Settlement Planning Guide

Transcription

1 Settlement Planning Guide As an injured persn wh is receiving a settlement related t a prfund injury, a surviving family member f a wrngful death, r even as a cnservatr r guardian charged with making critical decisins related t a settlement recvery, yu deserve t knw the ptins available t yu at the time f settlement. Yur chices and decisins related t a settlement plan are very imprtant in rder t preserve yur settlement award s that it can prvide financially fr yu and yur family nw and int the future while als prtecting eligibility fr future gvernment benefits and prgrams which may be impacted by the settlement. This guide is intended t help prvide infrmatin t yu abut settlement ptins and hw we can wrk with yu and yur attrney t fully address yur needs. A settlement resulting frm the wrngful death f a parent, spuse, r breadwinner requires a thughtful and cmprehensive apprach s that a resulting plan can best prvide a replacement f lst husehld incme and services. A persnal injury award als hlds its wn unique challenges such as meeting future healthcare needs and prtectin f ptential eligibility fr public benefit prgrams. Taxes, cash flw and investment risk are als ever present cncerns. Unfrtunately, yu must make a lifetime f decisins befre yu receive yur settlement r yu may jepardize yur ability t fully benefit frm the prgrams and resurces available t yu. Frtunately, Frge Cnsulting, LLC is available t help yu s yu dn t have t make these decisins n yur wn r thrugh a financial advisr wh may nt be knwledgeable with all areas f persnal injury settlements. Frge Cnsulting, LLC is a natinal cmpany dedicated t exclusively wrking with injured plaintiffs and their families as we wrk side by side with their attrneys in persnal injury and wrngful death cases in single event and mass trt settlements acrss the cuntry. With an exclusive fcus n settlement planning, Frge is uniquely qualified as a specialized resurce and prud t be at the frefrnt f the settlement planning industry. Thrugh Frge, yu have access t a full array f financial prducts and services with a settlement team f prfessinals licensed in all 50 states and a prven recrd f success in matching financial resurces t current and future needs. Our settlement preservatin strategies are designed t help ensure a lifetime f financial security fr yu and yur family and are crdinated with gvernment benefit prgrams in mind t help preserve eligibility fr Medicaid, Medicare and ther benefits. Once we have an understanding f yur needs and risks, we turn ur fcus t reviewing the available ptins and assisting in develping a plan that makes the mst prductive use f the settlement recvery. We strngly recmmend a balanced apprach t client slutins and assess yur verall financial picture frm a cmplete asset allcatin 1

2 standpint and hw settlement prceeds shuld be diversified acrss different asset classes. Cash flw and asset preservatin are key cmpnents t a financial slutin. Frequently Asked Questins Based n questins we receive ften, we ve created this dcument t address imprtant areas related t persnal injury and mass trt settlements: Financial Optins with yur settlement prceeds Taxatin f yur settlement Gvernment Benefits and Preservatin f Health Care Structured Settlements What are My Financial Optins with My Settlement? Traditinally, unless there are ther cnstraints within yur settlement agreement, yu can receive yur net settlement prceeds (the amunt remaining after attrney fees, case expenses, and any ther deductins frm yur settlement) in a lump sum frm (cash payment) r yu may be able t receive part r all f yur settlement paid t yu ver time via a structured settlement. Yur settlement prceeds paid t yu in lump sum frm are nrmally paid in the frm f a check r wire t the accunt f yur chice r thrugh a series f payments if designed thrugh a Structured Settlement Annuity. Will I Pay Tax n My Settlement? Typically, any mney yu receive as a taxpayer is assumed t be grss incme. There is, hwever, a sectin f the Internal Revenue Cde that permits a taxpayer t avid paying taxes n any mney (ther than punitive damages) received due t persnal physical injuries r physical sickness (see Sectin 104(a)(2)). Prvided that the mney yu receive is due t a physical injury r sickness r wrngful death, yu will nt pay tax n the mney when yu initially receive it. If yu place part r all f yur settlement prceeds int an investment vehicle that grws r prvides incme t yu, the future grwth r incme (if any) may be taxable incme unless invested in a tax exempt hlding r structured settlement. What If I am Receiving Mney Because f a Family Member s Injury? If yu are a Derivative Claimant (i.e., a spuse, parent r child f a physically injured persn) yu will nt be required t pay tax n the mney when yu initially receive it. Sectin 104(a)(2) f the Internal Revenue Cde says if yur claim has its rigin in the physical injury r physical sickness suffered by anther persn, then all settlement mney (ther than punitive damages) is viewed as being awarded fr that reasn, whether r nt the persn receiving the settlement mney is the injured party. As an example, settlement mney yu receive due t yur claim f lss f lve, supprt and affectin as a result f yur spuse s injuries is excludable frm yur grss incme. 2

