by: Begley Law Group

by Thomas D. Begley, Jr., Esquire, CELA

[Article originally published in The Barrister, March 2020.] [The other parts are here – Part 2, Part 3, Part 4]

Once a wrongful death case is resolved, a number of post-settlement issues arise.  These issues include:  (1) allocation between the survival claim and the wrongful death claims, (2) public benefit issues, (3) analysis of the need for a Special Needs Trust or Settlement Protection Trust, (4) Structured Settlement considerations, (5) the requirement of court approval, (6) the requirement of federal and/or state agency approvals, (7) bankruptcy considerations, (8) probate considerations including appointment of an administrator ad prosequendum and a state administrator.  This is the first in series of articles that will address these issues.

Allocation Between the Survival Claim and Wrongful Death Claims

The first issue in allocating between the survival claim and the wrongful death claims is what is fair.  Beyond that, federal estate and gift taxes and state estate and inheritance taxes must be considered.  The survival claim would be subject to federal estate taxes and state estate and inheritance taxes.  Monies allocated to the wrongful death claims are not subject to these taxes.  If the decedent died prior to January 1, 2017, the exemption from New Jersey estate tax was $675,000.  If the decedent died after January 1, 2017 but before January 1, 2018, the exemption was $2,000,000.  If the decedent died after January 1, 2018, there is no New Jersey estate tax.  The New Jersey inheritance tax remains in effect for estate beneficiaries other than a spouse or lineal ascendants or descendants.  The first $25,000 is tax free.  Thereafter, the tax ranges from 11% to 16% depending on the amount.  

The federal estate tax exemption for 2020 is $11,580,000.  However, the year of death is the year that is important for federal estate tax exemption purposes.  Going back five years to 2014, the exemptions were as follows:

Year                             Exemption

2014                            $5,340,000

2015                            $5,340,000

2016                            $5,450,000

2017                            $5,490,000

2018                            $5,490,000

2019                            $11,400,000

2020                            $11,580,000

The maximum federal estate tax rate is 40%.  In large settlements, it is helpful to allocate as much money away from the survival claim as possible to avoid federal and state estate and inheritance taxes.

If a surviving plaintiff in a wrongful death action is medically fragile, that plaintiff can make a gift.  There is an annual exclusion from federal gift tax of $15,000 per person per year.  With spousal consent, this can be doubled.  In addition, lifetime gifts in excess of the annual exclusion gifts can be made, so long as they do not exceed the amount of the federal estate and gift tax exemption.  While the estate tax exemption for 2020 is $11,580,000, this provision of the tax law is scheduled to sunset on December 31, 2025 and revert to $5,000,000 indexed to inflation.  If an individual receiving a recovery from the wrongful death claim does not have a long life expectancy, it may be wise to consider making a gift to avoid estate taxes on the death of the medically-fragile individual.  For example, an individual could give away $11,580,000 in 2020 and if that individual died in January 2026 and the federal estate tax exemption were $6,000,000, there would have been a significant tax saving.

In very large cases, rather than making a gift it is better to allocate away from the individual who is medically fragile, because his/her estate and gift tax exemptions are not affected. 

Income taxes are also a consideration.  If a portion of the settlement is to be structured, the structure payments must be made directly to the injured plaintiff or to a trust for the injured plaintiff’s benefit so that the payments, including the interest component, are income tax free.

Public Benefit Issues

            If any of the beneficiaries of the survival claim or wrongful death claim are receiving public benefits, what will the effect of receiving the settlement proceeds have on those benefits?  If an individual is receiving SSI, SSI-linked Medicaid, Medicaid Waiver Programs, Federally-assisted Housing, or SNAP (Food Stamps), these benefits may be adversely affected unless a Special Needs Trust is established.

            When an individual is receiving public benefits, it is always good practice to obtain a copy of the Determination of Disability Letter from the Social Security Administration, as well as the medical insurance card.  Clients frequently confuse Supplemental Security Income (SSI) and Social Security Disability Income (SSDI) and also confuse Medicaid and Medicare.  The rules are different for these programs and it is important to have accurate information before advising the client on how to proceed. 

            SSI is a monthly income program.  For 2020 the federal maximum payment is $783.  New Jersey has a state supplement of $31.25, and Pennsylvania has a state supplement of $30.  This program has income and asset limits.  The income and assets of parents are deemed to their child until the child attains age 18.  There is a transfer of asset penalty when assets are given away.  To be eligible for SSI the individual must be determined to be disabled by the Social Security Administration.  If the individual receives a recovery from a personal injury action, he/she must transfer the funds to a Special Needs Trust in order to remain eligible for SSI.

            SSDI is a monthly income based on the amounts the individual paid into the Social Security system while working.  There is no income or asset limit, no parental deeming and no transfer of asset penalty.  Because there is no asset limit a Special Needs Trust is not required to maintain eligibility, but in some circumstances may be advisable if the individual is receiving, or may receive in the future, other means-tested public benefits.  The individual must be determined to be disabled by the Social Security Administration.

            Medicaid is a state/federal program that provides medical services.  Many states, including New Jersey, have an income cap.  For 2020 the cap is $2,349 per month.  Parental deeming rules discussed above apply.  The asset limit is $2,000 for SSI-linked Medicaid.  There is a transfer of asset penalty.  To maintain eligibility a person must establish a Special Needs Trust for the personal injury recovery.

            Medicare is a federal program that provides medical services.  To be eligible for Medicare the individual must be eligible for Social Security either through retirement, the death, disability or retirement of a spouse, or disability of the individual receiving Medicare.  The person must be either over age 65 or receiving SSDI for a period of two years.  There is no income cap or asset limit, no parental deeming, and no transfer of asset penalty.  A Special Needs Trust is not required to maintain Medicare eligibility.

            Medicaid Waiver Programs are medical services.  Typically, they include home care, assisted living and nursing home care.  There are limits on income and assets.  There is a transfer of asset penalty when assets are gifted away.  The individual receiving a Medicaid Waiver must establish a Special Needs Trust or spend down the money from the personal injury recovery in order to maintain eligibility.  There are also clinical eligibility tests that must be met.  

There are also programs, such as Federally-Assisted Housing, SNAP (Food Stamps) and Veterans programs that are means-tested and that are beyond the scope of this article.