Advanced Strategies for Closing Cases Compliantly:  A Case Example

By Jason D. Lazarus, J.D., LL.M., CSSC, MSCC

In the confusing landscape of public benefits and planning issues that arise today for trial lawyers when settling catastrophic injury cases, finding your way can be a daunting task.  Many questions come up such as should the client seek Social Security Disability (SSDI) benefits and become Medicare eligible?  Doesn’t that trigger the need for a Medicare Set Aside?  What if the client is receiving needs-based benefits such as Medicaid and/or Supplemental Security Income (SSI)?  Is coverage under the Affordable Care Act (ACA)^[1] a better or even an available option?  How should the recovery be managed from a financial perspective?  Is a trust appropriate?  Should a structured settlement be considered?  There are no easy answers to these questions.  In the paragraphs that follow, you will find useful information related to these issues that will give trial lawyers the ability to spot issues when settling a case for a catastrophically injured client.

Let’s use a real-world example to identify the issues.   Take Jan Smith who was the victim of medical malpractice at a hospital.  Jan was in her early forties when she decided to have elective surgery on her back for degenerative disc disease.  During the surgery, a problem developed while being intubated and the procedure was cancelled.  Mrs. Smith was moved to the ICU and no neurologic monitoring was performed that evening after being moved from the surgical suite.  The next morning Mrs. Smith was found to be quadriparetic.  Unfortunately for Mrs. Smith, her condition was irreversible.  Suit was brought against multiple defendants with a significant seven figure recovery secured.  Mrs. Smith and her family had Medicaid coverage and SSI.  She had also applied for SSDI.  At the time of settlement, there was no Medicare eligibility since she had not been approved for SSDI and she wasn’t sixty-five.  How do you protect the client’s eligibility for public benefits?  Is that the right thing to do?  Should ACA coverage be considered?  What about protection of the monies recovered on Mrs. Smith’s behalf?  Should a trust be created?  What about structured settlements?  Let’s explore these questions further.

Public Benefits versus ACA Coverage

As a starting point, the first question is, does it make sense for Mrs. Smith to give up her needs-based benefits completely by taking the settlement in a lump sum and becoming privately insured through coverage under the Affordable Care Act?   This isn’t a question that can be answered with a simple yes or no.    There are multiple considerations before deciding to eschew coverage afforded by Medicaid and Medicare along with the needs based Social Security benefit, SSI.  First is whether the ACA coverage will be around for the long term.  Will it be repealed at some point?  Will portions of it be repealed making it a non-viable option?  Second, does the case involve needs that aren’t provided for by the Affordable Care Act coverage such as in-home skilled attendant care or long-term facility care?  These services can be very costly and may be covered by Medicaid in many states but are not covered by ACA plans.  In Mrs. Smith’s case, she will have a significant amount of attendant care needs that can be covered by certain Medicaid programs available in her home state but not by the ACA.  So, does that mean she shouldn’t apply for ACA coverage?  Should she create a special needs trust to protect Medicaid and SSI?  The answer lies in an analysis of the costs of the plans available under the ACA and the amount of spendable income that results if a special needs trust is utilized.

According to a 2013 article authored by Kevin Urbatsch and Scott MacDonald entitled “The Affordable Care and Settlement Planning”^[2] the numbers favor combining ACA coverage with a special needs trust.  The following chart illustrates the financial benefits of combining an SNT with ACA coverage in California.

PLANNING PROJECTIONS

(40 YEAR OLD FEMALE)

Source: Merrill Lynch Wealth Management Analysis through the Wealth Outlook Program, May 2013.

As the chart demonstrates, there can be some distinct advantages from a financial perspective to utilizing ACA coverage but also keeping Medicaid/SSI eligibility.  While that is true, it also is true that a special needs trust, which would preserve Medicaid and SSI, places many restrictions on how settlement monies may be used.  Accordingly, it isn’t a decision that should be made just for financial reasons.  A careful analysis of all of the issues is necessary.  In the case of Mrs. Smith, other considerations outweighed the use of a special needs trust.  She and her family didn’t want the restrictions that come with the SNT.   Since monies were allocated to her spouse and their children, all of the family’s assets disqualified her for needs-based benefits.

