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The Spring 2008 issue of "The Brief", a publication of the Tort, Trial and Litigation section of the American Bar Association (ABA), features an article written by Henry L. Strong and David M. Cordell, titled "Fiduciary Focus - The Prudent Integration of Structured Settlements and Post-Settlement Trusts".
Strong, the immediate past-president of the National Structured Settlement Trade Association (NSSTA), and Cordell, Director of Finance Programs at the University of Texas in Dallas, would appear to be well-qualified to analyze the relationship of annuities and trusts in personal injury settlement planning.
Summary of Article
The authors identify the following objectives for their article:
- Outline key distinctions between "structured settlements" and "post-settlement trusts";
- Articulate how these differences affect returns on a risk-adjusted basis;
- Demonstrate how a thoughtful integration can deliver "vastly superior results" compared with results of either alternative alone;
- Clear up the confusion over how to allocate settlement proceeds thereby assisting attorneys, judges and injured claimants;
- Offer practice tips to avoid problems.
Their article sets forth many premises and assertions including:
- Because attorneys and judges are not trained in "modern finance", they risk liability for failing to:
- Meet "prudent standards" of care, skill and caution; or
- Determine the risk and return of a settlement plan.
- Although "settlement fiduciaries" may analyze proposed settlements from a legal perspective, they rarely pay attention to "economic sufficiency" - which the authors define as "the prudent process by which recovery assets are actually conveyed to the injured party and then invested and managed over time".
- The core dynamic in the structured settlement vs. post-settlement trust debate parallels modern portfolio theory;
- Beyond risk and return, the most important investment decision-making considerations "by far" for personal injury settlements are diversification, taxation, fees and liquidity. According to Strong and Cordell, "all other considerations pale in comparison".
Following a one paragraph summary of "modern portfolio theory", Strong and Cordell propose a definition for "modern settlement theory": "the discovery that blending dissimilar distribution methods not only reduces risk but also increases returns for injured claimants".
The authors compare the relative merits of structured settlement annuities and post-settlement trusts in the context of the following "allocation strategy considerations":
- Conditionality of payments
- Trust/custodial fees
- Investment options
- Longevity risk hedge
- Medical underwriting
The authors conclude their article by addressing:
- Liability exposure
- Destructive receipt
- Informed consent
- Involvement of qualified experts.
Analysis of Article
The interaction of structured settlement annuities and settlement trusts represents an important, timely and complex subject. Instead of offering settlement solutions, the structured settlement industry historically has sold a single product (annuities) and viewed settlement trusts and trustees as competitors. From that perspective, the article by Strong and Cordell is a positive step forward. Their proposed "modern settlement theory" should serve as a catalyst for additional industry analysis and discussion.
Unfortunately, the article by Strong and Cordell contains serious omissions and flaws which call into question some of their assertions and conclusions. Here are some of the problems with their article:
- Definitions - The authors fail to define some of the most basic and important terms they are discussing. Examples:
- "Post-settlement trusts"
- What are "post-settlement trusts"? What types of settlement trusts
are the authors discussing (and not discussing) in their article? They
never say. Are they including or excluding settlement trusts which are
established concurrently with (not following) a personal injury
settlement? Most settlement trusts are part of the settlement. These
- Settlement preservation trusts
- Blended trusts
- Medical reversionary trusts
- IRC section 468B trusts
- Special needs trusts
- Medicare set-aside trusts
- IRC section 130 government obligation trusts
- Settlement preservation trusts
- "Settlement fiduciary" - Who exactly is a "settlement fiduciary"? The authors never define this term. They assert ,without offering authority, that judges and plaintiff attorneys owe a financial fiduciary responsibility to injured claimants. Compared with recent discussions and papers by attorneys Frank Johns and William Browning at the 2008 ASNP Annual Meeting , Strong and Cordell's discussion of fiduciary responsibilities, the Uniform Prudent Investor Act and ethical considerations under the ABA's Model Rules of Professional Conduct is incomplete. Strong and Cordell never specifically address the fiduciary responsibilities of settlement trustees, their attorneys, settlement planners or structured settlement consultants. They fail to reference either NAELA's Aspirational Standards or the SSP's Standards of Professional Conduct.
