Settlement Planning Guide
As an injured person who is receiving a settlement related to a profound injury, a surviving family member of a wrongful death, or even as a conservator or guardian charged with making critical decisions related to a settlement recovery, you deserve to know the options available to you at the time of settlement. Your choices and decisions related to a settlement plan are very important in order to preserve your settlement award so that it can provide financially for you and your family now and into the future while also protecting eligibility for future government benefits and programs which may be impacted by the settlement. This guide is intended to help provide information to you about settlement options and how we can work with you and your attorney to fully address your needs.
A settlement resulting from the wrongful death of a parent, spouse, or breadwinner requires a thoughtful and comprehensive approach so that a resulting plan can best provide a replacement of lost household income and services. A personal injury award also holds its own unique challenges such as meeting future healthcare needs and protection of potential eligibility for public benefit programs. Taxes, cash flow and investment risk are also ever present concerns. Unfortunately, you must make a lifetime of decisions before you receive your settlement or you may jeopardize your ability to fully benefit from the programs and resources available to you. Fortunately, Forge
Consulting, LLC is available to help you so you don’t have to make these decisions on your own or through a financial advisor who may not be knowledgeable with all areas of personal injury settlements.
Forge Consulting, LLC is a national company dedicated to exclusively working with injured plaintiffs and their families as we work side by side with their attorneys in personal injury and wrongful death cases in single event and mass tort settlements across the country. With an exclusive focus on settlement planning, Forge is uniquely qualified as a specialized resource and proud to be at the forefront of the settlement planning industry. Through Forge, you have access to a full array of financial products and services with a settlement team of professionals licensed in all 50 states and a proven record of success in matching financial resources to current and future needs. Our settlement preservation strategies are designed to help ensure a lifetime of financial security for you and your family and are coordinated with government benefit programs in mind to help preserve eligibility for Medicaid, Medicare and other benefits. Once we have an understanding of your needs and risks, we turn our focus to reviewing the available options and assisting in developing a plan that makes the most productive use of the settlement recovery. We strongly recommend a balanced approach to client solutions and assess your overall financial picture from a complete asset allocation
standpoint and how settlement proceeds should be diversified across different asset classes. Cash flow and asset preservation are key components to a financial solution.
Frequently Asked Questions
Based on questions we receive often, we’ve created this document to address important areas related to personal injury and mass tort settlements:
o Financial Options with your settlement proceeds
o Taxation of your settlement
o Government Benefits and Preservation of Health Care
o Structured Settlements
What are My Financial Options with My Settlement?
Traditionally, unless there are other constraints within your settlement agreement, you can receive your net settlement proceeds (the amount remaining after attorney fees, case expenses, and any other deductions from your settlement) in a lump sum form (cash payment) or you may be able to receive part or all of your settlement paid to you over time via a structured settlement.
Your settlement proceeds paid to you in lump sum form are normally paid in the form of a check or wire to the account of your choice or through a series of payments if designed through a Structured Settlement Annuity.
Will I Pay Tax on My 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 avoid paying taxes on any money (other than punitive damages) received due to personal physical injuries or physical sickness (see Section 104(a)(2)). Provided that the money you receive is due to a physical injury or sickness or wrongful death, you will not pay tax on the money when you initially receive it.
If you place part or all of your settlement proceeds into an investment vehicle that grows or provides income to you, the future growth or income (if any) may be taxable income unless invested in a tax exempt holding or structured settlement.
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 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 viewed as being awarded for that reason, whether or not the person receiving the settlement money is the injured party. As an example, settlement money you receive due to your claim of loss of love, support and affection as a result of your spouse’s injuries is excludable from your gross income.
This is because a direct link exists between your spouse’s or relatives’ physical injuries and the settlement money you recover as a “Derivative Claimant”. (See Private Letter Ruling 200121031, 5/29/2001, IRC Sec(s). 104). This would also be true if you are receiving settlement money as the parent or child of a physically injured person.
What are the Different Types of Government Benefits?
Many of the 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 these programs. It is crucial that you know what, if any, government benefits you are receiving now or could receive in the future.
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, the federal/state program that provides 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, your award may affect these benefits. A person with a savings account of $2,000, for example, generally is not eligible for SSI or Medicaid. Certain assets, such as an individual’s home and automobile, are not counted as available resources for purposes of determining eligibility. Subsidized housing and food stamps are also needs based programs that can be 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 12 months, they are eligible for SSD. If you are approved for any kind of Social Security disability benefit other than SSI, you will receive Medicare after you have been entitled to SSD benefits for two years. Medicare does not pay for long term care or many prescription drugs, but does pay for a portion of major medical expenses and hospitalizations.