3 This is because a direct link exists between yur spuse s r relatives physical injuries and the settlement mney yu recver as a Derivative Claimant. (See Private Letter Ruling , 5/29/2001, IRC Sec(s). 104). This wuld als be true if yu are receiving settlement mney as the parent r child f a physically injured persn. What are the Different Types f Gvernment Benefits? Many f the gvernment prgrams that prvide yu with mnthly incme r payments fr medical services have strict financial eligibility limits. Withut careful planning, yur settlement award may cause yu t lse yur eligibility fr these prgrams. It is crucial that yu knw what, if any, gvernment benefits yu are receiving nw r culd receive in the future. Supplemental Security Incme and Medicaid Supplemental Security Incme (SSI) and Medicaid are needs based prgrams (als called pverty prgrams ). In mst states, disabled peple wh qualify fr SSI autmatically becme eligible fr Medicaid, the federal/state prgram that prvides medical care cverage fr the needy. Medicaid benefits can cver items like prescriptin medicatin, transprtatin and hme based care. Because these prgrams are needs based, yur award may affect these benefits. A persn with a savings accunt f $2,000, fr example, generally is nt eligible fr SSI r Medicaid. Certain assets, such as an individual s hme and autmbile, are nt cunted as available resurces fr purpses f determining eligibility. Subsidized husing and fd stamps are als needs based prgrams that can be affected by yur award. Scial Security Disability and Medicare Scial Security Disability (SSD) and Medicare are entitlement prgrams. The SSD system was created t prvide disability insurance fr injured wrkers and their families. Once a wrker has paid a sufficient amunt int the Scial Security system and is unable t engage in substantial gainful emplyment fr a perid f at least 12 mnths, they are eligible fr SSD. If yu are apprved fr any kind f Scial Security disability benefit ther than SSI, yu will receive Medicare after yu have been entitled t SSD benefits fr tw years. Medicare des nt pay fr lng term care r many prescriptin drugs, but des pay fr a prtin f majr medical expenses and hspitalizatins. Because SSD and Medicare are entitlement prgrams, yur award shuld nt affect yur eligibility fr these prgrams. What is a Medicare Set-Aside (MSA)? An MSA is a fund created in the settlement f a wrkers' cmpensatin r liability case. It is established frm a prtin f the settlement amunt that is t be used t pay fr future medical expenses related t the jb injury/illness that wuld therwise be payable by Medicare. Funds must be established in insured accunts and may be managed by the claimant r set up and managed thrugh a custdial accunt. Why are MSAs Required? 3

4 In 1981, the Medicare Secndary Payer Statute established that Medicare was t be a secndary benefit payer behind the respnsible parties fr wrkers' cmpensatin claims. In July 2001, the Centers fr Medicare and Medicaid Services (CMS) declared that funds fr future medical expenses be set aside in Medicare Set-Aside accunts fr certain wrkers' cmpensatin settlements. Failure t d s may result in CMS refusing Medicare cverage fr all future medical treatments f claimant. Liability expsure exists with emplyers, insurance cmpanies r third party administratrs if Medicare is nt prperly taken int cnsideratin at the time f settlement. Hw are MSAs Funded? Typically, MSAs are funded thrugh settlement prceeds. An MSA can be funded 100% up frnt with a lump sum depsit as determined by the MSA allcatin requirement r it can be funded ver time thrugh a Structured Settlement Annuity. A Structured Settlement Annuity can be used t fund the annual depsit requirements int the MSA and may save mney if the cst f the annuity is less than the MSA lump sum amunt. What Can I D t Prtect SSI and Medicaid? A Special Needs Trust (SNT) may allw yu t use a prtin f yur settlement award fr items that can enhance yur quality f life withut jepardizing yur eligibility fr SSI and Medicaid. Yu shuld cnsider a SNT if yu anticipate needing r currently are receiving SSI r Medicaid. Abut Special Needs Trusts While there are different types f Special Needs Trusts, they all share the purpse f allwing an individual with disabilities t have bth a settlement award and gvernment benefits. The term Special Needs Trust cmmnly refers t the type f custm drafted disability trust established under sub sectin (d)(4)(a) f the Federal statute that authrizes such trusts (42 U.S.C. 1396p). T have a valid (d)(4)(a) disability trust established, yu must Be under age 65 when the trust is established Meet the Scial Security definitin f being disabled The trustee (parent, grandparent, guardian) is bligated t pay back Medicaid upn yur death. Keep in mind, hwever, that when medical prviders cntract with Medicaid, they agree t prvide services at a significantly lwer cst than if yu had t pay fr yur medical care privately withut Medicaid. When a trustee f a special needs trust repays Medicaid upn yur death fr services paid fr by Medicaid ver yur lifetime, repayment will be fr this lwer amunt and will be free f any penalties and interests. After reimbursing Medicaid, the rest f the trust mney can be distributed t yur family members/beneficiaries. Pled Trusts Fr individuals ver age 65, (d)(4)(c) Pled Trusts are available. Pled Trusts must satisfy the fllwing requirement The trust must be established and managed by a nn prfit assciatin 4

