These are the Best Tax Planning Tools for Contingent Fee Lawyers

This article was adapted from the book The Art of Settlement, written by Jason D. Lazarus.

Peaks are beautiful when they’re part of a mountain range, but they’re decidedly less beautiful when they’re part of your income taxes. No one wants to see sky-high taxes, followed by valleys of income. Yet, that’s exactly what many plaintiff attorneys fall victim to when it comes to managing the taxes on their own contingent legal fees. As part of the normal rhythm of their practices, many attorneys experience these highs and lows with their own personal income, which leads to concerns for trial attorneys about the unpredictability of their own income.

However, attorneys have a unique opportunity, not available to others who earn professional fees, to take their contingent legal fees and invest them on a pre-tax and tax-deferred basis to smooth out their income. This article answers some frequently asked questions about attorney fee structures and deferral of contingent legal fees.

Attorney Fee Structures

Attorney fee structures are annuities, and they work very much like a nonqualified deferred compensation plan. The taxes that would be otherwise paid on the fee earned at the time the case is settled are deferred, and that money grows without tax on the growth.

When distributions are made, the entire amount distributed during a year is taxable for that year. Based upon a taxpayer’s tax bracket, there may be some distinct tax advantages to entering into this type of arrangement as opposed to being taxed on the entire fee in the year it was earned and investing it after tax.

Depending on how much the fees are, current tax bracket rates, and any other sources of income, stretching out the payment of fees can result in a potentially smaller tax burden.

An attorney fee structure allows an attorney to set up a personally tailored retirement plan without the monetary and age restrictions or other drawbacks of a qualified plan. The attorney can defer taxes on his or her fees as well as the interest that those fees earn until the year in which a distribution is actually received from the fee structure.

The fee structure can help a lawyer avoid the highest tax brackets by leveling off income spikes due to large fees and spreading the income out over several years. An attorney who otherwise would have an unusually high income in one taxable year, but elects to spread the income over several years, avoids paying taxes in the highest bracket. Couple the tax savings with guaranteed earnings on the deferred funds, and the benefits of an attorney fee structure become very obvious.

Since fee structures are pre-tax and tax-deferred investment vehicles, a major benefit is the compounding effect of deferring payments over longer periods of time. The longer an attorney waits for payments or the longer the duration of the distribution term, the better the financial result and possibly the tax result as well.

Payments can start right away, but don’t have to. They can be deferred for any length of time and then can be paid out over a duration of years or for life. There are almost infinite possibilities in terms of the different types of arrangements that can be set up.

Deferred Compensation Plans for Attorneys

A non-annuity deferred compensation arrangement is another mechanism that trial lawyers can use to invest the contingent legal fees they earn on a pre-tax and tax-deferred basis. Like Fortune 500 executives who defer their compensation, you can defer all or a portion of your fees until you are ready to start receiving them. Using this kind of solution, you have flexibility with investments as well as more control over the timing of income.

For example, if you wanted to defer a $500,000 fee in the current taxable year by splitting the fee plus the investment gains into twenty quarterly payment buckets, you could do so. Thirteen months prior to any scheduled quarterly payment, you can elect to withdraw it. However, if you don’t need the payment, the payment bucket will automatically roll forward to the end of the line. By laddering payments in this way, you can effectively manage your cash flow and better control the timing of taxation.

From a legal tax perspective, fee deferrals are subject to the same body of tax rules that govern Nonqualified Tax-Deferred Compensation (NQDC). So, this means that the deferrals must avoid the application of the constructive receipt and economic benefit doctrines. NQDC has been used for decades by Fortune 500 companies as a way to attract, retain, and further compensate their top-level executives. These deferred compensation plans rely upon the same decisions as attorney fee structures, Childs. Since the legal underpinnings are the same and are well established, the risk is relatively similar to attorney fee structure annuities.

Smooth out the Spikes

Attorney fee structures and deferred compensation arrangements allow lawyers to avoid taking income all in one taxable year when they earn a large fee. While these financial products may seem complex, they are actually quite simple. Still, having an expert advisor who can provide you with different options is critical.

