Structured Settlements

Transcription

1 Structured Settlements What Is A Structured Settlement? A structured settlement is a way of taking part of your settlement as immediate cash to cover expenses now and part as a series of guaranteed, income tax-free future payments to meet your future needs later. Why Is Considering A Structured Settlement So Important? Cash Can be Quickly Spent Although most people feel that they could handle a large cash settlement, cash can be quickly spent. Cash settlements are often depleted by lending or giving money to family and friends, by a risky investment into a new business venture, or by purchasing high cost items. (Studies have shown that most people receiving cash settlements spend 95% of their money within five years.) A Structured Settlement having a designated, contractually fixed payment plan helps ensure that future needs can be met. Your Family Needs Protection Many personal injury claimants depend on a settlement for living expenses. Because cash can be so easily depleted, Structured Settlements provide a way to guarantee that the family will always be cared for. Your Structured Settlement can be designed to provide you a monthly check to pay for food, clothing, transportation and housing. Additionally, your Structured Settlement can be used to fund your children's educational needs or to provide income for you when you retire. Example Elizabeth, a 35-year-old single mother, was injured and is about to receive a settlement award. Elizabeth has a 10-year-old son, Jason. Elizabeth would like to put $100,000 aside in a structured settlement and take the rest of her money as up-front cash for her immediate needs. She wants to make sure she has enough money every month for food, housing and other expenses and perhaps for college tuition for Jason. Option 1: Lifetime benefit plan to Elizabeth for as long as she lives with 20 years of payments guaranteed no matter what. The Amount You Put In Payments You Receive Your Total Future Payout $100,000 For life - $595 per month $350,000 if she lives her normal life expectancy. $142,800 Guaranteed if she dies within 20 years. Little, Meyers & Associates, Ltd Observatory Ave. Cincinnati OH Phone: Fax:

2 Option 2: Regular payments are made to Elizabeth monthly for 30 years with additional onetime payments made at age 45, 55, and 65. The Amount You Put In Payments You Receive Your Total Future Payout $100,000 To age 65 - $575 per month; and Age 45 - $10,000 Lump Sum; then Age 55 - $15,000 Lump Sum; then Age 65 - $20,000 Lump Sum $252,000 Elizabeth was relieved that both she and her son could be assured that their future needs had been considered and met. Advantages Of A Structured Settlement Tax-Free Guaranteed Income Structured Settlement payments are income tax-free and guaranteed. Although cash settlements are also initially tax-free, the interest earned on investing that money is usually fully taxable. Unlike structured settlements, the return on any investment you make with a cash settlement is not guaranteed. 1 For instance, consider the recent volatility in the stock market over the past 18 months. Guarantees When you Structure your settlement, your future payments will come from a Structured Settlement Annuity. This means a highly rated, well-capitalized life insurance company contractually guarantees your payments. Depending on the plan you design, payments may be guaranteed for a specific period of time or for as long as you live. You can be assured that the funds you require to meet your future needs will be available. Other Important Things To Think About Timing Is Critical Decisions whether to accept a structured settlement must be made before accepting the settlement proceeds. The applicable tax laws state that you cannot accept the proceeds in cash now and then elect to do a structured settlement later. After you have received the cash, it is too late to set up a structured settlement. Flexibility Limited Once you commit to a payment plan, those payments become forever fixed. You cannot change the plan in the future. Depending on what government benefits you receive, it is important to set aside some of your up-front cash for emergency needs. 1 1 Guarantees are backed by the financial strength and claims-paying ability of the life insurance company(s) issuing the annuity.

