Certain types of settlements do not qualify for income tax exclusion via a traditional structured settlement annuity. Fortunately, a non-qualified structured settlement annuity offers guaranteed¹ tax-deferred payments for a wide range of cases.

Non-Qualified Assignment

Non-qualified structured settlements are those that do not qualify for income tax exclusion under Section 104 of the Internal Revenue Code. A non-qualified assignment offers a claimant involved in a non-physical injury case the opportunity to place all or a portion of the settlement proceeds in a structured settlement.

The claimant receives the settlement funds in a series of periodic payments and is liable only for the taxes on the funds received within a given tax year. In the meantime, the pre-tax settlement funds continue to earn interest.

Why utilize a non-qualified structured settlement annuity?

• Defer paying taxes on the lump sum settlement proceeds
• Create a stable, long-term source of income
• Receive guaranteed payments¹

Types of Claims

Non-qualified structured settlements can be used to resolve many different types of claims, including, but not limited to:

• Employment litigation (e.g., wrongful termination, sexual harassment, discrimination, and mental anguish)
• Construction defects
• Contract disputes
• Punitive damages
• Environmental claims
• D&O and E&O claims

Market-Based Structured Settlements

In addition to structured settlement annuities, there are other investment options available to claimants involved in non-physical injury settlements. To learn more, click our Market-Based Structured Settlements Tab.

¹Guarantees are subject to the claims-paying abilities of the issuing insurance company.

Plaintiff attorneys have the unique ability to place all or a portion of their contingency fees in several types of tax-advantaged investments. By electing to defer fees, an attorney also defers the tax obligation until the year in which payments are received.

Attorneys can choose to defer fees regardless of whether the claimant structures his or her own settlement proceeds; however, the ability to defer fees must be included in the settlement agreement.

Structured Attorney Fees

To facilitate an attorney fee structure using a fixed income annuity, the defendant (or insurance company) directs the attorney’s fees to a third-party assignment company. The assignment company then uses the fees to purchase a fixed annuity that provides the attorney with payments based on a pre-determined schedule.

Payments are eligible to be electronically deposited into the attorney’s bank account and will be reported on a 1099-MISC as income only during the years in which the payments are received.

Structured attorney fees do not have any ongoing administrative or maintenance fees, so more money stays in the attorney’s pocket. Payment schedules can be arranged for monthly, quarterly, semi-annually, annually, or in a series of future lump sums and can begin immediately or on a future date¹.

Tax Guidance for Structured Attorney Fees

Much like a structured settlement annuity for injured claimants, the tax treatment hinges on avoiding constructive receipt. In Childs v. Commissioner, 103 T.C. 634 (1994), aff’d, 89 F. 3d 856 (Table)(11^th Cir. 1996), the Tax Court ruled that because the attorney’s fees were transferred from the defendant directly to the assignment company, the attorney did not have constructive receipt of the fees; therefore, the fees did not yet count as taxable income.

Non-Fixed Annuity Options for Attorneys

Attorneys may select from several structured settlement annuity options, in addition to the fixed annuity. Minimums for investment may vary depending on the product, and non-fixed annuity options may include setup and/or annual administration costs.

However, non-fixed annuity options may offer the chance for greater growth than the fixed annuity while still providing guaranteed income. Your CW Settlements structured settlement consultant can provide a thorough consultation regarding your annuity options.

Fee Structure Plus®

Fee Structure Plus® allows an attorney to invest a contingency fee, tax-deferred, in a market-related investment portfolio. The funds can be managed by a respected financial institution or by a financial advisor of the attorney’s choosing. Payments will be received on a periodic payment schedule, with taxes due only on funds received during a given tax year. For more information about market-based investments, click our Market-Based Structured Settlements Tab.

Treasury Funded Structured Settlement™

A Treasury Funded Structured Settlement™ (TFSS) is backed by the United States government and uses U.S. Treasury Bonds as the underlying investment. Attorneys can choose to place all or a portion of their contingency fees in a TFSS for a safe, reliable fee deferral option.