Tax deferral mechanisms for lawyers are a great way to smooth out those income spikes caused by larger fees or just take better control over the timing of income. Attorney fee deferral solutions allow a plaintiff lawyer to not only defer receipt of (and tax on) fees until received, he or she can have the deferred fees invested, and have the income produced from it also taxable over time rather than immediately.

Due to the variety of options, there is likely something that will best suit an attorney’s needs and investment preferences. Attorneys should explore these options to take back control of the timing of income.

For more advice on attorney fee deferral, you can find The Art of Settlement on Amazon.

What’s the Difference Between a Pooled Trust and a Standalone Special Needs Trust?

This article was adapted from the book The Art of Settlement, written by Jason Lazarus.

Jane Doe is sixty-eight. She never worked outside of the home and was recently the victim of medical malpractice. She has a private insurance policy that she can no longer pay for after becoming disabled from the stroke she suffered, which wasn’t diagnosed in a timely manner. She needs to be in an assisted living facility due to the stroke.

She qualified for both Medicaid and Supplemental Security Income (SSI) after the stroke. In addition, she gets a small amount of Social Security benefits as a result of her husband’s death. Jane’s personal injury lawyer settled her case for the policy limits of the doctor who had missed the diagnosis, which is $250,000. This is completely inadequate to care for Jane. How will she qualify for nursing home care paid for by Medicaid given the small settlement? Can she keep her SSI intact? Will the death benefits cause an income problem?

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. These trusts are an indispensable planning tool for making sure your clients remain eligible for means-based benefits like Medicaid after receiving a settlement. But there are several types of special needs trusts, including a standalone (d)(4)(A) Special Needs Trust, and a (d)(4)(C) trust, commonly known as a pooled trust. What’s the difference, and what’s right for Jane?

Four Major Differences between the Standalone (d)(4)(A) SNT and Pooled (d)(4)(C)

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. The 1396p 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. Beyond that basic similarity, the pooled (d)(4)(C) trust and the (d)(4)(A) SNT have four significant 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.

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 nonprofit 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 nonprofit trustee may manage the money themselves or hire a separate money manager to oversee investment of the trust assets.

Fourth, at death, the nonprofit 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. By joining a pooled trust, a disabled aged injury victim can make a charitable donation to the nonprofit 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.

The Financial Differences between (d)(4)(A) and (d)(4)(C)

Whether your client has a pooled or standalone SNT, most trustees will charge an ongoing annual fee, which is typically a percentage of the trust assets. These fees vary between 1–3 percent depending on how much money is in the trust. From there, the financial management of these two types of trusts diverge.

With a (d)(4)(A) Special Needs Trust, a trustee needs to be selected, unlike the pooled trust where it is automatically a nonprofit 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, which can make it difficult to find the right trustee.

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.

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. Meanwhile, most pooled Special Needs Trusts will accept any sized trust and the nonprofit is experienced in dealing with people receiving disability-based public benefits.

Decide on a Client-by-Client Basis

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.

Because of the intricacies of each type of trust and each client’s situation, you must decide on a client-by-client basis. In Jane Doe’s case, the solution is to create a pooled Special Needs Trust. As Jane is over sixty-five, she cannot create a stand-alone SNT, so her only option is a pooled trust, which will protect both her Medicaid and SSI eligibility.

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.

This article was adapted from the book The Art of Settlement, written by Jason Lazarus. For more advice on structured settlements, you can find The Art of Settlement on Amazon.

2021 Florida Trend’s Florida Legal Elite™

Trial Lawyer View host, Jason D. Lazarus, Esq., Orlando, FL, Amazon best-selling author of “The Art of Settlement” and nationally recognized settlement compliance expert, was recently recognized in the 2021 edition of Florida Trend’s Florida Legal Elite™. The list of 1,263 honorees represents just over 1% of the active Florida Bar members, including attorneys in private practice as well as top government and non-profit attorneys who practice in Florida.

Learn more about Florida Trend’s Florida Legal Elite™ here.

7 Ways Structured Settlements Protect Personal Injury Victims

Structured settlements utilizing life insurance annuities as their funding mechanism have been around for four decades. Over half a million injury victims receive benefits from structured settlement annuities. Each year, life insurance companies that provide structured settlements receive more than $6 billion to fund new structured settlement arrangements and an estimated $156 billion has been paid in total to fund structured settlements in force since the seventies.