Even though she was currently ineligible for needs-based benefits, that didn’t mean she could never become eligible again in the future.  Mrs. Smith might have need for means tested benefits such as Medicaid/SSI in the future and could become a Medicare beneficiary at some point as well, and therefore a trust with provisions that would protect these benefits was created.  The trust created had provisions that would allow the trustee to move money into a “special needs sub-trust” and a “Medicare set aside sub-trust”.  The set aside sub-trust was contained within the “special needs sub-trust” so that in the event that the client was “dual eligible”, the set aside wouldn’t cause an eligibility problem for needs-based benefits.  Also, let’s now make the assumption that the ACA coverage isn’t an option or perhaps might not be around well into the future.  What are the types of benefits an injury victim should be concerned about preserving and what are the techniques used to preserve them?

Public Assistance Program Analysis

Because Mrs. Smith is eligible for Medicaid and SSI as well as having applied for SSDI, further explanation of these benefits makes sense to adequately understand the issues involved in planning for her recovery.  There are two primary public benefit programs that are available to those who are injured and disabled.  The first is the Medicaid program and the intertwined Supplemental Security Income benefit (“SSI”).  The second is the Medicare program and the related Social Security Disability Income/Retirement benefit (“SSDI”).  Both programs can be adversely impacted by an injury victim’s receipt of a personal injury recovery.  Understanding the basics of these programs and their differences is imperative to protecting the client’s eligibility for these benefits.  So how do we protect Mrs. Smith’s current and potential future benefits?

Planning Techniques for Keeping Mrs. Smith Eligible for Medicaid/SSI

Since Mrs. Smith receives Medicaid/SSI, an SNT can be created to hold the recovery and preserve public benefit eligibility since assets held within a special needs trust are not a countable resource for purposes of Medicaid or SSI eligibility.  The creation of a special needs trust is authorized by federal law.^[11]  Trusts commonly referred to as (d)(4)(a) special needs trusts, named after the federal code section that authorizes their creation, are for those under the age of sixty five.^[12]  However, another type of trust is authorized under the Federal law with no age restriction and it is called a pooled trust, commonly referred to as a (d)(4)(c) trust.^[13]

For a more thorough explanation of special needs trusts, refer to page 17.  To summarize, the 1396p^[14] provisions in the United States Code govern the creation and requirements for such trusts.  First and foremost, a client must be disabled in order to create a SNT.^[15]  There are two primary types of trusts that may be created to hold a personal injury recovery each with its own requirements and restrictions.  First is the (d)(4)(A)^[16] special needs trust which can be established only for those who are disabled and are under age 65.  This trust is established with the personal injury victim’s recovery and is established for the victim’s own benefit.  It can only be established by a parent, grandparent, guardian or court order.  The injury victim can’t create it on his or her own.  Second is a (d)(4)(C)^[17] trust typically called a pooled trust that may be established with the disabled victim’s funds without regard to age.  A pooled trust can be established by the injury victim unlike a (d)(4)(A).

Planning Techniques for Making Sure Mrs. Smith Will Not Lose Medicare Coverage in the Future

Mrs. Smith has applied for SSDI which means technically, according to CMS guidance, she has a “reasonable expectation of becoming a Medicare beneficiary within 30 months”.  A client who is a current Medicare beneficiary or reasonably expected to become one within 30 months should concern every trial lawyer because of the implications of the Medicare Secondary Payer Act (“MSP”).  Under the MSP, Medicare isn’t supposed to pay for future medical expenses covered by a liability or Workers’ Compensation settlement, judgment or award.  CMS recommends that injury victims set aside a sufficient amount to cover future medical expenses that are Medicare covered.  CMS’ recommended way to protect an injury victim’s future Medicare benefit eligibility is establishment of a Medicare Set Aside (“MSA”) to pay for injury related care until exhaustion.

In certain cases, a Medicare Set Aside may be advisable in order to preserve future eligibility for Medicare coverage. A Medicare set aside allows an injury victim to preserve Medicare benefits by setting aside a portion of the settlement money in a segregated account to pay for future Medicare covered healthcare. The funds in the set aside can only be used for Medicare covered expenses for the client’s injury related care. Once the set aside account is exhausted, the client gets full Medicare coverage without Medicare ever looking to their remaining settlement dollars to provide for any Medicare covered health care. In certain circumstances, Medicare approves the amount to be set aside in writing and agrees to be responsible for all future expenses once the set aside funds are depleted.

