Join Jason Lazarus in a very special 30-minute episode of Trial Lawyer View! 🌐 Craig Goldenfarb from GOLDLAW shares invaluable law firm business tips. In this episode, you will get Craig’s Law Firm CEO Insights like:
💼 Discover Craig’s role and how he runs his personal injury law firm like a business.
🏛️ Leadership and Structure: Uncover the secrets behind his firm’s leadership dynamics.
💡 Firm Business Essentials: Learn the top 5 things every trial lawyer should know about running a law firm as a business.
🤝 Law Firm Culture: Explore the importance of culture and aligning compensation.
📊 Data Analytics: Craig reveals how he leverages data for success for his law firm, sharing key metrics.
Don’t miss this super-focused powerhouse episode! 🚀
Effectively minimizing or eliminating the reimbursement of any claimed medical lien is a critical part of ensuring just compensation for the injured. Personal injury lawyers encounter numerous obstacles in the process of resolving liens. While the negotiation and resolution of liens can be done independently by the attorney and their teams, collaborating with a seasoned lien resolution expert can alleviate these challenges. The obstacles a personal injury lawyer may face encompass time-consuming tasks such as identification of lienholders, navigating the intricate web of jurisdiction-specific lien laws, and negotiating for the most substantial reduction possible. Confronting these challenges may prevent attorneys from focusing on what the firm does best and distract from the primary task of representing more clients successfully.
If you decide not to outsource lien resolution functions to experts, the following noteworthy precedents will serve as valuable guides in your efforts to minimize liens. The applicability of these cases for lien resolution depends on the unique context of the case and differences from jurisdiction to jurisdiction. Nevertheless, these cases have played a substantial role in shaping lien resolution principles in their respective areas.
Medicaid – Arkansas Department of Health and Human Services v. Ahlborn(2006):
Ahlborn was a landmark case that has played a pivotal role in establishing the principle of “proportional recovery” in Medicaid lien reduction. The Supreme Court ruled that Medicaid can only recover from the portion of settlement dollars that can reasonably attributed to medical expenses. The mandate from the Court is that an allocation must be made between medical expenses and all other types of damages. The parties agreed to a pro-rata reduction prior to the Court’s ultimate holding in Ahlborn, but it is most important to note that the Court expressly refused to mandate a method of allocation, only that an allocation must be done.
Medicaid – Gallardo v Marstiller (2022)
The Court provided additional clarification regarding the previous limitations for reimbursement to Medicaid as espoused by Ahlborn by holding that the Medicaid Act permits states to seek reimbursement from settlement payments allocated for future medical care, not just past medical care.
ERISA – Cigna v Amara(2011)
This case focused on whether the employees could enforce the terms of the ERISA Plan based on misleading SPDs, even if the terms of the Plan and the SPDs did not align. The Supreme Court ruled in favor of the employees, holding that the terms of an ERISA plan could be enforced based on equitable remedies when there was a discrepancy between the plan documents and the SPDs. The Court clarified that, under ERISA, the terms of the plan documents govern, but if there is a conflict or discrepancy between the plan documents and the SPDs, the actual plan terms controlled.
ERISA – US Airways, Inc. v. McCutchen(2013):
The US Supreme Court held that while ERISA plans are contractual, and their terms are generally enforceable, equitable doctrines can sometimes be invoked to limit the extent of reimbursement sought by a plan. The Court ruled that when a plan seeks reimbursement from a participant’s recovery, the common-fund doctrine and unjust enrichment principles can be considered to ensure fairness. However, the Court also emphasized that the specific terms of the Plan and the intent of the parties, as expressed in the plan documents, should guide the analysis. The Court remanded the case to the lower courts to apply these equitable principles in determining the extent of reimbursement owed to the ERISA plan, taking into account the circumstances of the case. While used by subrogation vendors as their support for why they don’t have to reduce their self-funded ERISA lien, it is also strongly support for the injured party when the policy language is not clear and concise.
ERISA – Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan(2016):
Montanile focused on whether the ERISA health benefit plan could enforce its subrogation rights to recover funds from Montanile’s settlement after he had spent the settlement proceeds on nontraceable items. The Montanile decision clarified the limitations on health benefit plans’ ability to enforce subrogation rights in certain circumstances. It emphasized the importance of timely action by plans to assert their rights and highlighted the challenges plans may face when seeking recovery from participants who have already spent settlement funds on general expenses.
Hospital/Provider – Howell v. Hamilton Meats & Provisions, Inc. (Cal 2011):
California Supreme Court case that addressed the issue of medical cost recovery in personal injury lawsuits. In this case, the court held that a plaintiff in a personal injury case could only recover the reasonable value of medical services actually provided, as opposed to the higher billed amount. The decision clarified that the “collateral source rule” did not allow plaintiffs to recover medical expenses greater than the amount actually paid for the services, typically negotiated down by health insurers. This ruling had implications for the calculation of damages in personal injury cases, limiting the amount plaintiffs could recover for medical expenses.
Medicare – Bradley v Sebelius(11th Cir 2010)
The 11th Circuit Court of Appeals dealt a significant blow to Medicare’s reimbursement practices under the Medicare Secondary Payer Act. The ruling, stemming from a case challenging Medicare’s ability to recover from the portion of the settlement dollars intended to compensate the heirs for their damages under Florida’s Wrongful Death Act’. This holding establishes that the Medicare Secondary Payer Act does not preempt the Florida Wrongful Death Act and that Medicare was limited to the funds allocated to the survivorship claim.
Medicare Advantage – In re Avandia (3rd Cir 2012):
The first court to conclude that a Medicare Advantage Plans rights under the Secondary Payer Act are identical to those under traditional Medicare. Unfortunately, some subrogation vendors for Medicare Advantage plans have twisted this and subsequent cases to mean that they have the same right to make a recovery but then do not believe it means that they have the same liabilities or requirements for reduction or compromise as traditional Medicare.
