Securing a Child’s Financial Future
When a child is traumatically injured in an accident or is the recipient of a financial windfall resulting from a settlement involving a parent, the unknowns of the child’s financial future can compound an already emotional transition. Fortunately, there are settlement solutions available to help ensure that the child’s financial future is protected.
Implications of Settling with Cash
There are many reasons why accepting a lump sum cash settlement is not in the best interest of a minor child (and in fact, some states will not allow cash settlements for minors):
Fast Depletion of Funds: An injury settlement is often the largest sum of cash a family has ever handled at one time. Compounding medical bills, education expenses, lending money to friends and family, and emotional spending are all common pitfalls that can quickly eat up settlement proceeds, especially if the family is inexperienced at managing large amounts of cash.
Ineligibility for College Financial Aid: A lump sum cash settlement could render the child ineligible for financial aid. Even if the family intends to use the money to cover the costs of caring for the injured child, college financial aid offices typically consider those funds when offering financial assistance.
Loss of Government Benefits Eligibility: Most states use income and asset tests in determining one’s eligibility for needs-based government benefits (e.g., SSI, Medicaid, CHIP, etc.). If the child or the child’s parents accept a lump-sum cash settlement, the family will almost certainly lose access to important needs-based benefits.
A Better Approach: Proactive Planning
There are a few different options for handling a minor’s settlement that will help avoid many of the negative consequences associated with a lump sum cash payment:
Option 1: Defer Payment Until After College
With private college tuition averaging over $30,000 a year before room and board, a four-year degree can easily top out at over $100,000. By placing settlement proceeds in a structured settlement and arranging to have the first payment deferred until after college, the child may be able to obtain eligibility for financial aid assistance. The deferred payments will be valuable to a young adult regardless of his/her chosen personal or professional path.
Option 2: Utilize a Minor’s Trust
Minors with more extensive medical needs may benefit from a minor’s trust. There are state-specific (and in many jurisdictions, county-specific) guidelines that must be followed to gain court approval. A minor’s trust is managed by a trustee, who is often a close loved one (i.e., a parent, grandparent, or guardian), but in some cases, could be a court-mandated professional or bonded trustee.
If funds for the minor child are not needed immediately, the trust does not necessarily need to distribute payments during the minor’s youth; instead, the trust can be set up to begin distributing funds when the minor reaches the age of majority in his/her state. To determine the most appropriate approach, families will want to consider medical needs, anticipated financial needs (whether there will be a loss of earnings or a large future purchase), and the minor’s ability to handle funds at the age of majority. Structured settlement annuities can be used to fund a minor’s trust, providing an added layer of protection while also maximizing the proceeds. When selecting this option, consideration must be made for the amount of funds going into the trust vs. the bonding and court fees for the time the trust is in existence.
Additional Options for Minors
Depending on the jurisdiction and the discretion of the judge, options for settlement may also include a guardianship account or a court registry account. In an effort to maximize and preserve the settlement proceeds, families are encouraged to explore the possibility of a structured settlement annuity or a combination of a structured settlement and a minor’s trust.
For more information regarding your next case involving a minor, contact Kimberly Overby at Sage Settlement Consulting today. Our experienced settlement consultants will help create a stable financial future for your minor clients.
How to Preserve Settlement Proceeds for Future Medical Needs
Despite success at the mediation table, settlement proceeds do not always sufficiently provide for an injured claimant’s future medical expenses. After paying attorney’s fees and liens, the typical claimant still needs money to cover medical costs incurred long after litigation ends, such as doctor’s bills, surgeries, medications, home modifications, and more.
Moreover, the Centers for Medicare and Medicaid Services (CMS) projects that from 2018 to 2027 the price of healthcare goods and services will grow at a faster rate than it has historically. CMS also estimates that healthcare spending will increase at an average rate of 5.5% per year during the same time frame.
Rather than leaving your client in a vulnerable financial state, it is best practice to develop a solid plan at the time of settlement. Here are two simple ways your settlement consultant can help protect your client’s long-term medical and financial needs:
#1: Provide Education Regarding Financial Pitfalls
Outside of advising your client against taking a cash lump sum and risking quick depletion, there are additional obstacles that claimants need to avoid, including:
Loss of Needs-Based Government Benefits Eligibility: Claimants who receive needs-based government benefits will likely lose their eligibility for such benefits if they accept a lump sum cash settlement. For example, in most states, assets totaling as little as $2,000 ($3,000 for couples) are considered enough for a claimant to be ineligible for Medicaid (Medi-Cal in California), SSI, and CHIP.
Medicare Non-Compliance: Although Medicare is an entitlement benefit, claimants who receive Medicare benefits have additional responsibilities when it comes to the cost of their future medical care. Medicare Secondary Payer provisions encourage Medicare-eligible claimants to set aside a portion of their settlement proceeds to cover future medical costs, typically in what is referred to as a “Medicare Set-Aside.” While in the past, many in the legal community have paid closer attention to future medical expenses in workers’ compensation cases, an MSA industry leader reported a recent case in which Medicare sought reimbursement for future medicals in a liability settlement.
#2: Offer Strategies for Preserving and Maximizing Settlements Long-Term
Once the potential complications have been identified, several solutions exist that may help your clients provide for their long-term medical and financial needs:
Special Needs Trusts: Disabled claimants under the age of 65 may meet the criteria for a special needs trust (“SNT”; also known as a (d)(4)(a) trust). Settlement proceeds placed in a special needs trust are not considered countable assets when determining eligibility for government benefits. The claimant can continue receiving their needs-based benefits while supplementing their financial needs with approved distributions from the SNT.
Spend-Down: In certain states, “spending down” the settlement proceeds may allow an injured claimant to maintain needs-based benefits, including Medicaid. The spend down method has many stipulations related to the timing of purchases, what constitutes an allowable expense, and whether or not needs-based benefits will be suspended for the month in which the settlement proceeds are received. Claimants who are considering a spend-down should always consult with their caseworker or agency representative before receiving the settlement proceeds.
ABLE Accounts: Individuals who became disabled before the age of 26 may be eligible for an ABLE (Achieving a Better Life Experience) account, a tax-advantaged savings account. Funds held within an ABLE account can be used to cover qualified disability expenses, including healthcare, education, housing and transportation for the disabled individual. While annual and lifetime funding limits for an ABLE account may vary by state, ABLE account funds are exempt from asset tests for needs-based government benefits, provided the total funds in the account do not exceed $100,000.
Professional MSA Administration: While some claimants choose to personally administer their own Medicare Set-Aside accounts, professional administration provides management of future medical funds by experts that can save your client money and help them live worry free. Post settlement, a professional administrator handles all of the claimant’s medical concerns pertaining to pharmacies and doctors, insurers, employers, attorneys, medical providers and Medicare. A professional administrator automatically files all reporting requirements for Medicare Set-Aside accounts to CMS, allowing the claimant to treat freely. CMS “highly recommends” the use of professional administration to make sure the funds are preserved as long as possible through discounts only a professional administrator can provide.
Some administrators also offer subject matter expertise and consultation on federal and state benefits for beneficiaries of worker’s compensation and liability settlements.
Certain programs even offer transparent pricing into the real-time cost of prescriptions and treatment, providing the injured party visibility into the actual pricing of these services.
Contact Sage Settlement Consulting to Learn More
To learn more about these settlement planning solutions, contact Kimberly Overby today. Our experienced team will help you and your client create a customized financial plan to secure a better future.