Structured settlements are commonly utilized in the settlement of tort claims because of these seven crucial advantages they offer personal injury victims.

1. Life Insurance Companies Have Strong Oversight

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There are a variety of legal protections offered by structured settlements, including several layers of protection against insolvency. The first layer of protection is that annuity providers are overseen by state insurance commissions. Secondly, state law imposes reserve and surplus requirements on life insurance companies. Thirdly, every state has a state guaranty association which guarantees annuities. The final layer of protection is careful selection of the highest-quality annuity providers to provide structured settlements.

Because of strong financial oversight of life insurance companies by the state departments of insurance, structured settlements are very safe and secure investment vehicles for injury victims.

2. States Have Structured Settlement Protection Acts

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In addition to the foregoing legal protections, there are state structured settlement protection acts. The acts protect structured settlement recipients from unscrupulous companies that purchase structured settlements.

“Factoring” companies, the name commonly used for companies that purchase structured settlements, buy injury victim’s payment streams in return for a lump sum payment to the injury victim. The lump sum payment to the injury victim for their future periodic structured settlement annuity payments is typically at a sharp discount with some discount rates being patently unfair.

3. Structured Settlements are Protected Against Future Legal Claims

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Injury victims only get one opportunity to recover compensation for their injuries. If someone who recovers compensation for their injuries is subsequently involved in an accident where they injure someone else or someone is injured on their property, bank accounts and most investments are exposed to claims. In addition, if an injury victim gets into debt and has creditors making claims, their assets could be exposed to these claims. However, many states have either common law or statutes that protect annuities from legal process. For example, in Florida there is a statute that completely exempts annuities from creditors and judgments.

4. Structured Settlements are Protected Against Divorce

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In addition, structured settlements offer enhanced protection under the law in case of divorce. Structured settlements are not owned by the injury victim. Instead, the injury victim is the payee and the life insurance company’s assignment company owns the annuity. Because of this legal arrangement, structured settlement annuities are not an asset owned by an injury victim. Consequently, it is not an asset that can generally be divided in the case of divorce. The income that it produces can be considered in determining alimony, but the asset itself usually is not divided.

5. Structured Settlements are Protected Against Bankruptcy

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Similarly, a structured settlement annuity is not an asset generally reachable in cases of bankruptcy. When a structured settlement is created as part of a settlement, an assignment is done. The assignment is done to transfer ownership of the annuity from the purchaser (the defendant) to the life insurance company assignment corporation. The assignment corporation takes on the obligation to make the future periodic payments and purchases an annuity from the annuity issuer. That means that structured settlements are very effective shields against creditors.

6. Structured Settlements Offer Many Benefits to Unsophisticated Investors

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Structured settlements are utilized in the settlement of tort claims because of the advantages they offer like income tax-free payments, fixed, low-risk competitive returns, guaranteed lifetime income, no-cost financial management, spendthrift protection, creditor protection, and avoidance of guardianship requirements in certain cases. Structured settlements offer the unsophisticated investor the ability to make a one-time, simple investment decision that will provide competitive returns with no market risk and no taxation.

7. Structured Settlements Offer Added Benefits for Sophisticated Investors

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Similarly, for sophisticated investors they can use the annuity as a funding mechanism for other investments using a dollar cost averaging approach. For the injury victim, a low-risk, fixed and income-tax-free vehicle that can provide guaranteed income is very attractive and appropriate. In addition, a structured settlement can be a tool to pass wealth on to the next generation avoiding income tax on any of the income generated. As such, having a structured settlement as the cornerstone of a financial settlement plan, can mean the difference between outliving the settlement or not.

This article was adapted from the book The Art of Settlement, written by Jason Lazarus. For more advice on structured settlements, you can find The Art of Settlement on Amazon.

Jason D. Lazarus on Grow Your Law Firm Podcast

Jason D. Lazarus was recently featured on Grow Your Law Firm podcast with Ken Hardison of PILMMA. In the episode, “Malpractice Traps That Most Lawyers Haven’t Thought About,” they discuss a variety of topics including:

Medicare Advantage plans’ recovery rights
Mandatory reporting requirements for insurers from Medicare
The pitfalls that apply to personal injury settlements
Medicaid/SSI protected benefits
The effect of the Supreme Court’s ruling in the McCutchen case on ERISA liens
How a qualified settlement can expedite the resolution of catastrophic and complicated cases
Attorney fee deferrals to Qualified Settlement Funds (QSF)
Special Needs Trusts (SNTs)
Jason’s book, “The Art of Settlement”

You can listen to this interview here.

