BASIC (09-08)

DI 52110.001 Annuities and Trusts

Citations:

Social Security Rulings 81-20 , Disability Insurance Benefits – Reduction of Benefits – Lump-sum Payment of Workmen’s Compensation Benefits Paid into an Irrevocable Trust

Social Security Ruling 81-32 , Disability Insurance Benefits – Reduction of Benefits – Annuity Awarded in a Workmen’s Compensation Settlement

Workers' compensation (WC) settlements may be paid in whole or in part as annuities or trusts.

A. Definitions

1. Annuity

An annuity is a prepaid investment that pays periodic (usually monthly) payments for a set period of time. Payments may begin immediately or at a future date.

2. Trust

A trust is a fund that the employer or carrier invests or sets aside for the needs of the individual. The funds are the property of the individual but can only be withdrawn according to a specific set of rules. A person or entity called a trustee is appointed to make payments from the trust either at set intervals or as needed.

Part or all of a lump-sum (LS) settlement may be paid as an irrevocable trust. Irrevocable means the funds can only be withdrawn according to a specific set of rules. .

B. Applying offset to annuities – Option test

Offset annuities paid as a substitute for periodic WC.

1. Option - Receives annuity or another payment method

If the number holder (NH) had the option to receive the proceeds of a LS settlement as an annuity (or some other payment method) and chose to receive an annuity:

  • Add the purchase price of the annuity (not including interest) to any cash payment paid as part of the settlement to determine the gross LS amount.

  • Prorate the gross LS amount as any other LS settlement per DI 52150.060 - Prorating a WC/PDB Lump Sum Settlement. If the settlement includes a life expectancy rate, apply the life expectancy rate to the entire gross LS amount.

EXAMPLE: Prior to settlement, the WC carrier was paying WC of $350 per week. The WC claim was settled with a $50,000 cash payment and an annuity that pays the NH $500 per month for 20 years. The settlement document did not indicate if the NH had any option and gave no proration rate for the settlement. The annuity purchase price was $76,000. Further development found the NH had the option and opted for a $50,000 cash payment with an annuity instead of a one-time cash payment of $115,000.

  • Offset determination. Add the annuity purchase price to the cash payment amount and prorate the result (the gross LS amount) according to the LS proration rules in DI 52150.060 - Prorating a Lump Sum Settlement.

  • For Interactive Computations Facility (ICF) processing: Enter the case as a $126,000 LS and prorate at $350 per week.

2. No Option – NH receives WC as annuity

If the NH can only receive the WC LS settlement as an annuity (e.g., the carrier's policy is to pay in a certain manner):

  • Offset the annuity payments actually received at the time that they are received or over the time period that they represent, if any. For example, divide the annual annuity amount by twelve months and apply offset as if it were received monthly.

  • Be alert to any scheduled changes in the annuity payments so offset can be adjusted in the future.

  • Do not apply life expectancy rates to the annuity payments. Only the cash payment part of the LS settlement is subject to the life expectancy rate.

EXAMPLE 1: Annuity – No Option

NH’s WC LS settlement consists of a $75,000 cash payment (which is offsettable); two annuities not subject to offset (because they represent medical expenses); and a third annuity that is offsettable. The third annuity purchase price is $76,000. It pays the individual $500 per month for 20 years starting one month after the cash payment. Further development found the NH did not have the option to receive any other form of payment in exchange for the annuity.

  • Offset determination: Although the annuity was part of the WC settlement award agreed to by the NH, he did not have the option to choose a larger cash payment in place of the annuity. Therefore, offset applies to the annuity payments as of the time they are actually paid to the individual. ($500 per month for 20 years.)

  • ICF processing: Input the case as if it were two WC claims. Input one claim with the $75,000 gross LS prorated per instructions in DI 52150.060, and the other claim with ongoing $500 monthly periodic payments. This enables ICF to compute the offset correctly.

EXAMPLE 2: Annual Annuity – No Option

The NH negotiated a LS settlement of her permanent partial WC claim. It was the WC carrier practice to settle each claim with no more than 40 percent of the award in cash and the rest as an annuity. There was no option for the NH to receive a larger cash payment in lieu of the annuity.

The WC carrier agreed to pay a $34,000 cash payment and annual annuity payments of $5,000 for 20 years. The annuity is paid every September 1 beginning with the current year. The NH pays approved attorney fees of $6,800 out of the cash portion of the LS. There are no other excludable expenses. No proration rate is stated in the agreement.

The NH was receiving $150 per week in permanent partial WC payments. The WC Board approved the settlement in April and the final periodic WC payment paid WC through April 15th.