Conclusion
In conclusion, effectively managing and minimizing medical liens in personal injury cases is a multifaceted and evolving challenge. The landscape of lien resolution is continuously shaped and redefined by significant legal precedents, such as Ahlborn, Gallardo, Amara, McCutchen, Montanile, Howell, Bradley, and the Avandia case. These rulings collectively underscore the necessity for personal injury attorneys to be acutely aware of the nuanced and jurisdiction-specific legal frameworks governing medical liens.
For attorneys, these cases serve as essential guides in navigating the complex terrain of medical lien resolution. They offer strategic insights into negotiating lien reductions, understanding the scope of lienholders’ rights, and leveraging equitable doctrines to contest excessive claims. More importantly, these rulings underscore the importance of precise and informed decision-making in the resolution process.
The evolving legal landscape, characterized by these landmark cases, reinforces the value of collaboration with experienced lien resolution professionals. While personal injury attorneys possess the legal acumen to represent their clients effectively, partnering with lien resolution experts can provide the specialized knowledge and strategic insight necessary to navigate this complex area efficiently. Such collaboration not only maximizes the potential for reducing liens but also allows attorneys to focus on their core competency—advocating for their clients—thereby enhancing the overall effectiveness and success of their legal practice.
Partner with Synergy for lien resolution services here.
Bryan Smith on TLV Podcast
Hello, Fellow Trial Lawyers!
In the latest podcast episode of Trial Lawyer View, host Jason Lazarus engages in a captivating conversation with Bryan Smith from Tamaki Law. Bryan’s unique blend of psychology and trial law expertise shines as he shares his journey in the legal profession. “You start to connect those dots, and it all starts to make sense” Bryan reflects on connecting the dots and highlighting how understanding trauma can make one a more effective advocate. Discover the profound impact of Bryan’s psychology background on his advocacy for victims of sexual abuse, medical malpractice, and wrongful death. “That’s what gets the best result for the client: confidence that the truth will prevail, that we are going to be able to tell this story in a way that really impacts the jurors on an emotional level,” Bryan passionately emphasizes. Gain insights into his expert strategies for maximizing recoveries in automobile accident cases and the challenges faced when representing survivors in sensitive cases. Bryan’s passion for the arts also parallels the challenges of trial lawyers, making this episode a compelling exploration of law, psychology, and justice. Don’t miss this engaging conversation.
In the world of personal injury law, every moment counts. The intricacies of building a solid case, negotiating with insurance companies, and advocating for your clients in court demand your undivided attention. Yet, there’s a persistent issue both during and after resolution of your case that often distracts you from your core responsibilities: healthcare liens. These liens, imposed by healthcare providers, government agencies, and private insurers, can become a legal labyrinth which negatively impacts the amount your injured clients will receive. This is precisely why collaborating with a dedicated Lien Resolution Specialist can be a game-changer for your practice.
We will explore the compelling reasons why you should outsource your lien resolution work to experts. We will delve into the complexities of different types of healthcare liens and how seasoned Specialists can positively impact your clients’ take-home recovery.
Understanding Healthcare Liens
Before probing into the reasons why you should engage experts for lien resolution, let’s take a step back and understand the nature of healthcare liens.
Healthcare liens are legal claims placed on a personal injury settlement or judgment by healthcare benefit providers. These liens aim to recover the medical expenses paid for by the health benefit program that were incurred by the injured party as a result of the accident or injury. The types of healthcare liens come in various forms including:
Medicaid Liens:
State-administered Medicaid programs that provide healthcare coverage to low-income individuals. When Medicaid beneficiaries are injured due to someone else’s negligence, state Medicaid programs may assert liens to recover the medical costs they’ve covered. Medicaid liens can have a substantial impact on personal injury settlements. However, case law, such as the Ahlborn and Gallardo decisions, have established the principle of proportional recovery. This means they should only claim a fair share of the settlement or judgment amount.
Medicare Liens:
Medicare is a federal program that provides healthcare coverage primarily for individuals aged 65+ and older or in specific other situations. When Medicare beneficiaries are injured, Medicare has an interest in being reimbursed for payments they conditionally made in third-party liability cases. Navigating Medicare liens requires an intricate understanding of federal law and the potential consequences of mistakes can be severe, including double damages or referral to the Department of Treasury for collection.
Hospital Liens:
Hospitals provide medical services to injured individuals with the expectation of receiving payment for their services. In cases where individuals lack sufficient insurance coverage or face financial difficulties, hospitals may place liens on personal injury settlements or judgments to recover unpaid medical bills. Proper itemized billing is crucial to verify the accuracy of the charges. This ensures transparency and fairness in the lien resolution process and ensures that you do not overpay hospital charges.
ERISA Liens:
Employer-sponsored health insurance plans governed by the Employee Retirement Income Security Act (ERISA) may also assert liens in personal injury cases. ERISA liens can be particularly sophisticated and difficult to resolve as they involve federal regulations as well as stringent compliance requirements. Case law has clarified the obligations of plan administrators in asserting ERISA liens, emphasizing the need for active assertion of a lien interest, clear and concise policy language and compliance with documentation requirements. Analyzing funding status and controlling documents is crucial to formulating strategies to gain leverage in negotiations.
Military and VA Liens:
Military personnel and veterans often receive medical treatment from military hospitals and VA medical facilities. When these individuals are involved in personal injury cases, the government may assert liens to recover the costs of medical care provided through military or VA healthcare systems. It’s fundamental to understand the unique jurisdiction and procedures associated with military healthcare facilities. These liens can involve complicated federal regulations. VA liens involve the Department of Veterans Affairs. It’s important to note that the laws governing VA liens can vary depending on the nature of the injury and the specific VA benefits received by the veteran.
FEHBA Liens:
The Federal Employees Health Benefits Act (FEHBA) provides health insurance coverage to federal employees and retirees. If a federal employee or retiree is injured due to the negligence of a third party, FEHBA may cover their medical expenses with the expectation that they be reimbursed from any settlement funds. FEHBA liens are governed by federal law and can be challenging to navigate. Case law that exists provides that these plans preempt state law but do not provide much other guidance.
