Caution with structured settlements

When accidents happen, and a person may get hurt or become disabled due to no fault of their own, they hire an attorney to take the defendant to court in a civil lawsuit. In some cases, they may win a monetary judgment against the defendant, while others settle outside of court. These payouts can be in one lump sum or paid out over time, known as a structured settlement. Attorneys work with their clients and opposing counsel to get the best payment deal possible. While it may feel like a victory for their client, plaintiff attorneys must consider the repercussions of structured settlements if their client is close to retirement age.

What is a structured settlement?

Congress passed The Periodic Payment Settlement Act of 1982, which allowed for structured settlements in personal injury cases and was also intended to allow for a plaintiff to remain eligible for Social Security and Medicaid benefits. A structured settlement, also known as a periodic payment, is a financial payout released in installments rather than one lump sum. The plaintiff’s attorney negotiates for a structured settlement for their client that is paid by a defendant, an insurer, or a Qualified Settlement Fund (QSF).

The legally-binding agreement has the defendant, insurer, or QSF bound to make future payments to the plaintiff or plaintiff’s attorney by purchasing an annuity from a life insurance company. Structured settlements are secured by an insurance company that secured the annuity. These payments are usually tax-free payments but can be cashed into a factoring company. The agreement contains the details as to how and when the plaintiff will get paid as well as the payment amounts.

While many attorneys will argue that structured settlements are preferable over lump-sum payments, they can be problematic for clients who want to retire due to pay for long-term care, especially if the settlement agreement calls for the rest of the judgment to be released when the plaintiff turns 65 years old.

Structured Settlements and Medicaid

Clients who have structured settlements need to be aware that their monies may have to be used for long-term care rather than whatever use they prefer. Medicaid and Supplemental Security Income are needs-based programs, so your client could be disqualified from being eligible if they receive a lump sum cash payout when they turn 65. Even structured settlement payments are considered income by the Federal government for determining government assistance purposes.

Attorneys may want to consider other financial mechanisms for their clients, such as having the payments or lump sum deposited into a Special (Supplemental) Needs Trust or a Supplemental Needs Trust for their clients. The Special Needs Trust would enable the monies to not be considered income for federal benefits purposes when they are trying to qualify for needs-based programs. Rather, the payouts can be used to cover day-to-day expenses. The Special Needs Trust can have limiting structures which may be unappealing long term so this option should be well vetted.

While obtaining a structured settlement for a client can be a victory to right wrongs, it can cause some problems. When they are negotiated to have a lump sum payout at age 65, or income payments at age 65, which are supposed to help the beneficiary in retirement, it actually forces all of those funds to be used to pay long-term care instead. Structured settlement agreements must be entered into cautiously.