- "Structured settlement" - Strong and Cordell never define "structured settlement". They fail to adequately explain or compare annuities and U.S. government obligations as alternative Qualified Funding Assets under IRC section 130. By ignoring the IRC section 5891(c)(1) definition of structured settlement, Strong and Cordell help to perpetuate an outdated industry perspective about structured settlement and settlement planning. Consistent with this outdated perspective, Strong and Cordell state: "structured settlements are not liquid because the recipient cannot exercise control over the funding assets". A related footnote references "certain finance companies" that "have begun" to offer "cash now" in exchange for a claimant's rights to receive future payments. Structured settlement transfers began in 1987 (21 years ago) and were legally sanctioned by IRC 5891 in 2002 (6 years ago). 46 states have enacted structured settlement protection statutes. Strong and Cordell fail to address how the secondary market impacts structured settlement liquidity and/or the interaction of structured settlement annuities, settlement trusts and settlement planning.
- "Post-settlement trusts" - What are "post-settlement trusts"? What types of settlement trusts are the authors discussing (and not discussing) in their article? They never say. Are they including or excluding settlement trusts which are established concurrently with (not following) a personal injury settlement? Most settlement trusts are part of the settlement. These include:
- Government benefits - With the exception of two minor references (one a footnote), Strong and Cordell ignore the impact of government benefits in settlement planning "distribution decisions". They never explain this omission. The importance of government benefit rules as "investment decision-making considerations" contradicts several of Strong and Cordell's assertions. These assertions include their priority of diversification, taxation, fees and liquidity as "by far" the most important considerations. To the contrary, government benefit issues frequently represent the single most important consideration in personal injury distribution decisions. As David Lillesand highlighted at the 2008 Annual Meetings of both the Society of Settlement Planners and the Academy of Special Needs Planners, qualification for Medicaid is a "life or death" issue for many personal injury victims. Analysis of structured settlement annuities and settlement trusts should consider their interaction with Medicaid, Medicare, Veterans benefits, Section 8 Housing rules, special needs trusts, Medicare set-aside trusts, the Deficit Reduction Act of 2005 and the Medicare, Medicaid and SCHIP Extension Act of 2007. So why do Strong and Cordell ignore government benefits? Perhaps, incorrectly, they consider government benefits to be merely a legal consideration and not an investment consideration. Alternatively, they may actually believe NSSTA's historic and continuing message to Congress: "structured settlements enable injured victims to live ...free of reliance on government assistance".
- Settlement planning and special needs planning
- The authors never reference or acknowledge settlement planning or
special needs planning as existing and growing professional specialties. Both of these overlapping professions address the legal and financial interaction of annuities and
trusts in personal injury settlements. The following professional associations and conferences feature experts and offer educational programs about
issues that are fundamental to Strong and Cordell's ABA article and
- The Society of Settlement Planners
- National Academy of Elder Law Attorneys
- Academy of Special Needs Planners
- Special Needs Alliance
- National Alliance of Medicare Set-aside Professional
- Stetson Law School Special Needs Trust Seminars
- National Alliance of Medicare-Set Aside Professionals
Conclusions: Strong and Cordell's ABA article highlights:
- An important topic that requires more and better analysis - the interaction of annuities (including the secondary market) and trusts in personal injury settlement planning;
- The knowledge gaps that currently exist between the structured settlement industry (and most personal financial planners) with:
- Personal injury settlement planning;
- Special needs planning;
- Settlement trusts;
- Government benefits;
- Secondary life and annuity markets.
- The need for
- Strategic thinking - The structured settlement industry, as a "transitional industry", needs to engage a new generation of leaders in strategic thinking that encompasses settlement trusts, government benefits and the secondary markets. For additional and related S2KM analysis, see 2008 NSSTA Annual Meeting-2.
- Professionalism - The structured settlement industry needs to upgrade its professionalism to understand and solve settlement problems instead of simply selling annuities. To achieve these objectives, SSP's educational programs, professional certification, and Standards for Professional Conduct currently offer the best industry resources and roadmap.
- New trade association - Settlement trust companies should consider forming their own trade association to provide education, standards and lobbying complementary to NSSTA and SSP.