A structured settlement is a voluntary agreement reached between an injured party and the defendant under which the plaintiff/claimant receives compensation in a stream of guaranteed, tax-free periodic payments. Such an arrangement may be agreed to privately, as in a pre-trial settlement, or it may be required by a court order, as in a settlement or judgement involving a minor.
The full amount of the damage payment(s) is tax-free, exempt from federal and state income taxes under 104(a) of the IRS codes.
The injured party receives compensation when needed as determined at the time of the settlement.
The claimant receives payments from a high rated life insurance company.
What Types of Cases Can Utilize Structured Settlement Benefits?
Temporary or permanently disabled plaintiffs or claimants
Guardianship cases, including minors or incompetents
Wrongful death cases where the surviving spouse and/or children need monthly or annual income
Severely injured claimants, especially with long-term needs for medical care, living expenses and support of family
Structured settlement payments are paid to the claimant through a structured settlement annuity. These annuities provide a contract from a life insurance company that says in return for a certain premium, the life insurance company will pay a stream of income, lump sum payments, or a combination of the two. Congress created structured settlements because of the risks and disadvantages with selecting a lump sum payment. The specific tax rules of a structured settlement are governed by Section 104(a) and Section 130 of the Internal Revenue Code.
SPECIAL NEEDS TRUSTS
A Special Needs Trust (SNT) improves a disabled person’s quality of life without endangering eligibility for government programs. An SNT allows a personal injury victim to receive a personal injury settlement/award without disqualification from public benefits, such as Supplemental Security Income or Medicaid. Federal law allows money to be placed into an SNT, and that money is not a countable resource for purposes of qualifying for needs based public assistance programs (See 42 U.S.C. 139p).
Types of SNT’s
Disabled person under age 65 (42 U.S.C. 1396p(d)(4)(A)): This trust is established with funds of the disabled person (typically a personal injury settlement/jury verdict) for the benefit of a disabled person with is under age 65 at the time of drafting the SNT. After the death of the beneficiary, the law requires that any funds remaining in the trust are first used to repay Medicaid for any disbursements made on behalf of the beneficiary while the SNT was in existence. After Medicaid is reimbursed, residual funds in the SNT are available to the heirs of the beneficiary.
Disabled person over age 65 (42 U.S.C. 1396p(d)(4)(C)): This trust is commonly referred to as a “pooled trust.” Typically serving those over age 65 who cannot set up a traditional SNT based on their age, a pooled trust offers the same protection as the more conventional SNT discussed above.
Third Party Special Needs Trust: This trust is established by someone else (parent, grandparent, etc.) for the benefit of a disabled person to provide comfort and happiness during their lifetime. When establishing a trust, the Grantor makes a decision as to where any remaining funds go once that disabled person passes away.
When Should I Consider a Special Needs Trust?
An SNT should be considered when the need for current or future medical support may have to come from a public benefits program, such as Medicaid or SSI. Depending on state laws, the SNT can also be used to pay for life-enhancing needs, such as:
Personal care attendant
Out-of-pocket medical expenses
Transportation, maintenance, and insurance for vehicles
Essential dietary needs
Goods and services that add pleasure and quality of life (a vacation or even a home)
A Medicare Set-Aside, or MSA, is an interest-bearing account, either professionally administrated or self-administrated, that holds the funds to pay for future medical and drug expenses that would otherwise have been covered by Medicare. According to the CMS (Center for Medicare and Medicaid Services) Policy Memorandum of July 23, 2001, Structured Settlements have become the favored method of funding MSA’s because of the reduced cost to the parties.
Through a non-qualified annuity, Quest offers a resolution for disputes and claims that do not fit the standard structured settlement form. Non-qualified annuities can be used in cases involving non-personal injury cases such as:
Psychological Damage Claims
Real Estate or Business Sales
Punitive Damage Awards
Disability Policy Buyouts
Breach of Contract
Some of the benefits of setting up periodic payments through a non-qualified annuity include: deferral of tax liability; competitive rates of return including market-based products; customized timing of payments to meet individual needs; savings of cost and time during negotiations.