¹Payment start date restrictions may vary by issuing insurance company.

A Qualified Settlement Fund (QSF), also referred to as a 468B Trust, is an exceptionally useful settlement tool that allows time to properly resolve mass tort litigation and other cases involving multiple claimants. When a QSF is created and funded, the defendant makes a payment into the trust account in exchange for a full release of all claims.

Qualified Settlement Funds: Benefits for Both Sides

In addition to the release of liability, the defendant is eligible to receive an immediate tax deduction for the payment. In the meantime, claimants gain the time they need to receive a proper settlement consultation and to determine their best settlement options.

The additional time also allows for lien resolution and the preparation of required documentation without the time pressures of litigation. Claimants without any outstanding issues will not have to wait for their co-claimants’ issues to be resolved in order to receive their settlement distribution.

Qualified Settlement Fund Services

CW Settlements has built close relationships with industry leaders in qualified settlement fund administration. Services include:

• Preparing all motions, court orders, and documents needed to establish and administer the fund
• Generating client closing statements and providing accounting for the fund
• Disbursement of all claimant payments, including directing funding of Special Needs Trusts and/or structured settlements
• Live call center assistance
• Attorney fee and expense disbursement
• Executing qualified assignments
• Managing payment of finalized liens
• Printed educational materials for claimants
• National bankruptcy and probate coordination
• Fraud protection/check validity verification
• Daily account reconciliation, monthly financial accounting, and reporting
• Treasury management and investment of funds within the QSF
• Tax return filings and 1099 issuance
• Access to local elder law and probate attorneys across the country
• Closing of the fund and interest reconciliation

Claimants have much to consider regarding the financial implications of their settlements. Eligibility for government benefits is one of the most important issues many claimants must resolve.

Eligibility for Government Benefits

Needs-based government benefit programs use income and asset tests to determine eligibility. In most states, assets as low as $2,000 ($3,000 if married) are sufficient to render a claimant ineligible for most needs-based government benefits.

While entitlement benefits such as Medicare, Social Security Disability Income (SSDI) and Social Security Retirement Income will not be impacted by the settlement, there are many needs-based programs that would likely be affected, including:

• Supplemental Security Income (SSI)
• Medicaid (Medi-Cal in California)
• Supplemental Nutrition Assistance Program (SNAP)/Food Stamps
• Temporary Assistance for Needy Families (TANF)
• Subsidized Housing
• Children’s Health Insurance Program (CHIP)

What to Expect When You Work With Our Team

While some may assume that settlement proceeds should provide an adequate replacement for any lost benefits, the reality is that for many injured claimants, the loss of benefit coverage can be catastrophic. The compounding costs of medical procedures, medication, home modifications, attendant care and more can quickly deplete a settlement.

Our team works with injured claimants before finalizing the settlement to determine:

• Whether the claimant is currently eligible or expects to be eligible for needs-based government benefits in the near future; and
• If so, what the best course of action is to protect benefit eligibility and maximize the settlement proceeds.

Whether a Special Needs Trust or a spend down is the right solution, our consultants are here to walk claimants through every step of the process to protect important benefits and preserve their settlement proceeds.

With projects that involve complex, ever-evolving compliance requirements, ethics rules, and legal and regulatory issues, it is imperative to have a team you can rely upon to properly resolve a mass tort claim.

That’s why many of the nation’s leading mass tort firms turn to our strategic partners to coordinate mass tort projects of varying sizes.

Scalable Mass Tort Solutions

CW Settlements partners with industry experts to offer scalable, customized solutions geared at ensuring law firm compliance, streamlining administration, minimizing costs, and reducing settlement funding time.

Whether the claimants are injured minors or adults, the ultimate goal is to ensure that every individual receives proper education about settlement options and potential issues that may arise.

Services include:

• Qualified Settlement Fund Administration
• Government Benefit Preservation
• Travel Coordination and Case Mapping
• Structured Settlements
• Market-Based Structured Settlements
• Trust Services
• Lien Resolution
• Claims Management
• Special Master / Guardian Ad Litem / Court Coordination

For many claimants, negotiating the payment of future medical bills is an essential component of a favorable settlement. Claimants who currently receive Medicare or who expect to receive Medicare in the near future must follow specific guidelines when it comes to their future medical payments.