To learn more about Ken Hardinson and PILMMA click here.

Lawyers Assisting Medicare Beneficiaries, Heed These Words of Warning

This article was adapted from the book The Art of Settlement, written by Jason Lazarus.

Medicare is complex, to say the least. Medicare Parts A, B, C, and D all cover distinct but overlapping services. Meanwhile, Medicare eligibility is connected to Social Security Disability Income, and the Medicare Secondary Payer Act is a series of statutory provisions that would make even the most detail-oriented person’s head spin.

Most lawyers find this area of the law very confusing at best and downright confounding at worst. While working with Medicare beneficiaries is worthwhile and valuable work, any lawyer who steps in to assist has a number of critical issues to consider.

Lawyers assisting Medicare beneficiaries are personally exposed to damages and malpractice risks daily when they handle or resolve cases for Medicare beneficiaries. The list of things to be concerned about is growing daily. Drawing on recent cases, here are some of my top words of warning for any lawyer assisting Medicare beneficiaries.

Don’t Ignore Medicare’s Interests

The government takes its reimbursement rights seriously and is willing to pursue trial lawyers who ignore Medicare’s interests. On January 8, 2020, the United States Attorney William M. McSwain announced that “a Philadelphia-based personal injury law firm…entered into a settlement agreement with the United States to resolve allegations that it failed to reimburse the United States for certain Medicare payments.”

As part of the settlement, like in other cases, the firm agreed to pay $6,604.59 to satisfy the debt owed to Medicare. In addition, the firm agreed to: “(1) name a person responsible for paying Medicare secondary payer debts; (2) train the employee to ensure that the firm pays these debts on a timely basis; (3) review any additional outstanding debts to ensure compliance; and (4) provide written certifications of compliance.” The firm also acknowledged that any future “failure to submit timely repayment of Medicare secondary payer debt may result in liability for the wrongful retention of a government overpayment under the False Claims Act.”

The following quote from McSwain sums it all up: “Lawyers need to set a good example and follow the rules of the road for Medicare reimbursement. If they don’t, we will move aggressively to recover the money for taxpayers.”

Cover Your Bases with Referrals

Last year on November 4, 2019, the United States Attorney for the District of Maryland announced that a Baltimore-based law firm paid the United States $91,406.98 to resolve allegations that it failed to pay Medicare for conditional payments that had been paid on behalf of the firm’s clients. The press release indicates that the firm had entered into a joint-representation agreement with co-counsel who, in turn, didn’t reimburse Medicare at settlement. According to US Attorney Robert K. Hur, “Plaintiffs’ attorneys cannot refer a case to or enter into a joint-representation agreement with co-counsel and simply wash their hands clean of their obligations to reimburse Medicare for its conditional payments.”

He went on to say, “[w]e intend to hold attorneys accountable for failing to make good on their obligations to repay Medicare for its conditional payments, regardless of whether they were the ones primarily handling the litigation for the plaintiff.”

So, this is a warning to every attorney who might refer a case to another attorney that you can’t do so and avoid liability if Medicare compliance is ignored. The lesson is that when you refer a case to another firm you need to make sure you have three things: 1) a written fee agreement; 2) a copy of the lawyer’s malpractice insurance policy declarations; and 3) proof that the lawyer has engaged a lien resolution firm or has a compliant process to resolve Medicare Conditional Payment obligations.

Develop a Comprehensive Medicare Compliance Plan

In June of 2018, the US Department of Justice announced a settlement with a Philadelphia Personal Injury Law Firm involving failure to reimburse Medicare. The firm agreed to start a “compliance program” and the DOJ stated that this “settlement agreement should remind personal injury lawyers and others of their obligation to reimburse Medicare for conditional payments after receiving settlement or judgment proceeds for their clients.”

The US Attorney’s office also stated, “When an attorney fails to reimburse Medicare, the United States can recover from the attorney—even if the attorney already transmitted the proceeds to the client. Congress enacted these rules to ensure timely repayment from responsible parties, and we intend to hold attorneys accountable for failing to make good on their obligations.”

