As settlement planners, we often get phone calls from attorneys at mediation conferences asking us to help evaluate structured settlement proposals being offered by the defense.  At this late stage of the game, our advice is generally to simply negotiate for a present value amount and not agree to any specific structured annuity proposal.  We recommend that you make sure that the settlement memorandum clearly states that you have your own settlement planning expert and any potential structured settlement will be designed by and funded through your expert.  Inserting such language in the settlement memorandum will give you and your client time after the stress of mediation to calmly consider the plaintiff’s needs and goals and to create a suitable settlement plan.

However, the approach outlined above is meant as a last resort and should only be used if you find yourself at mediation realizing that you have not yet contacted your settlement planner about the case.

Settlement planners are often used after, or even during mediation, but can also be a valuable resource to plaintiff attorneys preparing for mediation.  If involved before mediation, your settlement planner can provide you with valuable information in the form of a settlement packet that can help substantiate or even increase your settlement demand. 

The Medicare Secondary Payer Recovery Contractor (MSPRC) has, over the past couple of years, been slowly implementing new processes and procedures in an attempt to make the Medicare lien resolution process simpler and more efficient for settling parties.  However, while these efforts are appreciated, there is still considerable improvement that needs to take place to make the process more user-friendly, quick, and responsive.

The MSPRC keeps a website, www.msprc.info, on which all of the changes, updates, and new policies are posted.  It is also a site where attorneys, adjusters, and claimants can go to understand the Medicare lien resolution process, find answers to commonly asked questions, and now, even access specific information about their ongoing and open cases.

There is no hard and fast rule regarding when to involve a settlement planner.  However, as a general rule, the earlier a settlement planner is involved the better. This increases the chance that your client will receive the best possible advice.

Traditionally, settlement planners have been called after the case has settled or at the point of settlement.  Many attorneys don’t think to involve a settlement planner unless the client needs or wants a structured settlement annuity.  In such a case, the settlement planner is involved as a matter of necessity to facilitate the purchase of the qualified structured settlement annuity.  This is an important function, but simply relying on your settlement planner to implement a qualified structured settlement annuity does little to really help the client address his/her future financial needs and goals.

It is no secret that the returns on structured settlement annuities are not glamorous.  In fact, many investments outperform these annuities, especially if you ignore taxes, expenses and dissipation risk.  In recent times, the returns generated by settlement annuities have hovered around 3.5%.  A moderate–risk portfolio of securities may surpass that return.  But these higher rates of return are accompanied by volatility, expenses, taxes and dissipation risk.  In addition, the client may miss out on an opportunity to capitalize on a rated age.

A portfolio of securities is subject to market volatility whereas a structured settlement annuity is guaranteed by one of the highest-rated life insurance companies.  These companies have a well-documented history of faithful payment.  If the securities markets suffer a loss, it could impair the client’s ability to pay ongoing medical bills or living expenses.  Most injured parties cannot afford to chase high returns by putting their recovery in jeopardy.  The portfolio also bears accompanying expenses that eat into that higher return.  In many cases the fees may include financial advisors fees, trust fees, and investment fees and commissions.  These fees must be subtracted to get an expected rate of return net of them.

Income tax exempt?  Yes.  Estate tax exempt?  No.

Attorneys settling cases for injury victims need to understand that while personal physical injury recoveries are income tax exempt, they are not estate tax exempt.

INCOME TAX

Settlement recoveries arising from compensatory damages for personal physical injuries are income tax free.  IRC Section 104(a)(2) states in part:

...gross income does not include the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness.

This income tax-exemption is a much needed break for personal injury victims – most of whom have endured severe injuries followed by years of grueling litigation.  Additionally, if the injured party decides to utilize a qualified structured settlement annuity with all or a portion of their settlement recovery, the interest earned on that qualified structured settlement annuity is income tax-exempt as well.

Structured Settlement Annuities – advantages and disadvantages

Personal injury attorneys are well aware of the benefits of structured settlement annuities and the role they play in settling a personal injury claim.  Notably, structured annuities are an excellent vehicle to ensure that an injured client will have guaranteed income for a defined period of time or even their lifetime.  Structured settlement annuities also prevent premature dissipation of settlement recoveries by clients who may be ill-equipped to manage large sums of money.  Additionally, if the settlement is on account of personal physical injuries, as defined in IRC Sec. 104(a)(2), the income stream (both principal and interest) from the annuity is completely exempt from federal and state income taxes, and there are no ongoing management fees.

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

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.