There’s a lot to remember when you’re dealing with a personal injury case.  At Amicus, we see some of the common mistakes made by attorneys, and we want to help you avoid those same mistakes.  This article lists some of the most common areas where mistakes are made by attorneys involved in personal injury cases.

Neglecting Medicare Set Aside Accounts

The CMS has outlined when and how Medicare’s interests should be protected. If the primary payor is settling future medical benefits for a “qualified individual, allocation must be made to cover future injury-related Medicare allowable expenses to prevent the shifting burden to Medicare. This arrangement is referred to as a Medicare Set-Aside (MSA). Medicare Set Aside must be approved by CMS.

Medicare requires a Medicare Set Aside account in all Worker’s Compensation cases with a preset amount to pay future medical expenses. The law now requires a specific portion of a settlement from certain third-party liability claims be placed in a Medicare Set Aside to be used exclusively for future injury-related medical expenses otherwise paid by Medicare.

To qualify for a Medicare Set Aside account, the client must be a Medicare recipient at the time of settlement. A client may also qualify if he or she is not currently receiving Medicare, but the total amount of the settlement is over $250,000, and the client would reasonably be expected to qualify for Medicare within 30 months of the settlement.

Failure to Retain Your Own Financial Expert

Failing to retain your own financial expert could open you up to potential “failure to inform” malpractice, as evidenced in Grillo v. Pettiete et al. Cause No.96-145090-92 and Grillo v. Henry Cause 96-167943-96, 96th District Court, Tarrant County, TX.  We are financial planners specializing in settlement planning committed to protecting attorneys from liability. We will fight to ensure that your clients get the best possible deal, maximize their settlement longevity, and minimize liability exposure.

Failure to Use HIPAA to Your Advantage

Medical Information is private and protected. By filing a lawsuit, your client may have to give up some of that privacy, but not all. Privacy is good for its own sake, but may also be to your strategic advantage.

The defense, especially in medical malpractice cases, maybe routinely violating HIPAA. When a doctor gives medical information to a “business associate” (which should include their defense attorneys), they have to meet HIPAA requirements. If they don’t, they can be subject to civil and criminal sanctions-or at least deserve to be roundly embarrassed on the witness stand.

When your client signs the necessary medical releases, narrow the releases as much as possible. Require that the released information not be shared without your client’s further permission.

Unaware of Tax Treatment of Taxable Damages

According to the Internal Revenue Code, non-punitive damages received as compensation for physical injuries or sicknesses are not included in gross income. IRC §104(a)(2).  Payments for non-physical injury are also excluded from gross income for tax purposes as long as the origin of the claim is from a physical injury. Id. Damages due to wrongful death, pain and suffering from a physical injury, or lost wages from a car wreck would all be excluded from gross income under section 104(a)(2).

The IRS has developed audit guidelines to determine whether settlement proceeds fall under gross income. These guidelines are entitled “Lawsuit Awards and Settlements” and fall under the IRS Market Segment and Specialization Program. The purpose of the program is to target damages that “otherwise fall through the gap of unreported income.” The document instructs auditors to look for unreported punitive damages, confidentiality clauses, or anything that may have gone unnoticed. Traditionally, the IRS has given more weight to the statements made by the plaintiff in the original complaint to determine whether settlement money are from a punitive or otherwise taxable claim.

Click here for document: http://www.irs.gov/pub/irs-utl/lawsuitesawardssettlements.pdf

Another necessary consideration is that post-judgment interest is taxable. This can be very significant. If a verdict is compromised, the attorney should negotiate away the interest first.

When settlement proceeds consist of taxable and non-taxable damages, proper allocation is critical. While the general rule is to follow the old adage of substance over form, ensuring that the settlement takes the proper form is still an essential part of the settlement planning process. Settlement documents should clearly outline the basis for and amounts of the various damages paid in the settlement.

It is also important to know when to employ the use of a Qualified Settlement Fund (QSF). These funds sometimes called 468B Funds after the section of the IRS code that governs them are essentially a judicial allocation by a court. QSFs were developed to ease the distribution of settlement proceeds in large class-action settlements like Exxon Valdez. Today these tools can be an appropriate action for single claimant cases as well. A good settlement planner will know when the use of a QSF is appropriate.

This decision had several important impacts. Most plaintiffs receiving taxable damage settlements must include the gross amount of the settlement as income, and then deduct the attorney’s fee “below the line.” This would subject the client to phase-outs and exemptions limits and may create an alternative minimum tax (AMT) problem where the client’s income is substantially higher. The solution is to structure both the plaintiff’s recovery and the attorney’s fee. This will defer taxes over a period of years and negate the AMT issue entirely.  Commissioner of Internal Revenue v. Banks & Banaitis, 543 U.S. 426, 430 (2005).

Improper Language in Settlement Documents

After the settlement negotiation takes place, a plaintiff attorney must be aware of several documents required to execute the settlement and the pitfalls associated with each. The Settlement Agreement and Release identifies the parties and the settlement amounts and officially releases the defendant of liability. The Qualified Assignment sets for the schedule of payments and assigns the obligation of payments. Finally, the Court Order approves the settlement design and spells out any pertinent conditions such as a special needs trust trustee as Payee.

Several common mistakes in drafting the settlement agreement are easy to avoid. The settlement agreement should never state that the plaintiff or special needs trust trustee will purchase the annuity. The plaintiff attorney and settlement planner should be on the lookout for any language that may signal constructive receipt of funds. The defendant or its casualty insurer should send the check directly to the annuity company.

The agreement should avoid any terms such as “receipt and sufficiency is hereby acknowledged.” The term “receipt” and anything indicating such should be stricken from such a clause. Also, the settlement agreement should never put the plaintiff’s injury in question. Instead of a phrase such as “plaintiff claims that he sustained personal physical injuries, all as a result of the incidents…,” the document should say, “plaintiff sustained personal physical injuries that he claims are as a result of . . .”

