What Every Plaintiff Attorney Should Know About Structured Settlements
Structured settlements have been around for decades, and are an important settlement option uniquely available to an injured plaintiff. Under Section 104(a)(2) of the Internal Revenue Code, passed by Congress in 1983, the payments are income tax free, and can be designed in a variety of ways to meet present and long-term needs. Lifetime benefits payable immediately, deferrals for retirement, and future lump sums are among the options available to pay for ongoing medical care, replace wages, education expenses, or to provide for day-to-day needs. Assisting your client in constructing a plan to meet their specific needs is just the beginning in protecting the financial welfare of your client.
Recent legislation relating to the impact of Medicare on liability settlement has created much concern for any person who is a current Medicare recipient, currently Medicare eligible or soon to become eligible. Since Medicare is secondary to other sources of recovery including liability settlements [42 U.S.C. §1395(b)(2)(A)(ii)], concerns surfaced when President Bush signed the Medicare, Medicaid and SCHIP Extension Act of 2007 into law. Section 111 of the Act places an obligation on the primary payer (e.g., the defendant) to determine if a claimant is entitled to Medicare and to report claims on a quarterly basis. The goal of the law is to increase Medicare conditional payment reimbursements [42 C.F.R. §411.21] through more accurate reporting. Medicare expects billions of additional dollars in conditional payments and many are concerned about how this will impact claims settled for future medical expenses when a Medicare beneficiary is involved. This is a complex and evolving part of the law and it is absolutely critical that a settlement consultant have an extensive knowledge of Medicare and remain up to date on the latest developments. A significant recent decision held that it was not bad faith to delay settlement until a final conditional payment amount was known [Wilson v. State Farm Mutual Automobile Insurance Company, No. 3:10-CV-256-H, 2011 WL 2378190 (W.D. Ky., June 15, 2011)]; the implications of delaying settlements for weeks or months are both clear and far reaching.
Structured settlements provide cost effective funding for long-term medical care while preserving Medicaid (or in California, Medi-Cal) and SSI benefits through the use of a Special or Supplemental Needs Trust (“SNT”). Recent developments in this area include favorable case law on structured settlements [Rios v. Astrue, 2010 WL 4736485 (N.D.ILL.)] as well as new regulations [POMS Section SI 01120.199, October 10, 2010]. Blending cash to seed the SNT in conjunction with a structured settlement [In re Mark Anthony Fowler Special Needs Trust, 2011 WL 441702 (Wash.App. Div. 2)] combine the flexibility of cash with the tax-free future payments to capitalize on the best of both worlds.
Structured settlement consultants come from a variety of backgrounds, including claims, legal, and financial. Most specialize in certain fields, such as medical malpractice, personal injury, workers’ compensation or employment, but each consultant brings a unique set of skills, knowledge and years of experience to the table.
The nuances of structured settlements can be complicated and misunderstood. Providing the opportunity for the settlement consultant to meet with the family, answer questions and discuss their needs can assist in their understanding of this important financial decision. The tax driven nature of a structured settlement requires a decision that must be entered into in a timely fashion once settlement is reached. The complexities of the emotional and life-changing factors a plaintiff is faced with should not be rushed; the consultant’s involvement during the settlement process can help alleviate stress as the case resolves.
Knowing your client’s current standing relating to public benefits and considering their future needs set the foundation for designing benefits. Currently there are 12 major life insurance providers and one company offering a Treasury product. Each company has their own underwriting and pricing standards. Your consultant should be aware of interest rate trends, understand how to capitalize on daily rates and when appropriate, combine multiple structured settlement providers to maximize benefits and diversify risk with your client’s investment. Other factors that will impact a case are the size of the structured settlement and whether a “rated age” can be obtained. A “rated age” is basically a mortality factor the life companies use to price annuities. Certain medical conditions indicate a reduced life expectancy and can be used to obtain a rated age (higher than chronological age), which reduces the cost of the lifetime annuity, thus increasing benefits to the plaintiff.
For California attorneys who venture into medical malpractice litigation, accurately calculating the future value of a periodic payment verdict is not possible without the assistance of a structured settlement professional. With general damages capped at $250,000 and future medical care or wage loss subject to a periodic payment judgment, knowing how such a judgment stacks up against an economist’s report is crucial. The first step is obtaining medical underwriting for a plaintiff with lifetime medical needs. With underwriting in place, the consultant can provide the cost to fund your life care plan. This information is critical in understanding what the periodic payment verdict will look like should the case proceed to trial with a plaintiff verdict. While your economist may provide testimony establishing damages exceeding $10,000,000, the combination of underwriting, annuity rates and the growth of the payments over the lifetime of the plaintiff will result in a different amount paid out by the defendant. Knowing what this number is will help evaluate the cost of future care in a more concrete method. Your understanding of this piece of information gives you valuable information as you negotiate or prepare for trial.
Factoring, or the selling of a structured settlement for what is usually a deep discount, is an industry that has grown tremendously since 2001. Factoring has been on the rise since Section 5891 of the Internal Revenue Code was passed, requiring court approval of a factoring transaction in order to avoid a 40% excise tax on the factoring company. Neither Section 5891 nor any of the 47 states with transfer acts validate factoring, but rather regulate the transaction. Plaintiff attorneys should be aware there are steps they can take to reduce this risk to their client. The right consultant can provide protective language to limit factoring and educate judges on what to look for when reviewing a transfer petition. Some life insurance companies even offer their own version of a commutation in order to offer a reasonable alternative to factoring. A good settlement consultant can discuss all of these options with counsel or the injury victim.
Last, don’t forget to consider attorney fee structures. Plaintiff attorneys may elect, prior to the time of settlement, to defer recognition of their fees and allow the fees to grow on a tax deferred basis. The payment stream must be chosen up front, but can be immediate or deferred, and is funded with the same annuities or Treasuries as structured settlements. The attorney will receive a 1099-MISC for payments received, but only in years in which there is a distribution. This is a small but growing part of the structured settlement market, having started with the seminal attorney fee structure case, Childs v. Commissioner, 113 T.C. 634 (1994), affirmed without publication op. 89 F.3d 856 (11th Cir. 1996). With the recent market upheavals, more attorneys are turning to fee structures as a way to guarantee their income on a tax deferred basis.
Whether choosing a structured settlement for yourself or for your client, be aware of the options and the timing, and choose a structured settlement consultant that will serve your needs and those of your clients in the best way. Structured settlements are an invaluable settlement tool, but only if used correctly.