  • Offset determination: Offset the annuity over the period it represents (September 1 of one year through August 31 of the next).

  • Calculation: Prorate the $34,000 cash payment at $150 per week with $6,800 in excludable expenses. Method B proration is the advantageous and yields a monthly WC amount of $520 per month. Beginning September 1 and continuing until the LS proration ends, the total monthly WC will equal the $520 monthly proration of the cash payment plus one-twelfth of the annual annuity payment. Divide the annual annuity payment of $5,000 by twelve and inputs the result as a periodic payment of $416.60 per month. Total WC for offset purposes is the $520 LS proration plus the $416.60 annuity or $936.60 per month. Explain the annuity payments in the Special Instructions field on your ICF action.

3. Option test cannot be determined from the evidence

If you cannot determine whether the NH had the option:

  • Offset as if the NH did not have the option.

  • Document all attempts to determine whether the NH had the option. See DI 52145.001 - Obtaining Verification/Proof of WC/PDB Information for acceptable proofs.

C. Applying offset to trusts – Option test

Offset trusts paid as a substitute for periodic WC.

1. Option to receive trust or other payment method

If the NH had the option and chose to receive the proceeds of the WC LS settlement (or a portion of it) in the form of a trust:

  • Combine the amount of any cash payment paid as part of the settlement with the principal amount of the trust to determine the LS settlement amount.

  • Prorate the LS settlement amount per LS proration rules in DI 52150.060.

  • Do not offset any interest or other income generated by the trust, such as dividends or capital gains paid or accrued by the trust.

EXAMPLE: - Trust – NH has option

In a settlement negotiation, the WC carrier offers two separate options:

  • A $175,000 cash payment with a complete release of any liability for future medical payments; or

  • A trust fund set up for the WC for $100,000. The carrier will continue to pay medical payments for 10 years. The principal of the trust fund must be withdrawn at the rate of $1,000 per month.

The NH chooses the trust.

Offset determination/ ICF processing: Offset the $100,000 trust fund as a LS settlement and prorate per DI 52150.060 - Prorating a WC/PDB Lump Sum Settlement.

2. No Option – NH receives WC as trust

If the NH only has the option to receive payments as a trust (e.g., the carrier's policy is to pay in a certain manner), offset only the principal payments withdrawn from the trust at the time that they are withdrawn or over the period that they represent, if any. For example, if the settlement states the funds are to be withdrawn once every year, divide the amount by 12 to arrive at a monthly equivalent. Do not offset any interest or any other income generated by the trust, e.g., dividends or capital gains.

EXAMPLE: The NH is incapable after a catastrophic injury and the attorney negotiates a settlement. The NH appoints his wife trustee and the entire $143,000 LS settlement is paid as an irrevocable trust. When the NH is declared incapable, it is the WC carrier’s policy to pay out funds only in the form of irrevocable trusts. The settlement agreement states the trustee must withdraw $1,500 of the principal each month for the care of the disabled individual. In addition to the trust, the carrier pays the individual’s attorney fees of $15,000.

Offset determination: The NH or his attorney had no option. Therefore, offset payments when received. Attorney fees are normally an excludable expense. However, in this case, they were not paid out of the NH’s funds. Therefore, they do not count as excludable expenses per DI 52150.050 - Excludable Expenses.

ICF processing: Input the as a WC claim with periodic payments of $1,500 per month. Post the trust information to the Special Message.

3. Option test cannot be determined from the evidence

If you cannot determine whether the NH had the option:

  • Offset as if the NH did not have the option.

  • Document all attempts to determine whether the NH had the option. See DI 52145.001 - Obtaining Verification/Proof of WC/PDB Information for acceptable proofs.

D. Processing cases involving an annuity or trust

To process cases involving an annuity or trust:

  1. Obtain a copy of the settlement documents whenever possible. All documents must bear the signature of the WC judge or other approving official. For information on valid documentation, see DI 52145.001 - Obtaining Verification/Proof of WC/PDB Information.

  2. If the settlement documents do not state whether the NH had the option to receive the LS settlement in any other form, develop to the carrier or WC attorney to determine whether the NH had the option.

    NOTE: If more than one annuity or trust is received, apply the option test to each individual annuity or trust.

  3. Determine the appropriate offset method per DI 52110.001.B. if an annuity involved or DI 52110.001.C. if a trust is involved.


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DI 52110.001 - Annuities and Trusts - 09/25/2008
Batch run: 01/27/2009
Rev:09/25/2008