Disability Liens:
In personal injury cases involving individuals with disability benefits, there are disability liens to consider. When these policyholders receive settlements or judgments in personal injury cases, the disability insurance company may assert liens to recover the disability benefits paid. Disability liens can present difficult legal challenges. You must navigate the terms of disability insurance policies, which can vary widely, and negotiate with insurance companies to reduce the liens and ensure clients are not unfairly burdened with repaying disability benefits that they have already received. The disability plan’s policy language and the nature of the case are important components to analyze.
Private Health Insurance Liens:
Private health insurers, such as Blue Cross Blue Shield, Aetna, or United Healthcare, provide healthcare coverage to individuals through insurance policies. In personal injury cases, these insurers may assert liens to recoup the payments made on behalf of their policyholders for medical treatment related to the injury. Understanding the terms and conditions of private health insurance policies is essential when dealing with these liens. Case law and statutory framework in each state has emphasized the need for insurers to explicitly state their subrogation rights in their policies.
Important Practice Note: It is essential to assess whether a private insurance plan is really a Medicare Advantage or Medicaid Managed Care Organization (MCO) in hiding. Those plans are not governed by state law and require your swift attention.
Navigating Complex and Evolving Laws
Healthcare lien laws are elaborate yet vague , with federal and state regulations governing different aspects of liens. These laws are subject to change, and staying up to date can be a daunting task for busy personal injury attorneys. Engaging a Lien Resolution Specialist gives trial lawyers access to the latest legal insights regarding lien resolution. Specialists keep abreast of recent case law, regulatory shifts, and evolving lien reduction strategies, enabling you to maximize your client’s recovery while focusing on what you do best.
For instance, in the complex world of Medicare or Medicaid liens, experts can calculate the appropriate proportion of the settlement that should be allocated to the lien, ensuring that clients receive their rightful share of the recovery. In hospital lien cases, experts can scrutinize itemized bills and challenge overinflated charges, leading to substantial lien reductions. Moreover, experts are skilled in identifying potential unrelated treatment or discrepancies or duplications in lien calculations on lien statements, which can result in further reductions. This attention to detail can make a significant difference in the final net amount received by the client.
Healthcare lien resolution requires a deep understanding of the specific strategies and tactics necessary for each type of lien. Lien Resolution Specialists bring this expertise to the table, tailoring their approach to the unique circumstances of each case. Each company that handles healthcare lien recovery efforts operates differently. Having an in-depth understanding of the inner workings of the recovery vendors can provide significant advantages in the negotiations.
Enhanced Client Satisfaction
When you opt to utilize an expert in lien resolution, you’re not only lightening your workload but enhancing your client satisfaction. By bringing in experts to handle lien resolution, you are demonstrating a commitment to protecting your clients’ financial interests. This can build trust and confidence, leading to greater client satisfaction. Clients are more likely to recommend attorneys who have successfully reduced their liens and ensured they received a fair portion of the settlement or judgment.
Outsourcing to Synergy is THE ANSWER
To navigate these complexities effectively and prioritize the best interests of your clients, you should engage a team of Lien Resolution experts like Synergy. By understanding the nuances of healthcare liens and the legal principles that govern them, and entrusting the resolution to experts, you are restricting the lienholders to funds only when truly entitled to reimbursement for medical expenses incurred. You are also ensuring that your client is receiving the maximum compensation they deserve. Contact Synergy to learn more.
Brian Breiter and Joseph Limbaugh on TLV Podcast
Hello, Fellow Trial Lawyers!
Announcing a fascinating new episode on Trial Lawyer View with Brian Breiter and Joseph Limbaugh from Improv for Trial! 🌟⚖️Join us as we delve into the world of trial law using the power of improvisational techniques in the courtroom. Discover how Brian’s passion for justice has driven his exceptional career and why he believes in the use of improv skills by trial lawyers. 💼🏛️
Brian and Joseph take you on their incredible journey, sharing insights about their unique partnership and the creation of Improv For Trial. Learn why they advocate for every trial lawyer to undergo this transformative training, and how it can elevate storytelling and connection in legal practice. 🤝📣 Discover Brian’s unique approach of connecting deeply with clients, understanding their stories, and mastering the art of storytelling as a litigator. 🤝📣As Brian reveals the beauty of merging improvisational theater with law, you’ll understand how these techniques can enhance courtroom performances and build authentic connections with juries. 👥🎭 Incorporating these skills, Brian shares compelling stories, including one where a $50k offer blossomed into an $8 million verdict, showcasing that mistakes are valuable gifts in the journey of advocacy. 💰👏
Don’t miss this engaging episode filled with wisdom and practical advice for every trial lawyer! 📚🎭
A Medical Cost Projection (“MCP”) report helps a personal injury attorney quantify an injury victim’s future medical expenses. The report is generally prepared by a nurse allocator and will include projections for treatment that might occur as a result of the initial injuries. For example, an individual who has undergone a spinal fusion has a 36% chance of developing adjacent segment degeneration within 10 years after their initial fusion surgery.[1] In light of this, the MCP report is likely to include projections for spinal fusion extension surgeries and the associated care. Although there is a degree of uncertainty when it comes to predicting the course of an injury victim’s future care, the personal injury attorney can rely on the MCP in seeking to demand that his/her client receives sufficient compensation to cover any possible future injury-related care and medical bills.
A Liability Medicare Set-Aside (“LMSA”), on the other hand, is a settlement tool whereby a portion of an injury victim’s net settlement is earmarked for future injury-related Medicare covered treatment. Once the portion that is “set-aside” is properly spent on such post-settlement injury-related care, Medicare will step in and become the primary payer for any additional injury-related services.
So how do you reconcile the future medical projections in an MCP with a desire to limit the size of the LMSA? We begin the analysis with an overview of the MSP compliance framework. The MSP Act and regulations prohibit Medicare from making payment for services to the extent that “payment has been made or can reasonably be expected to be made under a workmen’s compensation law or plan of the United States or a State or under an automobile or liability insurance policy or plan (Including a self-insured plan) or under no-fault insurance.”[2] A primary payer’s reimbursement obligation to Medicare may be demonstrated by “a judgment, a payment conditioned upon the recipient’s compromise, waiver or release (whether or not there is a determination or admission of liability) of payment for items included in a claim against the primary payer or by other means.”[3] Section 111’s Mandatory Insurer Reporting requirement ensures that Medicare is placed on notice of the settlement and injuries alleged in the underlying matter. The reporting is intended to help Medicare recover conditional payments and avoid making improper future payments.