Dual Eligibility: The Intersection of Medicare and Medicaid – SNT/MSA

Since Mrs. Smith is potentially a Medicaid and Medicare recipient, extra planning is in order.  If it is determined that a Medicare Set Aside is appropriate or needed in the future, it raises some issues with continued Medicaid eligibility.  A Medicare Set Aside account is considered an available resource for purposes of needs-based benefits such as SSI/Medicaid.  If the Medicare Set Aside account is not set up inside a Special Need Trust, the client will lose Medicaid/SSI eligibility.  Therefore, in order for someone with dual eligibility to maintain their Medicaid/SSI benefits the MSA must be put inside a SNT.  In this instance you would have a hybrid trust which addresses both Medicaid and Medicare.  It is a complicated planning tool but one that is essential when you have a client with dual eligibility.

Financial Settlement Planning Considerations

While we have discussed Mrs. Smith’s public benefit preservation issues above, what about the management of her significant recovery?  Should a part of it be in the form of a structured settlement?  What about ongoing management of her financial affairs?  Will she need help from a fiduciary such as a corporate trustee?  There are no right or wrong answers to these questions.  Instead, there are options for Mrs. Smith to consider and they should be presented to her so that she can make an informed decision.

The first option is to take all of the personal injury recovery in a single lump sum.  If this option is selected, the lump sum is not taxable, but once invested, the gains become taxable and the receipt of the money will impact his or her ability to receive public assistance.^[18]  A lump sum recovery does not provide any spendthrift protection and leaves the recovery at risk for creditor claims, judgments and wasting.  The personal injury victim has the burden of managing the money to provide for their future needs, be it lost wages or future medical. Needs based public benefits would be a lost option if a lump sum is taken as would any reduction in the premium costs for the ACA insurance programs.

The second option is receiving “periodic payments” known as a structured settlement^[19] instead of a single lump sum payment.   A structured settlement’s investment gains are never taxed^[20], it offers spendthrift protection and the money has enhanced protection against creditor claims as well as judgments.  A structured settlement recipient can avoid disqualification from public assistance when a structured settlement is used in conjunction with the appropriate public benefit preservation trust.  However, a structured settlement alone will never protect the disabled injury victim’s needs based public benefits.

A third option, which should always be considered, is to create a “settlement trust” as an alternative to structured settlements.  Settlement trusts are typically spendthrift irrevocable trusts managed by a professional trustee and can also contain special needs provisions to allow for preservation of needs-based benefits.  These trusts provide liquidity and flexibility that a structured settlement can’t offer while at the same time protecting the recovery.  The investment options become limitless and the trust can always be paired with a traditional structured settlement.  Having a professional trustee in place that has a fiduciary duty to the client provides security for the client, and a trusted resource for life and financial management issues.  In certain cases, this solution makes a lot of sense because of its ability to adapt to changing circumstances.  When a disabled injury victim has needs that are not easily quantifiable or predictable, the settlement trust can adjust to the needs of the client seamlessly.  When a settlement trust is paired with certain fixed income investment vehicles and a deferred lifetime annuity via a structured settlement, the client can enjoy the best of both worlds with guaranteed income for life plus sufficient liquidity.

What Can You Do to Identify Clients Like Mrs. Smith in Practice?

You must establish a method of screening your files to determine which of them involve those who are disabled sufficiently to warrant further planning.  Once you identify a client as falling into that category, you must determine if outside experts should be consulted.  As discussed earlier in relation to Medicare compliance, the easiest way to remember the process once you have identified someone as sufficiently disabled is by the acronym “CAD”.  The “C” stands for consult with competent experts who can help deal with these complicated issues.  The “A” stands for advise the client about the available planning vehicles or have an outsize expert do so.  The “D” stands for document what you did in relation to protecting the client.  If the client decides that they don’t want any type of planning, a choice they can make, then document the education they received about the issue and have them sign an acknowledgement.  If they elect to do a settlement plan, hire skilled experts to put together the plan so that they can help you document your file properly to close it compliantly.

Disabled clients, especially, need counseling given the likelihood they will be receiving some type of public benefits.  To prevent being exposed to a malpractice cause of action, the personal injury practitioner should understand the types of public benefits that a disabled client may be eligible for, and techniques that are available to preserve those benefits.  Having this knowledge will help the lawyer identify disabled clients they may want to refer for further consultation with other experts.