Because SSD and Medicare are entitlement programs, your award should not affect your eligibility for these programs.
What is a Medicare Set-Aside (MSA)?
An MSA is a fund created in the settlement of a workers' compensation or liability case. It is established from a portion of the settlement amount that is to be used to pay for future medical expenses related to the job injury/illness that would otherwise be payable by Medicare. Funds must be established in insured accounts and may be managed by the claimant or set up and managed through a custodial account.
In 1981, the Medicare Secondary Payer Statute established that Medicare was to be a secondary benefit payer behind the responsible parties for workers' compensation claims. In July 2001, the Centers for Medicare and Medicaid Services (CMS) declared that funds for future medical expenses be set aside in Medicare Set-Aside accounts for certain workers' compensation settlements. Failure to do so may result in CMS refusing Medicare coverage for all future medical treatments of claimant. Liability exposure exists with employers, insurance companies or third party administrators if Medicare is not properly taken into consideration at the time of settlement.
How are MSAs Funded?
Typically, MSAs are funded through settlement proceeds. An MSA can be funded 100% up front with a lump sum deposit as determined by the MSA allocation requirement or it can be funded over time through a Structured Settlement Annuity. A Structured
Settlement Annuity can be used to fund the annual deposit requirements into the MSA and may save money if the cost of the annuity is less than the MSA lump sum amount. What Can I Do to Protect SSI and Medicaid?
A Special Needs Trust (SNT) may allow you to use a portion of your settlement award for items that can enhance your quality of life without jeopardizing your eligibility for SSI and Medicaid. You should consider a SNT if you anticipate needing or currently are receiving SSI or Medicaid.
About Special Needs Trusts
While there are different types of Special Needs Trusts, they all share the purpose of allowing an individual with disabilities to have both a settlement award and government benefits. The term “Special Needs Trust” commonly refers to the type of custom drafted disability trust established under sub section (d)(4)(A) of the Federal statute that authorizes such trusts (42 U.S.C. §1396p). To have a valid “(d)(4)(A)” disability trust established, you must…
o Be under age 65 when the trust is established
o Meet the Social Security definition of being “disabled”
The trustee (parent, grandparent, guardian) is obligated to pay back Medicaid upon your death. Keep in mind, however, that when medical providers contract with Medicaid, they agree to provide services at a significantly lower cost than if you had to pay for your medical care privately without Medicaid. When a trustee of a special needs trust repays Medicaid upon your death for services paid for by Medicaid over your lifetime, repayment will be for this lower amount and will be free of any penalties and interests. After reimbursing Medicaid, the rest of the trust money can be distributed to your family members/beneficiaries.
Pooled Trusts
For individuals over age 65, (d)(4)(C) “Pooled Trusts” are available. Pooled Trusts must satisfy the following requirement…
o The trust must maintain separate accounts for each Trust Beneficiary, but the funds are pooled for purposes of investment management
o Each separate trust account must be established solely for an individual who is disabled as defined by law, and
o Only that individual, the individual’s parent, grandparent, legal guardian or the court may create the trust.
There are no age restrictions or requirements for Pooled Trusts. Any funds that remain in the individuals account upon that individual’s death may be retained by the trust. Any funds not retained by the trust must be used to reimburse the State. This may be referred to as a modified payback provision.
What is a Structured Settlement?
This is a comprehensive solution designed for the present and the future. A structured settlement is a mechanism that allows plaintiffs a means of deferring part or all of the settlement and receiving the proceeds when desired as opposed to all at once. For example, you make take part of your settlement as immediate cash to cover expenses now and also have a portion of your personal injury or wrongful death settlement paid out in a series of guaranteed, income tax free periodic payments to meet your future needs as you like. This process was first made possible in 1982, when a bipartisan coalition of legislators in Congress came together to pass laws that amended the federal tax code. The Periodic Payment Settlement Act of 1982 (Public Law 97 473) was a means of formally recognizing and encouraging the use of structured settlements in physical injury and wrongful death cases
Who is Eligible to Structure a settlement?
The only persons entitled to the tax free benefits of a structured settlement are those who are settling a personal injury or wrongful death case.