While parties must address Medicare’s conditional payments in connection with a settlement, there is less clarity when it comes to the best way to consider Medicare’s future interests in a liability settlement. A failure to consider the interest may result in Medicare’s denial of post-settlement injury-related treatment that was claimed as a part of the personal injury case. Depending upon the settlement amount, an injury victim may elect to remove this risk by setting aside some of the settlement funds in an LMSA.
Although the MCP report and LMSA both deal with the projection of future injury-related care, they each address this issue in different ways. They are two sides of the same coin. The MCP will always be higher than an LMSA since the MCP projections reflect future treatment that may possibly occur, while the MSA reflects future injury-related treatment that is reasonably likely to occur. For example, in the situation where an injury victim might develop adjacent segment degeneration after fusion surgery, an MCP may include spinal extension surgery, while an LMSA would not. Another difference is that the MCP report includes projections of services that are not covered by Medicare, while an LMSA only includes Medicare covered services. Examples of non-Medicare covered injury-related services that you may find in an MCP include long-term custodial care, massage therapy, and transportation expenses. Since these injury-related services are not covered by Medicare, they would not be included in an MSA.
The life expectancy used in an MCP may also vary from the life expectancy in an MSA. The MCP may use an individual’s standard life expectancy without any consideration of co-morbid conditions. The LMSA however will usually be based on a rated age that factors in an individual’s co-morbidities in assessing their life expectancy. Current Procedural Terminology (CPT) codes also impact the pricing of the treatment projections. While an MCP projection may use the most comprehensive CPT code for a service, the LMSA projection will use one that is more limited in scope. While both the MCP and LMSA price the CPT codes for the services based on the usual and customary charges for the area where the injury victim resides, the MCP will often use a higher reimbursement rate than the LMSA in the projections.
In addition to the above differences between the MCP and the LMSA, the goal of each report is different. An MCP is used to demand 100% of the future injury-related medical damages in a case, while an LMSA will look at the parameters of the settlement in determining an appropriate amount to “set-aside” for future injury-related Medicare covered treatment. Unlike a workers’ compensation settlement where the workers’ compensation insurance carrier may fully fund all the future injury-related medical in an accepted case, a liability settlement is usually a compromise with a limited recovery on a greater range of damages. In light of this, it is reasonable to consider the relative value of the total damages suffered and the injury victim’s net settlement when assessing the amount of the LMSA that should be carved out from the settlement.
There are several ways to address Medicare’s future interests in a settlement and any given approach will depend on the facts of the case and the injury victim’s risk tolerance. Although an LMSA may be appropriate at times, there are other situations where a set-aside is uncalled for. This may occur when an injury victim’s treatment has concluded, and he is able to obtain a written treating physician certification that all injury-related treatment has concluded and no further injury-related care is indicated. Charlotte Benson’s September 20, 2011, Medicare memo specifically states that when a treating physician makes such a certification, Medicare considers its interest, with respect to future medicals, for that particular settlement satisfied. Similarly, a set-aside may be uncalled for when a settlement with significant objective economic damages is limited by inadequate policy limits. This settlement may be viewed as one that is insufficient to fund any future injury-related medical care. The support for this position comes from CMS’ May 25, 2011 Stalcup memo which provides that “Each attorney is going to have to decide, based on the specific facts of each of their cases, whether or not there is funding for future medicals and if so, a need to protect the Trust Funds.”
Conclusion
Both MCP reports and LMSAs have their place in the resolution of a liability settlement. MCPs bring value to any personal injury matter regardless of the injury victim’s Medicare status. By quantifying the future injury-related medical in a case, the personal injury attorney is able to provide support for the initial demand or use the MCP report to bridge the gap between the settlement offer and the settlement demand. When a settlement involves a Medicare beneficiary, it is important for the personal injury attorney to make sure that the injury victim is advised of the potential impact of the MSP Act on the settlement and that proper documentation is obtained for the attorney’s files.
Synergy Settlement Services is here to help you with both MCPs and Medicare Secondary Payer consulting. Our team of experts can provide expert support whether it is quantification of future damages or compliance with the MSP. Find out more here.
In the latest episode of Trial Lawyer View, we explore what drives one of the titans of the bar, Adam Shea of Panish, Shea, Boyle & Ravipudi LLP. As Adam brilliantly puts it in terms of his decades long track record of building an amazing practice, “we brought that sort of style (ex jocks), that competitive spirit, and brought it into the competition of going up against the big product manufacturers or insurance companies and their teams of lawyers and it really was inspiring.”
Discover how Adam’s background has significantly influenced his journey as a lawyer, pushing him to excel in the field, and his unique approach to building strong connections with clients. As he passionately states, “The damages are so big, the injuries are so catastrophic. And you’ve got to have that compassion and empathy. I like to spend a lot of time with my clients. It takes time to find out who they are …. so I can really tell their story.”
Learn about his remarkable cases, the impact of Trial College, and his advocacy’s role in enhancing safety practices within various industries. Tune in to uncover the top five guiding principles of Adam’s career, and his insights into the challenges and opportunities in catastrophic injury and wrongful death cases. Don’t miss this episode filled with wisdom, experience, and a genuine passion for justice. 🎧🏆🏛️🚑💼
Reduction of Taxation of Contingent Attorney Fees – A Comprehensive Guide
September 14, 2023
Introduction
Trial lawyers typically have large swings in their income based on the cases that settle in a calendar year. Unfortunately, it is hard to control the day a settlement will occur or when the settlement will be paid. This presents a problem in higher income years which create higher income tax liabilities. Fortunately, an increasing number of programs and processes are available for attorneys to plan for these income fluctuations.
These swings in income make it harder to plan for your retirement. In the past we have consulted with attorneys who were hesitant to use a deferral program because they were unsure about future years’ income. In other instances, they want to use the influx of revenue to offset costs on other cases in their inventory. These difficult decisions arise when there is not enough time to plan. The best plans are created when experts in various strategies work together to meet your specific needs.
