By Joanne Marcus, MSW, Executive Director, Commonwealth Community Trust
When the call comes from the plaintiff’s attorney asking what should be done about the client’s public benefits, be prepared to answer. The case is about to settle, or the verdict is in, and now the client wants to know how it will affect his or her benefits. First, you will likely have to help the PI attorney assess the type(s) of benefits the client is receiving and determine if the settlement puts those benefits in jeopardy. How did the client receive these benefits – through means-testing or due to work history? Perhaps the PI attorney has not considered benefits but understands that the client is incapacitated and will need their assets managed; or perhaps public benefits may be necessary in the future.
Medicaid, the means-tested public benefit for disabled individuals who are also impoverished, will need to be protected. More than $2,000 in resources and the client will lose this valuable benefit; personal injury proceeds are plainly resources. Medicare, the benefit received by disabled workers who have earned enough quarters to qualify for disability benefits, may also need to be protected as well. In addition, Supplemental Security Income (SSI) and Social Security Disability Income (SSDI) need to be considered. Both benefits provide a monthly income to the disabled. SSI is meanstested, just as Medicaid is, but SSDI, like Medicare, is not. Therefore, SSI income will need to be considered when planning.
Centers for Medicare and Medicaid Services (CMS) has begun enforcing the Secondary Payor Act for liability cases, meaning these clients should have a Medicare Set-Aside account. Some clients are eligible for both Medicare and Medicaid, but can they both be protected? The answer is yes, but not without some planning from the PI attorney and with your help. Adding complexity, many plaintiffs are choosing a Structured Settlement as a part of their proceeds. While providing important benefits to the client, these also have pitfalls to be avoided.
Weaving in a Structured Settlement
When incorporating a structured settlement into the already complex planning necessary to maintain public benefits and Medicare coverage, there are several issues to consider. Internal Revenue Code Section 104 provides that personal injury settlements for physical injuries are not taxable. Income from those proceeds may be tax-deferred as well, if the settlement is structured pursuant to Internal Revenue Code Section 130. Because of the tax advantages, as well as future financial security in the form of future payments, many cases include these qualified structured settlements as a part of the mix. The structure can be funded by the defendant’s insurance company, but most assign that liability from their books by purchasing annuities to make the payments. Funding with an annuity is allowed pursuant to Internal Revenue Code Section 130, but the qualified assignment must be done at the time of settlement. The timing and sequence of events are critical. Moreover, the insurance companies selling these annuities must be highly rated by companies such as AM Best and Standard & Poor’s.
The choice of trustee may be complicated by a structured settlement. Many bank and trust companies have minimum deposit requirements. If the SNT is funded with a small amount initially, consider a PSNT, which usually have much smaller initial funding requirements.
While the initial funding may be payable to the SNT, whether by Court order or otherwise, careful attention must be paid to the payee designation in the annuity documents. It must name the SNT as the payee. Many times, the insurance agents writing these annuities are not aware of the devastating effect of naming the beneficiary as the payee rather than the SNT, and the attorneys are concentrating on the Court Order, which even if correct, does not control the annuity. Once the qualified assignment is made and annuity purchased, it is irrevocable. If the beneficiary is accidentally named to receive annuity payments in the future, his or her public benefits can be lost for the period of the annuity payments. This period is often years or for the life of the beneficiary. At a minimum, benefits such as SSI ad Medicaid would be jeopardized in the months in which payments are received.
SNTs must contain a payback provision to reimburse the states which have provided Medicaid benefits to the beneficiary at the time of the beneficiary’s death. Therefore,
the contingent or successor payees of the annuity must also be the SNT. Many States have memorialized that requirement in their Medicaid Manuals; however, the prudent course of action, even if in a state which has not, would be to ensure the entire amount of the structured settlement will eventually pass to the SNT. While naming a successor payee at the death of the beneficiary may be an inventive way to avoid the repayment provision, the designation is irrevocable. For example, if your beneficiary moves to a state prohibiting such a structure, you will have advised your client out of means-tested benefits.
Finally, if the annuity payments are for a term certain and not just for the life of the beneficiary, then a commutation clause should be included as a part of the annuity contract. A commutation clause provides for a lump sum payment at the death of the beneficiary based on several different factors decided at the time of the annuity purchase. Receiving the commuted value of the remainder of the annuity at the time of the beneficiary’s death allows for the orderly administration and winding up of the SNT. The states’ Medicaid departments can be repaid, and any remaining assets in the trust can be distributed to the contingent beneficiaries immediately. Fees and administrative costs necessary to leave the trust open while annuity payments continue to come in are unnecessary. Most insurance companies require a commutation clause to commute the value of the annuity.
Joanne Marcus, MSW, is the Executive Director of Commonwealth Community Trust (CCT), a nonprofit organization that provides administration of pooled special needs trusts. Since its founding in 1990, CCT has served more than 1,300 Beneficiaries and CCT trust services are available nationwide. For more information, call 804-740-6930, or visit the CCT website at https://www.trustCCT.org.
