Often a personal injury that gives rise to a claim results in permanent disability for the client, meaning that he or she will need to depend on the settlement funds for the rest of his or her life, either for basic financial support or to pay for needs not covered by public health care and housing programs. In order to assure that the settlement funds are sufficient to meet these goals, plaintiffs' attorneys need to (1) maximize the recovery, (2) make certain the funds will be properly managed, and (3) structure the settlement so that the plaintiff can qualify for public benefits as appropriate. As a secondary concern, any plan should limit estate taxes for the client's heirs.
Limiting Claims Against the Settlement
While obtaining the best recovery possible for the plaintiff is the tort lawyer's area of expertise (and well beyond the scope of this article), very often health care providers and insurers have liens or rights of subrogation against the recovery. These may be commercial insurance companies, Medicare or Medicaid, or all three, depending on the circumstances. In general, these claims can be compromising, convincing the insurer to reduce its claim by its pro rata share of the cost of obtaining the settlement, essentially the attorney's fees and costs. In addition, these claims should be made only for that share of the proceeds allotted to the plaintiff's medical costs and past pain and suffering. The insurer should not be entitled to share in proceeds attributable to future pain and suffering or punitive damages. Likewise, settlement proceeds going to a family member for loss of consortium or emotional distress should not be subject to claim by the insurer.
While the Medicare and Medicaid liens are statutory, the claims of commercial insurance companies are contractual. As a result, if the insurer does not take action to perfect its claim in court, the attorney typically is not obligated to satisfy the claim before distributing the settlement proceeds to the client. Typically, commercial insurers have not pursued subrogation claims after settlement where they have not filed a subrogation claim before hand. Of course, such practices can always change
With respect to Medicare and Medicaid liens, the attorney is potentially liable if the claims are not satisfied. While it is generally the better practice not approach commercial insurance companies to settle their claims, the attorney should approach the federal and state agencies administering Medicare (the Health Care Financing Administration, "HCFA") and Medicaid (in Massachusetts, the Division of Medical Assistance, the "DMA") prior to settling the case. The attorney has some leverage in reducing the claim before settlement since she can argue that the settlement depends on resolving all claims. After settlement, it's too late to make this argument. In addition, since Medicaid and Medicare liens may continue to accrue during settlement negotiations and neither HCFA nor the DMA can claim reimbursement for expenses paid after settlement, the plaintiff's attorney may be able to limit the claim by an early resolution of the case. The attorney needs to calculate in each case whether the potential for a better recovery outweighs the cost of delay.
With respect to the Medicaid lien, an argument can be made that Congress intended to permit plaintiff's to fund "(d)(4)(A)" trusts (described below) prior to satisfying the lien. However, a recent New York decision and a notice issued by former HCFA Medicaid Bureau Director Sally Richardson have rejected the reasoning in support of this conclusion. Nevertheless, courts in other states are not bound by either the ruling or the letter and may be convinced to deny any Medicaid lien recovery if all the settlement funds are to be placed into a (d)(4)(A) trust, especially in the case of a sympathetic client. The threat of this result may convince a state Medicaid agency to compromise its claim. See "Medicaid Liens: Not All Need to Be Repaid in Full Before Funding SNTs" by Lawrence A. Friedman, The ElderLaw Report, February 1998, Vol. IX, No. 7.
Compromising subrogation claims, depending on the amounts involved, can be as important as negotiating a favorable settlement. Every dollar not paid to insurers, whether commercial or governmental, is another dollar available for the injured plaintiff's future care.
Managing the Funds
More likely than not, the settlement will amount to far more money than the plaintiff has ever had before. It may seem like an amount that can't be depleted by spending. The reality, however, is that virtually any settlement can quickly disappear if the client significantly changes previous spending patterns. Clients can also find themselves approached by family members and friends requesting loans from the new pot of gold. These pleas may be hard to resist. Some parents of children who have been injured may confuse what's theirs for their own loss of consortium claim and what's the child's, leaving little for the child when he or she reaches the age of majority. See "The Child's Tort Case: Ethics, Education and Social Responsibility," by Chris A. Milne, Suffolk University Law Review, Vol. XXX, No. 4, Winter 1997. Finally, the difference between wise and unwise investing can mean the difference between ample funds and penury in future years. A two percent difference in the rate of return on $1 million over two decades can result in the plaintiff having almost $500,000 more or almost $500,000 less.
The simplest solution to these problems used by many attorneys is a structured settlement, in other words for the plaintiff to receive an income stream for life rather than a lumpsum settlement. This has certain obvious advantages. The investment return on the settlement is not dependant on the financial acumen of the plaintiff or his or her parents or to the ups and downs of the market. Since the client does not have a huge lumpsum, he or she may not have the same urge to spend extravagantly or to take a flier on an unwise investment. He or she may also be less vulnerable to entreaties from family and friends for financial assistance. Finally, the annuity in effect permits the recovery to be invested without taxes on earnings since the tax law permits annuity payments to be treated as non-taxable income just like the initial recovery. Dividends, interest and capital gains earned on the investment of a lumpsum are all subject to taxation.