Deferral Plans & Tax Financing Programs
Let’s first explore two ways to plan for higher income years: deferral plans and tax financing programs.
The traditional solutions use several different tax deferral programs such as:
Trial attorneys can invest all or part of their contingent legal fees on a pre-tax and tax deferred basis using employer sponsored plans, annuity-based attorney fee structures or deferred compensation plans. These pre-tax investment options allow attorneys the unique ability to control the timing of their income in any given taxable year.
Benefits of tax deferral programs:
Tax deferred growth: The full value of the funds put into a tax deferral program are invested on a pre-tax basis. This allows for more funds to be working for you.
Lower current tax liability: The majority of tax deferred programs lower the amount of current year income. The amount placed in the program is considered income in the withdrawal year, not the deferral year.
Control over timing: Deferring income to future years allows you more time to plan around the withdrawal years. You can consult with your tax advisors to potentially create a plan that will allow a lower tax liability in the year of withdrawal when compared to what was due in the year of deferral.
Beneficiary and estate planning: Deferral programs can benefit your heirs (beneficiaries). The beneficiary will be responsible for the taxes, but they can potentially use programs to stretch the growth for a longer time frame.
Tax financing is a new way for an attorney to pay the tax in full through a financed arrangement. As opposed to using your own funds to pay the liability in the year due, you borrow the funds and pay those back on a three-to-five-year schedule. For example, if you have a $1,000,000 fee. We will assume you owe at a combined rate of 35%. The $350,000 tax bill is due for that year which limits the amount of funds you can invest. If you were to take a loan for $350,000, you would invest the full fee and pay the loan back over time. This allows you to have your full $1M fee working for you to potentially create a better monetary outcome.
Benefits of financing tax obligations:
Cash flow management: The use of a financing vehicle allows you to spread the tax obligation over multiple years vs a one-time immediate year payment. You will pay more overtime but in smaller amounts over a longer period.
Preserving more liquidity: Financing in general allows you to keep more money now and pay over a longer period. This allows you to keep more of your cash now and maintain a larger amount of liquidity.
Deployment of capital: The funds that would have been used to pay the current tax liability can be deferred to other investments.
Retaining assets: The ability to finance might allow you to keep an asset that would have been needed to cover the tax due.
Credit rating: If you finance a tax liability through a traditional note, you may increase your credit score by making payments on time.
The two strategies can be used in conjunction with each other. For example, you can use them both in one year: You can defer a portion of your fee and finance your remaining tax obligation. This would allow you to lower the current year taxes due by reducing your ordinary income and maintain liquidity by financing a tax obligation.
Third Strategy (Stack with an Insurance Product)
Alternatively, you can stack the strategies together and add in a third layer (leveraging insurance) to create optimal income streams in the future. For example, an attorney could use a deferred compensation program in year one and receive five equal payments in years two through six. The payments can be used to purchase an insurance policy (*life insurance or annuity). Spreading payments over five years might create a lower overall tax rate reducing the amount of tax that will need to be paid. The tax due in years two through six can be financed, allowing for the deployment of more funds into the insurance contract. The funds in the insurance contract can be received as loans (as opposed to income) and do not create a tax liability unless the policy is terminated. This three-tiered approach could minimize the overall taxes paid.
In combination, these three programs could provide the following benefits:
Potential reduction of income tax due (tax deferral and insurance plan)
Greater liquidity (tax financing)
Tax-free cash flows (insurance plan)
Death benefit protection (life insurance plan)
Estate planning (tax deferral and insurance plan)
*Life insurance contracts are typically subject to medical underwriting.
Conclusion
The foregoing plans and programs have been used independently to plan. The use of all three may be a solution that works for you and your law practice. Creating a comprehensive plan to protect yourself from paying too much taxes on contingent legal fees while providing sufficient liquidity and cash flow are a prudent part of your overall financial planning process.
Turn to Synergy as trusted partner for your firm in mitigating the impact of taxation of contingent legal fees. Through a consultative process, we can build a strategic plan for reducing the tax burden on a year-to-year basis for fees as well as provide greater control over the timing of income. Consider us your guide to cutting edge tax deferral strategies for your firm. Learn more and contact us here.
IRS CIRCULAR 230 NOTICE: In compliance with IRS requirements, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for (a) the purpose of avoiding penalties under the Internal Revenue Code or (b) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).
Preservation of Needs-Based Benefits & Other Considerations
Medicaid and SSI are income and asset sensitive public benefits, which require planning to preserve. In many states, one dollar of SSI benefits automatically provides Medicaid coverage. A special needs trust is a trust that can be created pursuant to federal law whose corpus, or any assets held in the trust do not count as resources for purposes of qualifying for Medicaid or SSI. Thus, a personal injury recovery can be placed into an SNT so that the victim can continue to qualify for SSI and Medicaid. Federal law authorizes and regulates the creation of an SNT. The 1396p[1] provisions in the United States Code govern the creation and requirements for such trusts. First and foremost, a client must be disabled to create an SNT.[2] There are three primary types of trusts that may be created to hold a personal injury recovery and one type used when it isn’t the injury victim’s own assets, each with its own unique requirements and restrictions. First is the (d)(4)(A)[3] special needs trust which can be established only for those who are disabled and are under age sixty-five. This trust is established with the personal injury victim’s recovery and is established for the victim’s own benefit. Second is a (d)(4)(C)[4] trust, typically called a pooled trust, that may be established with the disabled victim’s funds without regard to age. The third is a trust that can be utilized if an elderly client has too much income from Social Security or a pension to qualify for some Medicaid based nursing home assistance programs. This trust is authorized by the federal law under (d)(4)(B)[5] and is commonly referred to as a Miller Trust. Lastly, there is a third-party[6] SNT which is funded and established by someone other than the personal injury victim (i.e., parent, grandparent, donations, etc.) for the benefit of the personal injury victim. The victim still must meet the definition of disability but there is no required payback of Medicaid at death as there is with a (d)(4)(A) or (d)(4)(C).