Consequently, in today’s complicated regulatory landscape, a comprehensive plan for Medicare compliance has become vitally important to personal injury practices. Here are six major elements to watch out for:

Not knowing what medical information/ICD codes are being reported by defendant insurers complying with Mandatory Insurer Reporting law (MIR) created by MMSEA.

Agreeing to onerous “Medicare Compliance” language that may be inapplicable or inaccurate, which binds the personal injury victim.

Failing to report and resolve conditional payment obligations leading to personal liability.

Not using processes to obtain money back from Medicare using the compromise and waiver process.

Failure to identify a lien, such as those asserted by Medicare Part C lienholders thereby exposing the personal injury lawyer and the firm to double damages.

Inadequate education of clients about Medicare compliance when it comes to “futures” and the risks of denial of future injury-related care.

So, what do you do? The answer is to develop a process to identify those who are Medicare beneficiaries in your practice and make sure that process is put into place to deal with the myriad of issues that can arise.

Educate Yourself

The government is very serious about and intent on enforcing the Medicare Secondary Payer Act. Failure by a lawyer to take appropriate actions with regard to reimbursement of Medicare when they make conditional payments, exposes that lawyer and his firm to potential enforcement actions by the government.

Make sure you and your staff are educated about these various issues so you can identify problems before they become a malpractice issue or worse yet, a personal liability for any attorney involved in the matter.

For more advice on Medicare compliance, you can find The Art of Settlement on Amazon.

Personal Injury Lawyers Have a Responsibility to Address the Financial Implications of a Client’s Settlement

This article was adapted from the book The Art of Settlement, written by Jason Lazarus.

When personal injury victims win a settlement, it can be life-changing. They have costly medical bills to contend with, as well as the fact that they often aren’t able to live or work the way they used to. To victims, settlements aren’t just money; they’re an assurance that the victim will have their needs met and will be able to get on with their lives as best they can.

Still, it’s hard for personal injury victims to know what to do. Should they take the settlement in a lump sum? Take it in installments? Put it in a trust?

Many personal injury practitioners seem to believe that advice regarding financial matters and techniques to preserve public benefit eligibility crosses the line between legal and “financial” advice. However, these issues touch on the law and do create an obligation on the part of the personal injury practitioner to properly advise the client regarding their implication as to the form or structure of the recovery. Here’s why.

Malpractice Liability for Failing to Advise Injury Victim Clients

Precedent shows that lawyers who fail to advise their clients about the financial implications of their settlement are liable. The Grillo case from Texas is the most widely publicized legal malpractice settlement involving liability for failing to counsel a minor client on the form of a personal injury settlement. Christina Grillo was born with cerebral palsy, cortical blindness, and quite a few other medical problems. Her parents instituted a medical malpractice action alleging her medical problems were due to negligent medical care during delivery in a Texas hospital. The medical malpractice case was settled for $2.5 million. The settlement was placed into the court registry. The interest earned from the investments in the trust was taxable and the child lost her Medicaid eligibility since no Special Needs Trust was established.

The personal injury lawyers who handled the case were later sued for legal malpractice for their handling of the settlement. In the legal malpractice action, Grillo’s legal counsel, Kevin Isern, alleged that her personal injury lawyer “didn’t offer a structured settlement to the child and “[t]hey had the money deposited into the registry of the court…and she lost Medicaid.”

Having the money placed in the court registry meant Christina Grillo could not have a tax-free structured settlement and all of the accrued interest was taxable. He also pointed to the fact that the lawyers also failed to set up a Special Needs Trust which would have preserved her Medicaid eligibility.

The Grillo legal malpractice case was settled by the personal injury firm that handled the medical malpractice action on behalf of the minor and by the guardian ad litem (GAL) who had represented the minor’s interests when the settlement was approved. The personal injury firm settled the legal malpractice action for its handling of the medical malpractice settlement for $1,600,000. Interestingly, the suit against the GAL was settled for $2,500,000.

For attorneys who serve as guardian ad litems with any frequency, it is attention grabbing that the GAL wound up with the largest share of the liability in terms of the gross settlement amount. However, it sends a clear warning message to personal injury lawyers as well as guardian ad litems about their obligations to properly advise a client about the financial options they have and preservation of public benefits.