5 The trust must maintain separate accunts fr each Trust Beneficiary, but the funds are pled fr purpses f investment management Each separate trust accunt must be established slely fr an individual wh is disabled as defined by law, and Only that individual, the individual s parent, grandparent, legal guardian r the curt may create the trust. There are n age restrictins r requirements fr Pled Trusts. Any funds that remain in the individuals accunt upn that individual s death may be retained by the trust. Any funds nt retained by the trust must be used t reimburse the State. This may be referred t as a mdified payback prvisin. What is a Structured Settlement? This is a cmprehensive slutin designed fr the present and the future. A structured settlement is a mechanism that allws plaintiffs a means f deferring part r all f the settlement and receiving the prceeds when desired as ppsed t all at nce. Fr example, yu make take part f yur settlement as immediate cash t cver expenses nw and als have a prtin f yur persnal injury r wrngful death settlement paid ut in a series f guaranteed, incme tax free peridic payments t meet yur future needs as yu like. This prcess was first made pssible in 1982, when a bipartisan calitin f legislatrs in Cngress came tgether t pass laws that amended the federal tax cde. The Peridic Payment Settlement Act f 1982 (Public Law ) was a means f frmally recgnizing and encuraging the use f structured settlements in physical injury and wrngful death cases Wh is Eligible t Structure a settlement? The nly persns entitled t the tax free benefits f a structured settlement are thse wh are settling a persnal injury r wrngful death case. Hw Des a Structured Settlement Benefit Yu? It Prvides Financial Security A lng term structured settlement has several advantages. Security is first and fremst. A structured settlement prvides guaranteed lng term incme. It gives injured peple and their family the ability t adapt and/r recuperate withut spending time and resurces determining and being dependent upn varius investment strategies. The secnd primary benefit is financial. When Cngress amended the federal tax cde IRS Cde 104(a)(2) t prmte the use and integrity f structured settlements, it explicitly prvided that 100 percent f every structured settlement payment wuld be exempt frm federal and state incme tax. It Eliminates the Burden f Dealing with a Lump Sum Settlement Althugh mst peple feel that they wuld be able t handle a large cash settlement, in reality the mney can disappear all t quickly. Studies prve that mst peple wh receive cash settlements spend 95% f their mney within five years. Cash settlements are ften depleted when the recipient lends r gives mney t family and friends, makes risky r vlatile investments, r purchases expensive items. Yu must be certain that the mney designed t cmpensate fr a lifelng injury is there fr the cming years. With a 5