Section 2: Stand-Alone (d)(4)(A) versus Pooled (d)(4)(C) Special Needs Trusts
Since the pooled (d)(4)(C) trust and the (d)(4)(A) SNT are most commonly used with personal injury recoveries, it is useful to compare these two types of trusts. There are several significant differences between a (d)(4)(C) pooled trust and a (d)(4)(A) special needs trust. I will discuss these differences first starting with the (d)(4)(C) pooled trust. As a starting point, a disabled injury victim joins an already established pooled trust as there is no individually crafted trust document. There are four major requirements under federal law necessary to establish a pooled trust. First, the trust must be established and managed by a non-profit.[7] Second, the trust must maintain separate accounts for each Beneficiary, but the funds are pooled for purposes of investment and management.[8] Third, each trust account must be established solely for the benefit of an individual who is disabled as defined by law, and it may only be established by that individual, the individual’s parent, grandparent, legal guardian, or a Court.[9] Fourth, any funds that remain in a Beneficiary’s account at that Beneficiary’s death must be retained by the Trust or used to reimburse the State Medicaid agency.[10]
In directly comparing a (d)(4)(C) to a (d)(4)(A) special needs trust, there are four primary differences. First, a (d)(4)(A) special needs trust can only be created for those under age sixty-five; however, a (d)(4)(C) pooled special needs trust has no such age restriction and can be created for someone of any age. The only caveat to the lack of an age restriction is that certain states may impose a transfer penalty for people who are over the age of sixty-five and fund a pooled trust causing a period of ineligibility. Second, a pooled special needs trust is not an individually crafted trust like a (d)(4)(A) special needs trust. Instead, a disabled individual joins a pooled trust and a professional non-profit trustee pools the assets together for purposes of investment, but each beneficiary of the trust has his or her own sub-account. Third, a pooled trust is managed by a not-for-profit entity who acts as trustee overseeing distributions of the money. The non-profit trustee may manage the money themselves or hire a separate money manager to oversee investment of the trust assets. Fourth, at death the non-profit trustee may retain whatever assets are left in the trust instead of repaying Medicaid for services they have provided, which is a requirement with a (d)(4)(A) special needs trust.[11] By joining a pooled trust, a disabled aged injury victim can make a charitable donation to the non-profit who manages the pooled trust and avoid the repayment requirement found within the federal law for (d)(4)(A) special needs trusts. Other than the aforementioned differences, it operates as any other special needs trust does with the same restrictions on the use of the trust assets.
With a (d)(4)(A) special needs trust, a trustee needs to be selected, unlike the pooled trust where it is automatically a non-profit entity. This provides some flexibility to the family or loved ones to have a hand in the selection of the trust company or bank acting as trustee; however, it is important to have a trustee experienced in dealing with needs-based government benefit eligibility requirements so that only proper distributions are made. Many banks and trust companies don’t want to administer special needs trusts with a corpus under $1,000,000.00, which can make it difficult to find the right trustee. Most pooled special needs trusts will accept any sized trust and the non-profit is experienced in dealing with people receiving disability-based public benefits. With the (d)(4)(A), there are no startup costs except the legal fee to draft the trust which can vary greatly. The (d)(4)(C) pooled trusts typically have a one-time fee at inception which can range from $500 to $2,000, which is typically much cheaper than the cost of establishing a (d)(4)(A) special needs trust. Most trustees (pooled or (d)(4)(A)) will charge an ongoing annual fee which is typically a percentage of the trust assets. These fees vary between 1-3% depending on how much money is in the trust. A (d)(4)(A) will offer unlimited investment choices for the funds held in the trust while a (d)(4)(C) will have fewer investment choices.
The following chart illustrates the five primary differences between these two trusts:
Stand-Alone Special Needs Trust
Pooled Special Needs Trust
Can only be created for those under the age of 65.
Can be created for someone of any age. Caveat though for a possible transfer penalty in some states.
Individually drafted for someone who is disabled. Provisions are unique and tailored to the trust beneficiary. A qualified elder law attorney who understands the unique needs of a personal injury victim should be consulted to assist with drafting the stand-alone special needs trust.
Not individually drafted. A disabled individual joins an established master trust, and his or her funds are pooled for investment purposes with those of other beneficiaries. Beneficiaries have their own sub-accounts where an accounting of their funds is maintained. A qualified elder law attorney who understands the unique needs of a personal injury victim should be consulted to assist with joining a pooled trust.
Trustee may be an individual but is typically a bank or trust company who may or may not handle investment of the trust assets. Investments may be personalized for the trust beneficiary’s circumstances.
Trustee is a non-profit entity who oversees distributions but often delegates investment functions to a third-party money manager using model portfolios.
All funds left in trust at death must be used to repay Medicaid for services provided to the trust beneficiary.
All funds left in trust at death may be retained by the non-profit instead of repaying Medicaid for services provided, allowing an injury victim to make a charitable donation to the non-profit and avoid repayment to Medicaid.
No startup costs except the legal fee to draft the trust, which can vary greatly. Most trustees charge an ongoing annual fee, typically a percentage of the trust assets. These fees vary from 1% to 3%, depending on how much money is in the trust. A stand-alone special needs trust will offer unlimited investment choices for the funds held in the trust. Typically, there are additional costs tied to investment management.
Typically have a one-time fee at inception, ranging from $500 to $2,000 (often much cheaper than the cost of establishing a stand-alone special needs trust). Most non-profit trustees charge an ongoing annual fee, typically a percentage of the trust assets. These fees vary from 1% to 3%. A pooled special needs trust will offer fewer investment choices—oftentimes, only one choice.
Key Takeaway: Different methods for protecting needs-based benefit preservation must be explored for any disabled injury victim who is currently eligible. Special needs trusts allow injury victims to continue to access critical needs-based government benefits after settling their cases. Federal law authorizes and regulates the creation of special needs trusts. Two primary types of trusts may be created to hold a personal injury recovery, each with its own requirements and restrictions. First, is the (d)(4)(A) stand-alone special needs trust. A stand-alone special needs trusts can be established only for those who are disabled and under age sixty-five. This trust is established with the personal injury victim’s recovery, for the victim’s own benefit. It can be established by the victim, a parent, a grandparent, or a guardian, or by court order. Second, is the (d)(4)(C) pooled special need trust. A pooled trust can be established with a disabled injury victim’s funds, regardless of age. Like a stand-alone trust, this trust is established with the personal injury victim’s recovery, for the victim’s own benefit, and can be established by the victim, a parent, a grandparent, a guardian, or by court order.