Medicare Secondary Payer provisions specify that Medicare will not pay for medical services related to a lawsuit when the proceeds include funds for future medical expenses until all such funds are properly expended. In other words, Medicare becomes the secondary payer to the settlement or award.

Medicare Set-Asides

A Medicare Set-Aside (MSA) is the government’s preferred method for protecting Medicare’s interests. A portion of the settlement is placed into an account to cover future medical costs related to the claimant’s injury. Once the account is depleted, the claimant can begin receiving Medicare payments again.

To create a proposal with a recommended allocation amount, the claimant’s estimated total cost of future medical care will be reviewed, as will the claimant’s medical history, including any pre-existing conditions, current treatments, physician statements, life expectancy, and other factors.

Criteria for Reviewing a Proposed Medicare Set-Aside

An expert can help determine the appropriate amount to “set aside” so that the MSA is not over- or under-funded. To date, the Centers for Medicare and Medicaid Services (CMS) have only released guidelines for reviewing Workers’ Compensation Medicare Set-Asides (WCMSAs).

CMS will only review WCMSA proposals that meet the following criteria:

• The claimant is a Medicare beneficiary, and the total settlement amount is greater than $25,000; or
• The claimant is not a Medicare beneficiary at the time of settlement but has a reasonable expectation of Medicare enrollment within 30 months of the settlement date, and the total settlement amount is greater than $250,000.

Within the past few years, CMS has also made advances on the Liability Medicare Set-Aside (LMSA) process. While official guidelines have yet to be released, CMS released a change request (which was modified and reissued on October 27, 2017) that indicates the following:

• Medicare Administrative and Recovery Contractors (MACs) may deny payment for items and services that should be paid from a Liability MSA (or No-Fault MSA);
• Medicare may deny payment for claims if it determines that the claims should have been paid by a liability insurance policy or another payer as outlined in the Medicare Secondary Payer (MSP) provisions; and
• Medicare is within its rights to seek reimbursement for expenses it has paid if those expenses should have been paid for out of the settlement or by another payer.

As guidance continues to unfold, it is imperative that attorneys and claimants work closely with a settlement planning expert to avoid Medicare issues. Failure to comply with Medicare Secondary Payer provisions may result in severe consequences for the attorney and the claimant.

Funding a Medicare Set-Aside

There are two methods of funding a Medicare Set-Aside: with a lump sum or with a structured settlement. The structured settlement option may allow the claimant to retain more of the settlement proceeds, as once the MSA funds are depleted each year, Medicare will cover any remaining injury-related medical costs until the structured settlement replenishes the MSA the following year¹. Claimants who choose to fund an MSA with a lump sum payment must deplete the entire MSA before Medicare resumes paying for injury-related medical care.

¹Claimants who choose the structured settlement option to fund an MSA must make an initial deposit of “seed money” in the amount of the first surgical procedure or replacement and two years of annual payments. The structured settlement will then fund the MSA with annual deposits. Any funds remaining in the MSA at the end of the annual period will be carried forward to the next period.

For more information about Medicare Set-Asides, contact us today.

Some claimants may be required to go through estate administration procedures to receive the distribution of settlement proceeds from a loved one’s estate. The probate process can be slow, and it involves reviewing the decedent’s assets and dividing them according to the law or the decedent’s wishes.

For claimants who do not wish to settle the estate themselves, we work closely with industry leaders to offer expert probate assistance. Our business partners will help coordinate probate matters and, if necessary, will assign local probate counsel from their national database of highly qualified legal counsel to help properly administer the estate.

Given how confusing and expensive the probate process can be, it can save you considerable time and money to engage an expert. Each estate is unique and potentially complex. Contact CW Settlements today and get a team behind you who will walk you through the process and connect you with competent counsel at a fair and reasonable cost.