3 Government Benefits Many government programs that provide you with monthly income or payments for medical services have strict financial eligibility limits. Without careful planning, your settlement award may cause you to lose your eligibility for those programs. It is important that you know what, if any, government benefits you are receiving now, or could receive in the future. What Are The Different Types Of Government Benefits? Supplemental Security Income And Medicaid Supplemental Security Income ( SSI ) and Medicaid are needs-based programs (also called poverty programs ). In most states, disabled people who qualify for SSI, automatically become eligible for Medicaid, which is the federal / state program for medical-care coverage for the needy. Medicaid benefits can cover items like prescription medication, transportation, and home-based care. Because these programs are needs-based programs, your settlement award may affect these benefits. For example, a couple with a savings account of $3,000 is not eligible for SSI or Medicaid. Subsidized housing and food stamps are also needs-based programs affected by your award. Social Security Disability And Medicare Social Security Disability ( SSD ) and Medicare are entitlement programs. The SSD system was created to provide disability insurance for injured workers and their families. Once a worker has paid a sufficient amount into the Social Security system and is unable to engage in substantial gainful employment for a period of at least twelve months, SSD eligibility follows. If you are approved for any kind of Social Security disability benefit other than SSI you will get Medicare after you have been entitled to Social Security disability benefits for two years. Because SSD and Medicare are entitlement programs, your settlement award should not affect your eligibility for these programs. Medicare does not pay for long-term care or prescription drugs, but does pay for a portion of major medical expenses and hospitalizations. In this regard, severely injured people will typically look to Medicaid to pay for their long-term care and prescription drugs. How Can I Tell Which Benefits I Am Receiving? SSI checks usually have SSI printed on them and are mailed in blue envelopes. SSD checks usually have SOC SEC FOR INS printed on them and are mailed in brown envelopes. Medical coverage cards for Medicare are red, white and blue. Medicaid coverage cards or related papers should say that they are from your state s Human Services office. What Can I Do To Protect SSI And Medicaid? A Special Needs Trust (SNT) may allow you to have your settlement award available for items that can enhance your quality of life, while still keeping your SSI and Medicaid.

4 You should consider a SNT if you are now receiving SSI or Medicaid or if you may need them soon. If you are not now disabled under Social Security standards, but may become disabled over time, you may place your funds into a SNT at any time before you turn 65, as long as you have a parent, grandparent, guardian or court willing to establish the trust for you. For instance, if you are still able to work, but fear that the long-term effects of you injury are likely to disable you eventually, you would have the option, at the time you become disabled under Social Security standards, to put your remaining cash award or redirect your Structured Settlement payments, into a SNT in order to become eligible for Medicaid. Details About Special Needs Trusts How Do Special Needs Trusts Work? A Special Needs Trust (SNT) is a trust arrangement that allows an individual with disabilities to have both a personal injury settlement award and government benefits. To have a SNT set up you must: be under age 65 when the trust is established, and meet the Social Security definition of being disabled. The catch is that the trustee must promise to pay back Medicaid upon your death. After reimbursing Medicaid, the rest of the trust money can be distributed to your beneficiaries (family members). There are also guidelines for using the money in a SNT. For example, it is generally best to use the trust funds to purchase supplemental goods and services, not food, shelter, or clothing items that government programs are supposed to cover. What Are Supplemental Goods And Services? As mentioned above, people who receive SSI and Medicaid are limited in the amount of monthly income they can receive. In general, income is anything you receive, whether earned or unearned, in cash or in kind that you can use to meet your needs for food, clothing, and shelter. In this regard, distributions from a Special Needs Trust should be for Supplemental Services. Supplemental Services are in addition to the basic needs that government benefits cover. For instance, your trustee can use your SNT money for things like: 1. Travel and vacations. 2. Participation in hobbies, sports or other activities. 3. Items beyond necessary food and clothing (e.g., funds for dining out occasionally, for special food periodically delivered, or for an article of clothing such as a coat that is extra but which is desirable because it is newer, more stylish, etc.). 4. Cosmetic, extraordinary, experimental or elective medical or dental care, if not available through other third-party sources. 5. Visiting friends, companionship. 6. Exercise equipment or special medical equipment, if not available through other third-party sources.