Section 3: Limitations on Spending & Advantages/Disadvantages of Establishing an SNT
The major limitation of all types of special needs trusts is that the assets held in trust can only be used for the “sole benefit” of the trust beneficiary. The disabled injury victim could not withdraw money and gift it to a charity or family. The purpose of the special needs trust is to retain Medicaid eligibility, and use trust funds to meet the supplemental, or “special” needs of the beneficiary. These can be quite broad, however, and include things that improve health or comfort such as non-Medicaid covered medical and dental expenses, trained medical assistance staff (24 hours or as needed), independent medical check-ups, medical equipment, supplies, programs of cognitive and visual training, respiratory care and rehabilitation (physical, occupational, speech, visual and cognitive), eye glasses, transportation (including vehicle purchase), vehicle maintenance, insurance, essential dietary needs, and private nurses or other qualified caretakers. Also included are non-medical items, such as electronic equipment, vacations, movies, trips, travel to visit relatives or friends and other monetary requirements to enhance the client’s self-esteem, comfort or situation. The trust may generally pay for expenses that are not “food and shelter” which are part of the SSI disability benefit payment; however, even these items could be paid for with trust assets, but SSI payments could be reduced or eliminated. This may not be problematic if the disabled injury victim qualifies for Medicaid without SSI eligibility; however, many states grant automatic Medicaid eligibility with SSI so one has to be careful about eliminating the SSI benefit.
Each type of trust discussed above has advantages and disadvantages. Some think of pooled trusts as only being appropriate for a smaller settlement, which is not the case. Some think of pooled trusts just for the elderly, which is not the case either. In the right case, the pooled trust is an excellent alternative to a (d)(4)(A). Just the same, in some cases a (d)(4)(A) may be the best option because of the flexibility in selecting a trustee and the customizable money management options. In the end though, a special needs trust, be it pooled or a (d)(4)(A), must be considered because it will safeguard a disabled client’s recovery from dissipation and protect future eligibility for needs-based public benefits. Just as importantly, the different types of trusts and their advantages as well as disadvantages should be closely considered before making a decision since special needs trusts are irrevocable along with bringing substantial restrictions on how the money may be used. Creating a special needs trust for a disabled injury victim gives them the ability to enjoy the settlement proceeds while preserving critical healthcare coverage along with government cash assistance programs.
Key Takeaway: There are important advantages and disadvantages to establishing a special needs trust for an injury victim. The advantages are that the injury victim can retain SSI/Medicaid eligibility; get professional trustee services; can avoid guardianship and annual reports; and the trust can pay for everything except “food & shelter”. The disadvantages are that there is no unrestricted use of funds by the injury victim; “Sole Benefit” rule applies; at death Medicaid must be paid back (except 3rd party); adds an extra layer of complexity; and the trust is irrevocable.
Section 4: Spousal & Parental Deeming in Cases with a Consortium Claim
Deeming is an important concept to understand for trial lawyers when working with their client to construct a plan post settlement to preserve needs-based government benefits. The following example will illustrate the point. Assume you have just resolved a catastrophic birth injury matter for a minor client and his parents. The minor receives SSI as a result of severe injuries from hypoxia at birth due to negligence. Upon resolving the case, the parents agree, and the court approves that all settlement proceeds for the minor child will go into a special needs trust. Mom and dad are given $200,000.00 for their consortium claim. The minor child is now ineligible for Medicaid and SSI as a result of “parental deeming” until he reaches age 18.
What is deeming? Deeming is when either a parent’s or spouse’s income and/or assets are counted towards the SSI/Medicaid recipient’s resources when applying for or receiving SSI. In my example, “parental deeming” is triggered as the child is under the age of 18 and is living in the same household as his parents. The theory behind deeming between a parent and minor child living at home is that it is the responsibility of the parent to care for a minor child. As part of deeming, a parent’s earned and unearned income as well as assets deem to a child. For a married couple, resources over $3,000 deem to the child. In my example of a $200,000 recovery for a consortium claim allocated to the parents, that well exceeds the asset cap of $3,000. Deeming of that recovery would cease once the minor reaches age 18 even if he is still residing at home; however, if the settlement occurred when the child was relatively young, say at 5 years of age, there would be 13 years of ineligibility due to the deeming from the consortium recovery (assuming it wasn’t spent down before the 13 years had passed).
Similarly, there is spousal deeming. If you represent a married couple where one is on SSI and there is a consortium claim, a similar issue could be created as with the example of a minor child parental deeming. This is so since if the combined assets of a couple exceed the $3,000.00 asset cap, then the SSI benefit will be lost by the injury victim that is disabled. In the event there is a consortium claim on behalf of the non-injured spouse and money is allocated to them, then the injury victim with SSI will lose their eligibility even if their settlement money goes into an SNT.
Given the complexities of deeming and some exceptions, it is important to consult an elder law attorney at settlement. If it is possible to avoid allocating monies to a parent or spouse in a deeming situation, that is advisable; however, often that simply doesn’t work given the dynamics of settlement. That is where an elder law attorney’s experience and expertise can help trial lawyers navigate these issues.
Key Takeaway:Deeming is a critical concept for trial lawyers to understand when planning to preserve their clients’ needs-based government benefits post-settlement. Deeming occurs when a parent’s or spouse’s income and assets are considered as part of the SSI/Medicaid recipient’s resources. Parental deeming can make a minor child ineligible for Medicaid and SSI until age 18 if the parents receive a settlement exceeding the $3,000 asset cap. Similarly, spousal deeming can affect a disabled spouse’s SSI eligibility if the non-injured spouse’s consortium claim results in combined assets exceeding the cap. The intricacies of deeming necessitate consultation with an elder law attorney to ensure proper allocation of funds and benefits preservation.