What Do You Do if You Represent Mrs. Smith?

When a case, such as Mrs. Smith’s arises, which involves the protection of public benefits or settlement assets, outside counsel is typically retained to assist with the trust devices commonly used to protect the client.  Lawyers who are well versed in “settlement law” or “settlement planning” can be found and relied upon to assist with these difficult and complicated issues.  The legal fees for creation of the trusts to protect the settlement monies or public benefit eligibility are normally paid for out of the injury victim’s recovery.  Fees can vary but the typical range at time of print is from $3,000 to $7,500 depending on the complexity of the issues.

What Was Done to Protect Mrs. Smith in the Real World?

On assessment of Mrs. Smith’s situation, a settlement trust was created.  It has two ‘buckets’.  One ‘bucket’ is an immediate fixed income portfolio of annuities that provides a high yield stream of periodic payments to the trust that the trustee can then use to provide the client with a monthly income.  The fixed income portfolio was paired with a lifetime structured settlement which was deferred to maximize return but guarantee payments for life.  The second ‘bucket’ is a cash reserve that is professionally managed but can be accessed when the need arises, or circumstances change.  This gives the trust beneficiary the guaranteed income she needs coupled with the flexibility and liquidity that is crucial for injury victims when unforeseen needs arise.

The settlement trust created had provisions that gave the trustee discretion to move monies into the two sub-trusts identified in the trust document.  These sub-trusts would allow Mrs. Smith to qualify for Medicaid/SSI as well as preserve future Medicare eligibility by utilizing special needs provisions as well as set aside provisions.  Until such time as eligibility was needed for public benefits, Mrs. Smith could purchase ACA coverage and make use of the settlement monies without the restrictions that accompany a special needs trust or set aside.

It is a win, win solution in today’s complicated planning environment for settlements such as Mrs. Smith’s case.  One final note, while I have discussed these issues in the context of settlements, all of these considerations (with the exception of a structured settlement) can be done post-verdict.  To sum it all up, complex settlements require detailed planning and creative solutions.

[1] Patient Protection and Affordable Care Act, 42 U.S.C. § 18001 et seq. (2010).

[2] The Affordable Care Act and Settlement Planning, Kevin Urbatsch & Scott MacDonald, Plaintiff Magazine (December 2013).

[3] Id.  (u — After-tax spendable income, net of premium or SNT expenses, assuming 2.5% COLA through actuarial life        expectancy of the beneficiary).

[4] Id. (v — Net Spendable Income for SNT options has been reduced by $3,000 expense to establish the SNT and 1% annual administrative expenses.).

[5] Id. (w — Net Spendable Income for ACA options has been reduced by average annual premium and    maximum annual out of pocket expenses for the respective income level (based on percent of FPL)).

[6] Id. (EM = Qualifies for the Expanded Medi-Cal Program).

[7] Id. (NQ = Not Qualified for Expanded Medi-Cal Program).

[8] Id. (x — Assumes 4% annual taxable income based on the settlement net asset level).

[9] Id. (y — Maximum annual income level to qualify for the Expanded Medi-Cal Program is 133% of the federal poverty limit ($15,282) plus 5% ($11,490 * .05% = $574.50) any income disregard = $15,856 for 2013).

[10] Id. (z — Average of highest premium rate for that income level across the 19 California regions. Amount shown is beneficiary’s cost after federal subsidy).

[11] 42 U.S.C. §1396p (d)(4).

[12] 42 U.S.C. §1396p (d)(4)(A).

[13] 42 U.S.C. §1396p (d)(4)(C).

[14] 42 U.S.C. §1396p.

[15] To be considered disabled for purposes of creating an SNT, the SNT beneficiary must meet the definition of disability for SSDI found at 42 U.S.C. §1382c.

[16] 42 U.S.C. §1396p (d)(4)(A).

[17] 42 U.S.C. §1396p (d)(4)(C).

[18] Id.

[19] A structured settlement is a single premium fixed annuity used to provide future periodic payments to personal physical injury victims.

[20] See I.R.C. § 104(a)(2).  See also Rev. Rul. 79-220 (1979) (holding recipient may exclude the full amount of the single premium annuity payments received as part of a personal injury settlement from gross income under section 104(a)(2) of the code).