Ethical and Legal Duties to the Plaintiff at Settlement

The fact that all the issues relating to the form of the recovery touches the law drives home the fact that it is the personal injury lawyer’s obligation to at least raise these issues as part of their discussions with the disabled client. There are provisions in the United States Code along with the Internal Revenue Code that impact the form of the recovery. These provisions, if not explained to the injury victim client, can result in the client’s inability to avail themselves of options available under the law. If the injury victim’s lawyer does not explain these issues to them, who will?

If the disabled client is not given advice about how to structure their recovery, they could suffer quantifiable damages that can be proven in a legal malpractice case. Furthermore, allowing a disabled client to take the personal injury recovery in a single lump sum without any advice on the impact of that decision would set up a situation where the client could be adversely impacted by the passage of time. Without knowledge of the tax law, the client can lose the power of a significant tax exemption offered for structured settlement recipients. He or she can lose out on the opportunity for a safe investment with competitive rates of return. Finally, and potentially the most damaging, the client can lose public assistance eligibility.

Personal injury lawyers have an ethical responsibility to inform their clients about the financial implications of their settlements. There are many experts that can be hired to make sure clients are properly advised of all their options for their recovery. To avoid future liability, the personal injury lawyer should hire such experts to protect their clients and themselves. If clients refuse counseling or refuse methods to protect their recovery, a good course of action is to have them sign a waiver or acknowledgment that they have been advised of their options and understand what they are giving up. If the personal injury practitioner gives clients all their options regarding how to structure their recovery, and has them sign a waiver/acknowledgment if they decline the options presented to them, the lawyer has at least documented the file so if there is a subsequent legal malpractice claim, they can offer evidence of the advice they gave.

You’re Responsible (or, You’re Responsible for Hiring an Expert)

The American Bar Association released its report on the Profile of Legal Malpractice Claims in 2003 and personal injury lawyers made up the largest percentage of malpractice claims, at twenty percent. Advice and settlement/negotiation made up over twenty-three percent of the claims overall. When those two categories are combined, they are tied for first in terms of the highest claims by type of activity in the study.

While the report does not specify, it is logical to conclude that claims of failing to give advice about financial options, taxation of damages, and preservation of public benefits would squarely fall within the purview of advice as well as settlement/negotiation malpractice claims. A personal injury practitioner must discuss with disabled clients the form of their personal injury recovery or hire an expert to do so.

For more advice on personal injury lawyers’ responsibilities at settlement, you can find The Art of Settlement on Amazon.

How the Acronym “CAD” Can Help You Ensure You’re Medicare Compliant

This article was adapted from the book The Art of Settlement, written by Jason Lazarus.

Jim Doe is forty-six. He was injured in a motorcycle accident and lost both of his legs. He worked up until his accident and applied for Social Security Disability after the accident. He was accepted two years ago, and he is a current Medicare beneficiary as a result of qualifying for SSDI. You are about to settle his case for $2 million, gross, and you want to make sure you address Medicare compliance issues.

Unless you want to end up in court later, it’s important to have your ducks in a row.

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.

Once you’ve already identified someone as a Medicare beneficiary (or someone with the reasonable expectation of becoming one within thirty months), the easiest way to make sure you’re compliant is to follow the acronym “CAD.”

C: Consult

The “C” stands for consult with competent experts who can help deal with these complicated issues. For most practitioners, it is nearly impossible to know all of the nuances and issues that arise with the Medicare Secondary Payer Act. From identifying liens, resolving conditional payments, deciding to set money aside, the creation of the allocation to the release language, and the funding/administration of a Set-Aside, there are issues that can be daunting for even the most well-informed personal injury practi- tioner. Without proper consultation and guidance, mistakes can lead to unhappy clients, or worse yet, a legal malpractice claim.

A: Advise

The “A” stands for advise the client about the available planning vehicles or have an outside expert do so. All lawyers assisting those on Medicare must be knowledgeable when it comes to dealing with Medicare conditional payments as well as Part C/MAO liens. Medicare beneficiaries must understand the risk of losing their Medicare coverage should they decide to set aside nothing from their personal injury settlement for future Medicare-covered expenses related to the injury. It is about educating the client to make sure they can make an informed decision relative to these issues.