Counter arguments against structured settlements include their effect on the plaintiff's eligibility for public benefits since the monthly income usually exceeds the eligibility limits for most programs. Whether the client would be better off with the annuity or investing a lumpsum settlement depends on actuarial predictions and assumptions about investment returns that would require an accountant or actuary to calculate. The monthly income stream may be insufficient to pay for one-time expenses that the disabled client may have and which may be unpredictable, whether they be for housing, transportation or special equipment. Finally, professional investment management which should be in place for many personal injury plaintiffs, especially if minors, satisfies many of the purposes of structured settlements.
When personal injury plaintiffs are minors and or if they suffer a permanent disability, they need someone reliable to look after them. This may be a parent or other family member, a professional trustee, a social worker or someone else with the welfare of the client at heart. In general it's better to have at least two people in this role. It may be impossible to find investment prowess and personal knowledge of the beneficiary in the same person. Two trustees can provide a check on one another and provide for continuity in case one ceases to serve for any reason. In especially complicated cases, it's not unusual to appoint a committee of family members and professionals to advise the trustees in how best to spend trust funds to care for the beneficiary. In short, there's no one answer that's appropriate for all cases. The trust terms and the choice of trustees must fit the needs of the particular case.
Public Benefits
The primary public programs that typically provide benefits to tort victims are Social Security Disability Income ("SSDI"), Medicare, Supplemental Security Income ("SSI"), and Medicaid. The first two programs are based on physical need and on whether the beneficiary or his or her parents have paid into the Social Security system. The financial status of the beneficiary is irrelevant. In contrast, to receive SSI and Medicaid benefits the applicant must be poor under the particular definitions of each program. In general, they have similar rules. The applicant may only have $2,000 in "countable" assets. His or her home is not counted against this limit. Neither are funds in trust for his or her benefit if properly drafted. Here, however, the rules of the two programs diverge significantly, with trusts passing muster for one program not necessarily working for the other. Other public benefits programs that clients may qualify for can include Aid to Families with Dependent Children, Food Stamps, and housing subsidies. They each have their own rules and with some the timing of the creation of trusts for the client's benefit can be vital to his or her continued eligibility for benefits.
In general, trusts used in planning for disability fall within one of the following three categories:
Supplemental or Special Needs Trust
A parent or other third party can create a trust for the benefit of a disabled person that will not interfere with the beneficiary's eligibility for public benefits. The trust must be clearly discretionary in nature so that it can not be interpreted as requiring the trustee to pay for the beneficiary's support. The trust may be revocable or irrevocable and it may name anyone the grantor chooses as a remainder beneficiary to receive what remains upon the primary beneficiary's death. A parent who has received part of a personal injury recovery for his or her loss of consortium might create this trust for the disabled child. Those involved in the case might make certain that a large portion of the settlement is allotted for this purpose.
Self-Settled Supplemental Needs Trust
An SSI beneficiary may create a supplemental needs trust for his or her own benefit without incurring a period of ineligibility for benefits. It must be irrevocable and it must name a remainder beneficiary. The trust will be useless in terms of the beneficiary's eligibility for Medicaid independent of SSI.
(d)(4)(A) Trust
Pursuant to 42 U.S.C. sec. 1396p(d)(4)(A), a disabled person under age 65 may fund a trust for his or her own benefit and still qualify for Medicaid if the trust meets certain requirements. This is a "safe harbor" from the customary rules for self-settled trusts. The trust must be created by a court, guardian, parent or grandparent. The beneficiary must be under age 65 when the trust is created and funded. The trust must provide that the state be reimbursed for its Medicaid expenditures at the death of the disabled beneficiary. But to avoid problems with SSI eligibility it must also designate a beneficiary to receive any funds that may be left over after the death of the primary beneficiary. While the primary beneficiary must be under age 65 at the time of the creation and funding of the trust, the trust may continue after he or she reaches that age with presenting problems with Medicaid eligibility.
Tax Issues
Large settlements raise income, estate and gift tax issues. It can be important to steer income to potential plaintiffs in lower income tax brackets. Income earned by trusts is often taxed at a higher rate than it would be if the income were attributed to the beneficiary. The trusts need to be drafted with these issues in mind.
The gift and estate tax issues can be more important than the income tax issues with larger settlements. Transfers among family members can require the filing of gift tax returns. If a plaintiff dies, his or her estate may be subject to estate taxation which might be avoided or limited if the settlement were allotted among all potential plaintiffs in the case. Trusts can also be used to make sure that funds inherited by a surviving family member are not included in his or her estate and taxed a second time at his or her death. Structured settlements can raise serious estate tax problems upon the death of the beneficiary since they will be taxed based on their present value on the date of death. While the value based on future distributions may be great, the estate may not have the funds available to pay the resulting tax.
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