6 structured settlement, a designated, cntractually future needs will be met. fixed payment plan ensures that It Prtects Yu AND Yur Family Many peple may depend n the settlement fr daily living expenses. By structuring yur settlement, yu can guarantee that yur family will always be financially prtected. Yu may design yur structure t include a mnthly check with sufficient funds fr fd, clthing, transprtatin and husing. In additin, yur structured settlement can be used t fund yur children's educatinal needs r t prvide incme fr yu when yu retire. The fixed nature f structured settlements prvides assurance, peace f mind and a lifetime f security. It is Tax Free Structured settlement payments are incme tax free and guaranteed. Althugh cash settlements are als initially tax free, the interest earned n investing that mney is usually fully taxable. Unlike structured settlements, the return n any investment yu make with a cash settlement is speculative and will vary ver time. Cnsider the perfrmance f the stck market ver the past few years and yu can see the vlatility f investments that cme withut guarantees. Hw Valuable is this Tax Advantage? The chart belw shws the value f receiving tax free structured payments. The chart cmpares the rate yu wuld have t earn n anther investment t equal the Structured Settlement internal rate f return. Interest Rate Required T Equal Structured Rate Structured Settlement Internal Rate f Return 15% Tax Bracket 28% Tax Bracket 33% Tax Bracket 35% Tax Bracket 4.00% 4.71% 5.56% 5.97% 6.15% 5.00% 5.88% 6.94% 7.46% 7.69% 6.00% 7.06% 8.33% 8.96% 9.23% 7.00% 8.24% 9.72% 10.45% 10.77% Fr example: assume yu are in the 28% federal tax bracket and invest a lump sum settlement in a Bank Certificate f Depsit. The CD interest rate wuld have t be 8.33% t get the same return after taxes are paid as a structure with a 6% internal rate f return. If yur state is 3% and yur lcal tax is 2% (ttal tax is nw 33%), the CD interest rate wuld have t be 8.96% t equal a 6% interest rate n a structure. EXAMPLE #1: STRUCTURED SETTLEMENTS Grace, a 35 year ld single mther, was injured and is abut t receive a settlement award. Grace has a 10 year ld sn, Rbert. Grace wuld like t put $100,000 aside in a structured settlement and take the rest f her funds as upfrnt cash fr her immediate needs. She wants t make sure she has enugh mney every mnth fr fd, husing and ther expenses and perhaps enugh fr cllege tuitin fr Rbert. 6

7 Optin 1: Lifetime benefit plan fr Grace, with 20 years f fixed, guaranteed payments. Amunt Put In Payments Received Ttal Future Payut $100,000 Fr life $ per mnth $289,280 if she lives her nrmal life expectancy. (life time benefit) $113,443 Guaranteed if she dies within the 20 year certain perid. Optin 2: Regular payments are made t Grace mnthly fr 30 years with additinal netime payments made at age 45, 55, and 65. Amunt Put In Payments Received Ttal Future Payut $100,000 T age 65 $420 per mnth; and $211,200 Age 45 $15,000 Lump Sum; then Age 55 $20,000 Lump Sum; then Age 65 $25,000 Lump Sum Grace is relieved that her needs and the needs f her sn have been cnsidered and met. In her case, r in the case f any injured persn, the design and flexibility f structured settlement payments are limited nly by the imaginatin. The ability t custmize a structured settlement makes it an ideal financial vehicle fr many f life's financial challenges, including cllege educatin, retirement planning, estate planning, and diversificatin in investment planning. It s Backed By The Highest Rated Insurance Cmpanies When yu structure yur settlement, yur future payments are generated frm a Structured Settlement Annuity. This means a highly rated, well capitalized life insurance cmpany cntractually guarantees yur payments. Depending n the plan yu design, payments may be guaranteed fr a specific perid f time r fr as lng as yu live. Befre Chsing a Structured Settlement, Please Cnsider Timing is Critical The chice f a structured settlement must be made befre accepting the settlement prceeds. The applicable tax laws state that yu cannt accept the prceeds in cash nw and then elect t create a structured settlement later. Payment Streams are Fixed Remember that the nature f the peridic payment ptin is t prvide a fixed stream f incme t prperly address yur future needs. Payments cannt be accelerated. 7

8 What T D Next: Please write dwn any questins yu have and have yur attrney cntact us s we may assist yu. Please feel free t call (866)-68 FORGE r visit ur website at The experts at Frge prvide persnalized settlement plans fr plaintiffs invlved in persnal injury and wrngful death lawsuits seeking lng-term financial slutins. By piecing tgether the ptimal balance between structured annuities, liquid and lng term hldings and investments, yu will receive lifelng security and valuable tax advantages that are part f every plan. We have a netwrk f prfessinals and financial advisrs wh knw the persnal injury landscape and are extremely skilled in wrking with thse whse lives have been irreversibly impacted by a persnal injury r wrngful death. Frge Cnsulting, LLC is here t prvide sund financial strategies that help yu make the mst f yur settlement tday, tmrrw and int the future. 8