Ethical Obligations to Advise about “Form” of Settlement

For the personal injury practitioner the most treacherous time, from a malpractice standpoint, is when a personal injury case settles.  The critical initial question is does a lawyer have any obligation to advise clients regarding the "form" of settlement?  Is the lawyer providing financial advice or legal advice?  Does a lawyer have an ethical obligation to advise the client regarding impact of a settlement on public benefits and techniques to protect eligibility as well as protection from the Medicaid Estate Recovery Lien? 

There are four ABA Model Rules of Professional Conduct that are relevant to the personal injury lawyer's advisement obligations.  Rule 1.4 (b) provides:  "A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions . . . ."  Rule 1.3 states: "A lawyer shall act with reasonable diligence and promptness in representing a client."  The commentary warns: "A client's interests can be adversely affected by the passage of time."  1.2 (a) admonishes that:  "A lawyer shall abide by the client's decisions concerning the objectives of representation . . . and shall consult with the client as to the means by which they are to be pursued."  Finally, Rule 2.1 indicates:  "In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors that may be relevant to the client's situation."

In addition, there are two main statutory provisions that provide a personal injury victim with different settlement options.  The first statutory provision that is important is section 104(a)(2) of the Internal Revenue Code which excludes from gross income personal physical injury recoveries.  "(G)ross income does not include . . . the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness."  Section 104(a)(2) gives the personal injury victim two financial options at the time of settlement.  A victim can take a lump sum payment or future periodic payments also known as a structured settlement. 

The second statute that addresses a personal injury victim's options is 42 U.S.C. Section 1396p (d)(4) which authorizes trusts whose assets are not counted as an available resource for public assistance eligibility.  This type of trust is commonly referred to as a Special Needs Trust (SNT) or Supplemental Needs Trust.  In many cases, an SNT is created even if the plaintiff is not currently on public assistance but there is an anticipation that he or she may need public assistance in the future.

In summary, the law gives personal injury victims two settlement options and the decision of which option to accept can have a tremendous impact on their financial future.  The law also provides for an opportunity to protect public assistance eligibility through the use of an SNT.  If the trial lawyer does not discuss these options with the client given they are part of the law, who will?  The Model Rules require matters to be explained to the extent that the client can make an informed decision and the lawyer act diligently so that the passage of time does not adversely impact the client.  If a lawyer fails to counsel clients regarding their financial options at settlement it results in the client losing the opportunity to exercise options available under the law

Personal injury victims can't make an informed decision if they are not aware of all their legal options.  Passage of time without explanation about financial settlement options gives the client no chance to utilize favorable tax laws and mechanisms to preserve public assistance leading to a potential adverse impact.  A lawyer may discuss financial options with a client without giving financial advice and the model rules allude to discussing economic factors in the scope of representation.  A complete failure to advise clients of their financial options under the law can lead to violation of some of the aforementioned model rules and exposes the lawyer to a malpractice claim such as in Grillo (click here to go to legal malpractice liability to read about Grillo).