A personal injury client’s recovery may take several forms – cash, future payments, trusts, or a blend of each. Each of these three options has distinct advantages and disadvantages. No case and no client are the same, and no single settlement solution is right in all circumstances. Each case requires planning to fit the needs, goals and special circumstances of each client.
Cash is the most widely used settlement option for most clients for obvious reasons. Cash is extremely liquid. It can be used to meet any need, goal, or whim of the client. It is often used to pay down debt, purchase new cars or homes, and meet the immediate needs many injury victims face upon settling a personal injury case. The biggest disadvantage of cash is also its greatest advantage – liquidity. Cash in the hands of many injured clients will be dissipated quickly – often leaving the client without future income or money to pay ongoing medical expenses.
Structured Settlement Annuities
Structured settlement annuities provide injured clients with guaranteed, tax-exempt future payments. Before the settlement papers are signed, the client designs the stream of payments he would like to receive in the future and those payment streams become part of the settlement between the parties. The defendant then assigns its obligation to make the future payments to a life insurance company (MetLife, New York Life, etc). The defendant satisfies its obligation to the injured client by sending the premium for the annuity directly to the annuity issuer. The payment structure is extremely flexible in design, and can be designed to fund future goals (i.e. college or retirement) or can be used to provide lifelong income. Seriously injured clients seeking a lifetime payment can benefit from a “rated age,” which serves to increase the payout per premium dollar. For many clients, structured settlement annuities provide much needed dissipation protection, guaranteed income and financial stability. However, they are not without their drawbacks.
Annuity payments are guaranteed by the annuity companies that offer them, and thus are only as solid as the company backing them. Most annuity companies in the structured settlement market are rated A+ or better with AM Best, and while the risk of annuity company insolvency is small, it nonetheless exists. Also, while these annuities are flexible in design, they are unchangeable once established, which can increase the risk that clients will feel a need to later factor their future payments.
Settlement trusts are a planning solution that has gained popularity in recent years. Trusts (often called settlement preservation trusts or settlement protection trusts) allow clients some flexibility and liquidity without giving them unfettered access to the entire settlement recovery. Settlement trusts can be drafted to allow for payments to be made for education expenses, medical expenses and provide a monthly income. They can also allow for some percentage of the trust corpus for discretionary spending – thus giving the client some freedom without allowing them to dissipate the entire principal amount. These trusts allow the beneficiary to gain financial discipline and establish a budget, while still allowing for future contingencies to be paid. Structured settlement annuities can pay directly to such trusts, allowing settlement money to grow tax-free inside the annuity while taking advantage of the liquidity of the trust. They also make it impossible for the client to factor the future payments since the trust, not the injured client, is the payee of the annuity.
Trusts are not without disadvantages. Trust principal is not guaranteed, as it is placed in an investment portfolio. Additionally, corporate trustees often have hefty trustee fees and management expenses that will decrease the net return of the trust portfolio.
In order to know the right mix of cash, future payments, and trusts for each client, it is imperative your client is educated about the pros and cons of each option before settlement, and that your client’s unique situation and circumstances are understood. Pre-settlement planning allows the client to consider their post-settlement needs and goals before the stress and pressure of mediation. In addition, a pre-settlement financial plan allows the client to have input in and “sign-off” on the form the settlement takes. Clients that feel arm-twisted into “over-structuring” their recovery will resent not having access to enough money to pay down debt, buy a car, etc., and will likely end up frustrated, upset with their attorney and running to the nearest factoring company to get the cash they feel they need. Proper pre-settlement planning can greatly reduce the risk that clients will factor their structured payments because liquidity issues, future cash needs and contingency plans have been discussed and pre-planned.
No matter the form the settlement takes, a settlement plan in which all of the client’s funding options are considered and discussed will result in happier and more financially secure clients.