D: Document

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 acknowledgment. If they elect to do a settlement plan, hire skilled experts to put together the plan so they can help you document your file properly to close it compliantly.

In addition, release language is critical when it comes to the question of documentation of considering Medicare’s future interests. Release language I have seen prepared by defendants/insurers is typically overbearing. Frequently the language cites regulations that are related to workers’ compensation settlements and typically will specifically identify a figure to be set aside. The latter can potentially cause a loss of itemized deductions for the client.

Not only is release language an important consideration, so is the method of calculation of the Set-Aside, potential reduction methodologies, and funding alternatives (lump sum vs. annuity funding). These issues do impact how the release is crafted as well as considerations of whether to submit to Centers for Medicare and Medicaid Services for review and approval (which is rarely a good idea).

CAD in Action

After consulting the proper experts in Jim Doe’s case, you may learn that it makes sense to do a Medicare Set-Aside analysis to document your file regarding what you are doing to deal with the Medicare Secondary Payer Act. The settlement will be reported to Medicare under the mandatory insurer reporting requirements which could trigger a future denial of injury-related care.

It is ultimately up to the client whether to set aside or not, but you need to advise him as to all of his options. You must explain them clearly and fully, so he can make an informed decision.

Whatever decision he makes, your file should be documented about what was done and why. This might be a situation where an argument could be made for a reduced Set-Aside amount based on Ahlborn/Benoit reduction methodologies if the client did want to set aside. It seems likely that here the client would not be recovering their full value of future medical.

Don’t Wind up in Court

The lesson to take away is not to wind up in federal court over compliance issues. Instead, deal with these issues presettlement strategically. If a client is a Medicare beneficiary, discuss with competent experts the proper steps for Medicare compliance. Advise your client about all their options, and properly word the release if a Set-Aside is being used to make sure the client doesn’t get saddled with inappropriate language or lose itemized deductions.

Appropriate planning will avoid a bad outcome or unnecessary trips to federal court.

For more advice on Medicare compliance, you can find The Art of Settlement on Amazon.

Reducing Medicaid Liens: Why Was the Ahlborn Case Such a Significant Victory for Injury Victims?

This article was adapted from the book The Art of Settlement, written by Jason Lazarus.

Heidi Ahlborn was injured in a very serious car accident in January of 1996. At the time, she was a nineteen-year-old college student pursuing a degree in teaching. She suffered a catastrophic brain injury that left her incapable of finishing college and unable to care for or support herself in the future.

Due to her injuries and lack of assets, Ahlborn qualified for Medicaid coverage in Arkansas. Medicaid paid Arkansas healthcare providers $215,645.30 for injury-related care on her behalf.

When the Arkansas Department of Health tried to assert a lien against Ahlborn’s settlement, she sued, and the case went all the way to the Supreme Court, who found in her favor. When the Ahlborn decision was published, it was hailed by the Center for Constitutional Litigation as a “significant victory” for injury victims. Here’s why Ahlborn’s case was so revolutionary.

The Background

After the accident, a personal injury action was filed on behalf of Heidi in April of 1997. The damages sought included not only past medical costs but also for her “permanent physical injury; future medical expenses, past and future pain, suffering and mental anguish; past loss of earnings and working time; and permanent impairment of the ability to earn in the future.”

During the pendency of the litigation, the Arkansas Department of Health Services (hereinafter “ADHS”) sent Ahlborn’s personal injury attorneys periodic notices regarding the outlays by Medicaid on behalf of Ms. Ahlborn. The letters indicated that Arkansas law provided ADHS with a claim for reimbursement from “any settlement, judgment or award” that was obtained from “a third party who may be liable” for Heidi Ahlborn’s injuries and no settlement “shall be satisfied without first giving [ADHS] notice and a reasonable opportunity to establish its interest.”

When the suit was filed, ADHS wasn’t notified of the suit, as requested. Plaintiff’s counsel did inform ADHS of the available insurance coverage in the suit. ADHS intervened in the personal injury action in February of 1998 to assert a lien against any proceeds from a settlement or judgment. The case was ultimately settled in 2002 without, per customary practice, any allocation of the settlement proceeds between categories of damages. ADHS asserted a lien against the settlement for the total amount of the payments made by ADHS for Ahlborn’s care, which totaled $215,645.30.