5 7. Equipment such as telephones, cable television, televisions, radios and other sound equipment, and camera for private use by the individual. 8. Membership in clubs such as book clubs, health clubs and record clubs. 9. Subscriptions to magazines and newspapers. 10. Small and irregular amounts of personal spending money, including reasonable funds for the occasional purchase of gifts for family and friends, or for donations to charities or churches. 11. Reimbursement for attendance at or participation in meetings, conferences, seminars or training sessions. 12. Items which Medicaid and other Governmental programs do not cover or have denied payment or reimbursement for, even if those items include basic necessities such as physical or mental health care or enhanced versions of basic care equipment (e.g., wheelchairs) and items which are not included for payment by the per diem of the facility in which the beneficiary lives. In some cases, it makes sense for the trust to pay for basic items, such as housing costs. It is important to consider the effect of these expenditures on your benefits prior to making such payments, as they may cause a decrease in your SSI benefits or an increase in your Medicaid spend-down requirements. Like a structured settlement, you generally cannot change your mind and take all your money out of the trust. If you recover and are no longer disabled, you can take steps to terminate the trust. Example Joseph, age 42, is disabled due to his injuries. He receives a small Social Security Disability check and another check from Supplemental Security Income (SSI), and has both Medicare and Medicaid as his health insurance programs. When Joseph receives his settlement award, he will be at risk for becoming ineligible for SSI and Medicaid because he will have excess resources. Joseph agreed to deposit his cash award and structured settlement payments in the trust so that he can continue to receive government benefits to cover his basic living expenses and medical care and have the money in the trust available for special, supplemental needs. The trust can be used to purchase a car and a computer for Joseph. The trust also will pay for car insurance, gasoline, and maintenance for the car (among other things). Who Should I Talk To About Creating A Special Needs Trust? The rules for establishing Special Needs Trusts are complex. Regardless of whether you speak with LMA, or one of the disability lawyers LMA recommends, please be sure to speak with a lawyer that is familiar with this special area of the law.

6 Will I Pay Tax On My Settlement? Taxation Of Your Settlement Typically, any money you receive as a taxpayer is assumed to be gross income. There is, however, a section of the Internal Revenue Code that permits a taxpayer to not pay taxes on any money (other than punitive damages 2 ) received due to personal physical injuries or physical sickness (see Section 104(a)(2)). The money you receive as a person actually injured by Rezulin is due to a personal, physical injury. Therefore, you will not pay tax on the money when you initially receive it. What If I Am Receiving Money Because Of A Family Member s Injury? If you are a Derivative Claimant (i.e., a spouse, parent or child of a physically injured person) you also will not be required to pay tax on the money when you initially receive it. Section 104(a)(2) of the Internal Revenue Code says if your claim has its origin in the physical injury or physical sickness suffered by another person, then all settlement money (other than punitive damages) is treated as being received due to personal physical injuries or physical sickness whether or not the person receiving the settlement money is the injured party. For example, settlement money received by you due to your claim of loss of love, support and affection because of your spouse s injuries are excludable from your gross income. This is because there exists a direct link between your spouse s physical injuries and the settlement money you recovered as a Derivative Claimant. (See Private Letter Ruling , 5/29/2001, IRC Sec(s). 104). The same would be true if you are receiving settlement money as the parent or child of a physically injured person. What Do You Mean By Initially Tax-Free? You will not pay taxes on the initial cash amount you receive from your personal injury settlement award. However, if you invest the money in any other investment besides a structured settlement annuity, the interest earned or growth of those investments is usually fully taxable. This is the main reason structured settlements are often so attractive All future payments provided by a structured settlement will be income tax-free. 2 Punitive damages are monies that a defendant may have to pay as punishment for outrageous behavior. The idea is that such punishment will keep the defendant from repeating the same behavior in the future. Punitive damages are most often found in jury verdicts rather than negotiated settlements. When they are awarded, they are awarded to the plaintiff (injured person) over and above the amount awarded to compensate the injured person for his or her personal physical injuries. Punitive damages are not excludable from gross income under section 104(a)(2).