Section 5: Spend Down
In the right settlement situation, an alternative to establishing an SNT that is often overlooked is a spend-down plan on exempt assets. A “spend-down” plan involves promptly spending settlement money in excess of the applicable asset limit within the same calendar month of receipt to maintain eligibility for public benefits. The Social Security Administration (SSA) considers a lump sum of money as income only in the month received, so long as it is spent within that same calendar month (SI 01110.600); therefore, by the month-end of receipt, the injury victim must retain no more than the resource limit, usually $2,000 for an unmarried individual and $3,000 for a married couple.
A well-planned spend-down leverages SSA statutes and regulations that exempt certain assets from the “countable resources” category. The personal injury settlement proceeds can thus be used to acquire or pay off certain exempt assets permitted by statute, 42 U.S.C. § 1382b(a), potentially eliminating the need for an SNT. These exempt resources are detailed in the Program Operations Manual System (POMS) at SI 01110.210 and typically include:
A primary residence of any value, 20 C.F.R. §§ 416.1210(a), 416.1212.
One vehicle of any value for transportation of the SSI recipient or a household member, 20 C.F.R. §§ 416.1210(c), 416.1218.
Household goods and personal effects, irrespective of value, 20 C.F.R. §§ 416.1210(b), 416.1216.
A dedicated account for burial expenses up to $1,500, 20 C.F.R. §§ 416.1210(l), 416.1231(b), though an unlimited amount is allowed in an irrevocable funeral service contract, POMS SI 01120.201.H.1.a.
Life insurance policies with a cash surrender value under $1,500 and unlimited term insurance, 20 C.F.R. §§ 416.1210(h), 416.1230.
For example, as part of a comprehensive spend down plan, a recipient could use the settlement to pay off a mortgage, purchase a new home, repair an existing one, or buy long-needed household goods or appliances. They could also use the funds to clear credit card debts. The following is a non-exclusive list of potential ways to spend down:
• Paying off existing debts (note: loans from family members or friends need to be bona fide with an expectation of repayment).
• Purchasing or paying off a home or part of a mortgage.
• Paying only that calendar month’s rent.
• Making home repairs and modifications for disabilities.
• Purchasing home furnishings, electronics or appliances.
• Paying an attorney for estate or Medicaid planning.
• Paying off non-Medicaid/Medicare medical bills, educational expenses, entertainment/recreation expenses, and vacation travel.
• Pre-paying burial arrangements.
• Purchasing a vehicle.
• Buying personal products or services like clothing or hygiene products.
However, making purchases for someone else or giving away money should be avoided, as these are considered transfers for less than market value and could result in loss of public benefits (SI 01150.001, SI 01150.007).
Lastly, it is important to report spend-down to the local Social Security Administration (SSA) office and/or the state Medicaid office. As a trial lawyer, you can either directly advise your client on these issues or engage an elder law attorney to guide the client in tracking and reporting their spend-down, including dates, amounts, and items purchased. It’s crucial to remember that if the client is on SSI, the money they get and spend down is income in the calendar month they get the money, so it does interfere in that one month’s SSI payment. If spend-down exceeds one month, the interference with SSI (and Medicaid) will continue beyond that one month. If there is no SSI and only Medicaid, then as long as spend down occurs in the same calendar month there should be no interference with medical coverage.
Key Takeaway: A “spend-down” plan is a viable alternative to a Special Needs Trust (SNT), in the right settlement scenario. It involves the prompt expenditure of settlement funds that exceed the asset limit within the same month of receipt to retain public benefits eligibility. The plan leverages statutes and regulations that exempt certain assets from being countable resources, thus permitting the use of settlement proceeds to acquire, pay down, or improve exempt assets, potentially bypassing the need for an SNT; however, the spend-down must be strategically planned and promptly executed, taking into account eligible exemptions and avoiding non-permissible transactions. All transactions should be timely reported to the Social Security Administration and/or the state Medicaid office. While a spend-down may cause interference with benefits for the month in which the lump sum is received, especially for SSI recipients, if effectively managed, it provides a pathway to preserve government benefits while monetarily benefiting from the settlement.
Conclusion
In conclusion, the evaluation of different methods for protecting needs-based benefit preservation must be explored for any disabled client who is currently eligible. Special needs trusts allow injury victims to continue to access critical needs-based government benefits after settling their case. When creating a plan that includes an SNT for a minor child or a spouse, understanding the impact of deeming and consortium claims is important. Spend-down is a viable alternative to establishing an SNT in some situations. Every case and client is different though and careful consideration of the advantages and disadvantages should be done with an elder law attorney.
[2] 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. 42 U.S.C. § 1382c(a)(3) states that “[A]n individual shall be considered to be disabled for purposes of this title … if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or … last for a continuous period of not less than twelve months (or in the case of a child under the age of 18, if that individual has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or … last for a continuous period of not less than 12 months).”
[3] 42 U.S.C. § 1396p(d)(4)(A) provides that a trust’s assets are not countable if it is “[a] trust containing the assets of an individual under age 65 who is disabled (as defined in section 1382c(a)(3) of this title) and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter.”
[4]42 U.S.C. § 1396p(d)(4)(C) provides that a trust’s assets are not countable if it is “[a] trust containing the assets of an individual who is disabled (as defined in section 1382c (a)(3) of this title) that meets the following conditions: (i) The trust is established and managed by a non-profit association. (ii) A separate account is maintained for each beneficiary of the trust, but, for purposes of investment and management of funds, the trust pools these accounts. (iii) Accounts in the trust are established solely for the benefit of individuals who are disabled (as defined in section 1382c(a)(3) of this title) by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court. (iv) To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this subchapter.”
[11] If the funds remaining in the trust at death are sufficient to repay Medicaid’s payback right in full, many pooled trusts will distribute some portion of the remaining monies to the trust beneficiary’s heirs; however, each pooled trust will have a different policy and the amount retained at death can vary greatly. It is very important to investigate how much is retained in this type of situation. Some trusts will only retain $5,000 while others may retain $50,000.