The Case and Decision

In September of 2002, Ahlborn filed suit in the United States District Court for the Eastern District of Arkansas seeking a declaratory judgment that “the lien violated the federal Medicaid laws insofar as its satisfaction would require depletion of compensation for injuries other than past medical expenses.”

Certain stipulations were entered into by the parties in the litigation in the US District Court. Firstly, ADHS and Ahlborn stipulated that Heidi Ahlborn’s total claim “was reasonably valued at $3,040,708.18.” Secondly, the parties agreed that the out-of-court settlement reached represented “one-sixth of that sum.” Thirdly, the parties stipulated that if the plaintiff’s “construction of federal law was correct, ADHS would be entitled to only the portion of the settlement ($35,581.47) that constituted reimbursement for medical payments made.”

On cross motions for summary judgment, the federal district court found that Ahlborn, under Arkansas law, assigned to ADHS her right to any tort recovery from third parties to the “full extent of Medicaid’s payments for her benefit.” The court held accordingly that ADHS was entitled to its full lien amount of $215,645.30.

The ruling was appealed to the Eighth Circuit and the judgment of the District Court was reversed. The Eighth Circuit held that ADHS was only entitled to the portion of the settlement attributable to payments for medical care. ADHS appealed to the United States Supreme Court which affirmed the Eighth Circuit’s decision.

The Supreme Court’s Affirmation

The heart of the controversy before the Supreme Court was the interpretation of federal law requiring state Medicaid programs to recover from third-party tortfeasors amounts paid on behalf of an injury victim. Arkansas had complied with federal law and enacted statutes providing ADHS with the right to recover “the cost of benefits” from third parties.

Further, the Arkansas statute provided that ADHS “shall have a right to recover” when medical assistance is provided to the Medicaid recipient due to “injury, disease, or disability for which another person is liable.” It was pursuant to this statute that the ADHS claimed an entitlement to recover all of the costs expended on Ahlborn’s behalf even though it would be recovered from portions of a settlement that didn’t represent medical expenses.

The court’s decision in favor of Ahlborn rested on its interpretation of the “anti-lien” statute in the United States Code. The anti-lien statute prohibits states from exerting liens against a Medicaid recipient’s property prior to death for medical assistance paid on their behalf except in specifically enumerated situations.

While the court found one of the anti-lien statute’s enumerated exceptions was relevant to Ahlborn’s situation, it was the assignment of a Medicaid beneficiary’s rights to the state and assertion of liens to collect from a third-party recovery which it found was limited only to medical care. Accordingly, because the exception that was carved out was limited to payments for medical care, the anti-lien provision bars recovery by ADHS against the portion of Ahlborn’s settlement that was nonmedical.

The Implications

The holding of Ahlborn was a surprising result and has had a significant impact on personal injury litigation. In some instances, it has resulted in a much larger net amount being available to the injury victim at the expense of the States’ ability to recover Medicaid expenditures.

Since the primary holding in Ahlborn is that federal laws that authorize states to assert recoveries against third parties who have provided payments for medical care for Medicaid beneficiaries only applies to the portions of a settlement that represent compensation for past medical expenses, it appeared to invalidate state statutes that require full reimbursement of Medicaid expenditures from a third-party recovery.

After the Ahlborn decision, states began to revise their third-party liability statutes with inconsistent results in the courts. In 2012, a challenge of the North Carolina Medicaid’s third-party liability recovery statute would lead the United States Supreme Court to again weigh in on state Medicaid agencies’ rights to recover.

The Limits on a State’s Recovery Rights

As a trial lawyer, it is important to understand the underpinnings of the Ahlborn decision so you can apply them to your state’s third-party liability recovery provisions. The important thing to remember is that this case limits a state Medicaid agency’s recovery rights related to a third-party liability settlement. In order to reduce a Medicaid lien, state-specific statutes must be followed, but arguments to reduce should be based on the principles espoused in Ahlborn so that the lien is reduced in proportion to the full value of damages versus what was received.

For more advice on Medicaid liens, you can find The Art of Settlement on Amazon.