not only the injury victim but also for their loved ones. There are so many ways to mismanage a fortune. In addition, needs based benefits will be lost in most instances since as little as $2,000 can cause ineligibility. This can leave the injury victim with huge medical expenses and no way to pay for them without spending the recovery for their care.

Because of the many down sides to taking a lump sum when settling a personal injury case, many injury victims are offered a structured settlement annuity. This is the second option. A structured settlement annuity is an income tax-free investment vehicle available exclusively to injury victims. There are many reasons to set up a structured settlement. First, the interest earned is income tax-free. There are no ongoing money management fees as it is self-executing. In most instances it enjoys enhanced creditor-judgment protection. It is spendthrift, meaning it can’t be dissipated quickly. The money is safe from predators and family members as well. In short, it is a protected asset with tax favored treatment. It is similar to having a job you can’t be fired from since you have a guaranteed income stream. Sound too good to be true? It isn’t without its faults. Once it is set up, it can’t be changed, accelerated or deferred. It can’t be sold (without taking a huge loss). The rates of return are conservative (think bond returns).

The third option is a settlement trust. Settlement trusts are a good alternative to taking the money in a lump sum or structuring the entire settlement. This is so because it provides spendthrift protection with liquidity and flexibility. Typically a settlement trust is created with some ongoing periodic distributions for living needs paired with a cash reserve that can be accessed for larger purchases. This allows the injury victim the best of both worlds while still offering protection of the monies from abrupt dissipation. As with structured settlements, it isn’t without faults. These trusts are typically permanent and can’t be undone. There are ongoing trust administration costs as well as tax on the interest earned.

There is a fourth option which is a combination of all of the foregoing three. Frequently, a lump sum is taken for immediate needs such as the acquisition of a house or car (perhaps both). Plus cash for other immediate needs such as paying off high interest debts or loans. The remaining funds can be split between a structured settlement annuity and a settlement trust. By pairing a tax-free structure with a trust, it provides a sound tax-advantaged financial plan for the recovery. It lowers the annual cost of trust administration as well since most trustees will only charge fees on assets held in the trust. In the end, the best plan is one that meets the needs and has enough flexibility to deal with changes in circumstances. Because taking a lump sum or just a structured settlement alone limits the options, it isn’t recommended for most personal injury settlements.

The key is finding an experienced professional settlement planner to work with. It is important to make sure that the planner has all of the different tools in his/her arsenal to properly create an all-encompassing plan. If a planner doesn’t have access to all of the financial products in the marketplace, doesn’t have the necessary professional qualifications and doesn’t ask the tough questions about needs/wants/desires, then find someone that will do so. Choose a firm that has experts on staff that can also analyze the public benefit preservation issues along with the options under the Affordable Care Act. Medicaid/Medicare eligibility, ACA coverage and liens can make for some tough issues at settlement, make sure the team includes experts that can help navigate those issues along with the financial planning issues.

Finally, plaintiff counsel should also explore options to protect their contingent legal fees. There are some great ways to invest fees on a pre-tax and tax deferred basis (see www.structuredfees.com). Attorneys can have sudden money problems too.

Contact Synergy today for more information at 877-242-0022 or by clicking here.

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