The Qualified Assignment assigns the obligation to pay future payments from defense or its liability insurer to an assignment company. This document states that the assignment company purchases and owns the annuity.

The court must approve any settlement for a minor or an incompetent adult. The court orders the payment made directly to the assignment company. If the case requires an SNT, then the court will order the payee of the annuity to be the SNT trustee. To protect Medicaid’s interest, no other beneficiary is allowed other than the SNT trustee. The Deficit Reduction Act of 2005 requires disclosure of any injure requires disclosure of any interest an applicant has in an annuity even if the annuity is irrevocable or not treated as an asset. Insufficient disclosure may result in denial or termination of Medicaid eligibility.

Beneficiaries of an SNT do not have an interest in the annuity. The settlement agreement requires that future payments will be paid by the defense. The defense assigns that obligation to an assignment company through the Qualified Assignment. The court orders the payments are sent by the assignment company directly to the SNT trustee. Therefore the trustee is the only party who could sell, accelerate, or encumber the future payments.

Structured settlement annuities are among the safest investments around. The major companies frequently enjoy A+ or better ratings. Even when an insurance company declares bankruptcy, annuitants almost always get reimbursed for the annuity. Of the 700,000 people insured by a structured settlement, only about 300 failed to realize 100% of the benefit promised. Even those claimants managed to obtain most of the benefit after some delays. The industry as a whole is heavily regulated by insurance commissioners requiring reserves, capital and surplus. This ensures that even if a company becomes insolvent, there will still be funds available to pack back annuitants.

Inadequately Prepared for Mediation Negotiation

An attorney should be prepared with information about settlement proceeds before mediation. The attorney should have a qualified settlement planner prepare several documents prior to meeting with the defendants. An attorney should have an estimate of the current cost per $1000 of an annuity in the current market. The settlement planner should also secure medical underwriting based on the client’s medical records. An “annuitized” life care plan will also be valuable in approaching mediation.

During the mediation, the defense will likely argue that their own structure plan is the only or best for your client. It is not uncommon for the other side to bring up myths such as “corporate policy mandates we use this company for structured annuities” or “you must use an approved broker.” The important thing for a plaintiff attorney to remember is that there is no need to argue over a structure. The proper response is to negotiate for the highest present dollar value possible and reserve the right to structure later. The following is sample language to be included in such a settlement:

“The parties agree to settle for consideration of cash and future periodic payments, if any, the details of which to follow within the next 14 days, all of which will cost the defendant $X. Defendant agrees to . . .”

This negotiation based on “cash cost” allows the plaintiff and the plaintiff’s settlement planner to design the settlement allocation that is appropriate for the plaintiff, not the defendant. When the annuity company and settlement planner are both chosen by the client, plaintiff attorney’s liability during the time of settlement is dramatically reduced. Plaintiff attorneys should still be willing to cooperate with the defense by executing the necessary documents (such as the Qualified Assignment).

Confidentiality Clauses

Settlement agreements in personal injury cases commonly contain confidentiality provisions. Based on a tax court decision from 2003, Amos v. Commissioner, T.C. Memo 2003-329 (December 1, 2003), plaintiffs who sign settlement agreements containing confidentiality provisions put themselves at risk for future tax liability.

The facts of the Amos case are condensed as follows:

• Dennis Rodman, upon falling out of bounds during an NBA game, kicked a photographer in the groin.
• The photographer filed suit, and the dispute settled for $200,000.
• However, the settlement agreement contained a confidentiality clause.
• The photographer assumed all $200,000 was excluded from income tax as compensation for personal physical injury under IRC Sec. 104(a)(2).
• The IRS audited the photographer’s tax return. They declared the $200,000 to be taxable compensation because they determined that the payment was motivated by a desire for confidentiality.

Tax Court analysis:

• The taxpayer has the burden of proving that damages are on account of personal physical injuries or sickness, under IRC Sec. 104(a)(2), citing Commissioner v Schleir, 515 U.S. 323, 328 (1995), and United States v. Burke, 504 U.S. 229, 248 (1992).
• “The nature of the claim forming the basis for the settlement controls whether such damages are excludable under IRC Sec. 104 (a)(2).” Burke, supra, 504 U.S. at 237.
• “The intent of the payor is critical” and “the character of the settlement payment hinges ultimately on the dominant reason of the payor in making the payment” Knuckles v. Commissioner, 349 F.2d 610, 613 (10th Cir. 1995).

Tax Court ruling:

• The court treated 60% of the damages as compensation for the photographer’s physical injuries, and 40% as payment for confidentiality. Thus, 40% of the damages were taxable.

Impact of ruling:

• The court acknowledged that the dominant reason Mr. Rodman paid the photographer was to compensate him for his physical injuries. However, the court still held that a portion of the award represented taxable damages.
• The holding in Amos provides justification for the IRS to treat all personal injury damage awards as part taxable and part non-taxable, if the settlement agreement contains confidentiality provisions.

Plaintiffs must insist on striking confidentiality provisions from personal injury settlements that fall within IRC Sec. 104(a)(2). If the defense insists on a confidentiality provision, the plaintiff should demand the defendant and its liability carrier indemnify the plaintiff against adverse tax consequences. Or, the settlement agreement needs to be clear regarding the percentage of the total settlement that is being allocated to confidentiality, and the percentage allocated to 104(a)(2) damages. However, the best option, other than striking confidentiality provisions altogether, is to make sure express language is added to the settlement agreement stating that confidentiality is mutually beneficial to both parties and that no money is being paid for confidentiality purposes.