How Does a Structured Settlement Benefit You? It Provides Financial Security
A long term structured settlement has several advantages. Security is first and foremost. A structured settlement provides guaranteed long term income. It gives injured people and their family the ability to adapt and/or recuperate without spending time and resources determining and being dependent upon various investment strategies. The second primary benefit is financial. When Congress amended the federal tax code IRS Code 104(a)(2) to promote the use and integrity of structured settlements, it explicitly provided that 100 percent of every structured settlement payment would be exempt from federal and state income tax.
It Eliminates the Burden of Dealing with a Lump Sum Settlement
Although most people feel that they would be able to handle a large cash settlement, in reality the money can disappear all too quickly. Studies prove that most people who receive cash settlements spend 95% of their money within five years. Cash settlements are often depleted when the recipient lends or gives money to family and friends, makes risky or volatile investments, or purchases expensive items. You must be certain that the money designed to compensate for a lifelong injury is there for the coming years. With a
structured settlement, a designated, contractually fixed payment plan ensures that future needs will be met.
It Protects You AND Your Family
Many people may depend on the settlement for daily living expenses. By structuring your settlement, you can guarantee that your family will always be financially protected. You may design your structure to include a monthly check with sufficient funds for food, clothing, transportation and housing. In addition, your structured settlement can be used to fund your children's educational needs or to provide income for you when you retire. The fixed nature of structured settlements provides assurance, peace of mind and a lifetime of security.
It is Tax Free
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 speculative and will vary over time. Consider the
performance of the stock market over the past few years and you can see the volatility of investments that come without guarantees.
How Valuable is this Tax Advantage?
The chart below shows the value of receiving tax free structured payments. The chart compares the rate you would have to earn on another investment to equal the Structured Settlement internal rate of return.
Interest Rate Required To Equal Structured Rate Structured Settlement
Internal Rate of 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%
For example: assume you are in the 28% federal tax bracket and invest a lump sum settlement in a Bank Certificate of Deposit. The CD interest rate would have to be 8.33% to get the same return after taxes are paid as a structure with a 6% internal rate of return. If your state is 3% and your local tax is 2% (total tax is now 33%), the CD interest rate would have to be 8.96% to equal a 6% interest rate on a structure.
EXAMPLE #1: STRUCTURED SETTLEMENTS
Grace, a 35 year old single mother, was injured and is about to receive a settlement award. Grace has a 10 year old son, Robert. Grace would like to put $100,000 aside in a structured settlement and take the rest of her funds as upfront cash for her immediate needs. She wants to make sure she has enough money every month for food, housing and other expenses and perhaps enough for college tuition for Robert.
Option 1: Lifetime benefit plan for Grace, with 20 years of fixed, guaranteed payments.
Amount Put In Payments Received Total Future Payout $100,000 For life $472.68 per month $289,280 if she lives her normal life
expectancy. (life time benefit) $113,443 Guaranteed if she dies within the 20 year certain period.
Option 2: Regular payments are made to Grace monthly for 30 years with additional onetime payments made at age 45, 55, and 65.
Amount Put In Payments Received Total Future Payout
$100,000 To age 65 $420 per month; and
Age 45 $15,000 Lump Sum; then Age 55 $20,000 Lump Sum; then Age 65 $25,000 Lump Sum
$211,200
Grace is relieved that her needs and the needs of her son have been considered and met. In her case, or in the case of any injured person, the design and flexibility of structured settlement payments are limited only by the imagination. The ability to customize a structured settlement makes it an ideal financial vehicle for many of life's financial challenges, including college education, retirement planning, estate planning, and diversification in investment planning.
It’s Backed By The Highest Rated Insurance Companies
When you structure your settlement, your future payments are generated 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.
Before Choosing a Structured Settlement, Please Consider… Timing is Critical
The choice of 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 create a structured settlement later.
Payment Streams are Fixed
Remember that the nature of the periodic payment option is to provide a fixed stream of income to properly address your future needs. Payments cannot be accelerated.
What To Do Next:
Please write down any questions you have and have your attorney contact us so we may assist you. Please feel free to call (866)-68 FORGE or visit our website at
www.forgeconsulting.com. The experts at Forge provide personalized settlement plans for plaintiffs involved in personal injury and wrongful death lawsuits seeking long-term financial solutions. By piecing together the optimal balance between structured annuities, liquid and long term holdings and investments, you will receive lifelong security and valuable tax advantages that are part of every plan.
We have a network of professionals and financial advisors who know the personal injury landscape and are extremely skilled in working with those whose lives have been irreversibly impacted by a personal injury or wrongful death. Forge Consulting, LLC is here to provide sound financial strategies that help you make the most of your
