S2KM introduced, summarized and reviewed a paper written by Jeremy Babener titled "Structured
Settlements and Single-Claimant Qualified Settlement Funds: Regulating
in Accordance with Structured Settlement History" (QSF paper), in four prior blog posts:
S2KM previously interviewed Babener (Jeremy Babener Interview) as part of the S2KM blog series "Dissipation Studies" which featured Babener's paper titled "Justifying the Structured Settlement Tax Subsidy: The Use of Lump Sum Settlements".
This S2KM post publishes an exclusive interview with Jeremy Babener about his QSF paper. S2KM also features Babener in S2KM's structured settlement public policy wiki.
S2KM: Jeremy, what are the principle conclusions and recommendations in your QSF paper?
Babener:
The paper focuses on the Treasury’s treatment of single-claimant QSFs,
recommending their explicit eligibility for the structured settlement
tax subsidy. In order to properly consider the subject, however, one
must view the present question in the context of three decades of
structured settlement tax and policy history.
The paper narrates a pattern of increased economic control being
allowed to structured settlement recipients, the most well known
example being factoring. It also analyzes previously made arguments in
the single-claimant QSF debate. Doing both provides the legal and
interpretive bases for future Treasury action.
The paper describes the historical benefits that defendants and
casualty insurers have captured by using structured settlements,
arguably at the expense of personal injury claimants. The paper
explains how single-claimant QSFs are currently being used, and how
such use helps to achieve the structured settlement tax subsidy’s
purpose. Doing both provides the policy rationale for future Treasury,
or perhaps legislative action.
S2KM: What surprised you most about your findings?
Babener:
I was quite surprised by the methods used by some plaintiff
representatives to avoid defendants' detection of QSF use (so as to
avoid defendant opposition to the QSF's creation). Representatives
sometimes arrange for QSFs to be created in a state different from that
in which the personal injury action was filed, and direct the defendant
to write a lump sum check to a name not typically associated with a
QSF. In fact, because QSF regulations merely require that a government
entity create the QSF, some have contemplated petitioning non-judicial
entities.
S2KM: What caused you to focus on single claimant QSFs?
Babener:
I clerked at the U.S. Department of Justice’s Federal Tort Claims Act
Section during the summer of 2008. After being introduced to structured
settlements there I began researching their use, purpose, and the
policy behind Congress’ subsidy for them. In my research I focused on
the effectiveness of the subsidy.
The subsidy’s purpose is to decrease
premature dissipation by encouraging long-term planning (by committing
to periodic payments over time). It is important to ask if the
plaintiff-defendant negotiation table, where settlements are typically
structured, is the opportune place for long-term planning to occur.
This led me to QSFs, which offer defendants a fast and permanent
settlement option, and plaintiffs an unhurried and less combative
option. Thus, my work addresses the great deal of uncertainty among
practitioners as to whether their single-claimant clients can use QSFs
and still benefit from the structured settlement tax subsidy.
S2KM: Did you write your QSF paper for a specific class or seminar?
Babener: I wrote both my papers – the dissipation paper and the QSF paper – for a course called Tax and Social Policy.
S2KM: What were the primary resources for your research?
Babener:
I set out to use all relevant sources that I could find on structured
settlements and QSFs. The paper relies on treatises, articles,
textbooks, cases, memos, presentations, web sites, and interviews.
S2KM: How many persons did you interview and how did you select them?
Babener:
I contacted as many within the structured settlement industry as I
could, and spoke with any who were willing. I formally interviewed some
two-dozen individuals, including representatives of the National
Structured Settlements Trade Association, the National Association of
Settlement Purchasers, and the Society of Settlement Planners. Among
those interviewed were plaintiff and defense attorneys, plaintiff and
defense side structured settlement brokers, casualty and life insurance
representatives, factoring attorneys, QSF administrators, structured
settlement commentators, law professors, treatise authors, and a state
court judge.
S2KM: What linkage, if any, exists between your QSF paper and your dissipation paper?
Babener:
The dissipation paper was actually the result of research for the QSF
paper. In order to explain the justification for the structured
settlement tax subsidy I needed to find the basis for the claim that
lump sum recipients frequently dissipate their settlements. In time, I
realized that the empirical work cited could not be found.
The dissipation paper observes that there is no empirical foundation
for the structured settlement tax subsidy, though much anecdotal
evidence exists. The QSF paper looks to increasing the effectiveness of
that subsidy by structuring in a non-combative and less hurried context.
S2KM: Why, in your opinion, has Treasury delayed clarifying the application of 468B to single claimants?
Babener:
The issue has been in the Treasury’s Priority Guidance Plan since 2004.
It is not unclear why it has not been addressed. I cite to work
recommending against such clarification in the paper, and to
disagreement within the Treasury. However, needed regulations are
delayed all the time for any number of reasons.
S2KM: What are the strongest public policy arguments for and against single claimant QSFs?
Babener:
The public policy argument for allowing single-claimant QSF structured
settlements to benefit from the tax subsidy is very strong. Settlements
are often hurried and contentious. In addition, the parties, including
the plaintiff, are likely concerned with the final amount more than
scheduling future periodic payments to accurately match future needs.
QSFs, as Robert Wood has observed in his work, provide a “tax free way
station” for settlement monies. This allows the plaintiff, hopefully
with the help of informed advisers, to properly structure the receipt
of future monies. It may also enable plaintiffs to capture more of the
benefits of structuring, including more of the tax subsidy, by removing
the defendant from the structuring process.
Opponents of such Treasury action argue that the use of single-claimant
QSFs will lead to less structured settlements, and therefore more
premature dissipation of settlement monies. Because defendants have
historically been able to decrease settlement costs by structuring,
they have had an incentive to push for using a structured settlement
during negotiations. By removing defendants from the structuring
process, QSFs may result in many plaintiffs not being pushed to
structure.
However, there are at least two problems with this argument.
First, it must be remembered that while defendants have an economic
incentive to structure, they do not have an economic incentive to
structure accurately,
matching the timing of plaintiff’s future payments with future needs.
Second, just as defendants have an incentive to structure to mitigate
settlement costs, other parties have an economic incentive to encourage
plaintiff to structure even outside of plaintiff-defendant
negotiations. These are structured settlement advisers (and possibly
QSF administrators), whose business depends upon plaintiffs
understanding the benefits of structuring.
There will surely be plaintiffs whose use of single-claimant QSFs ends
in a lump sum distribution rather than structuring. But, there are
likely many more who will structure, who otherwise would not have as a
result of the plaintiff-defendant settlement process. By increasing the
frequency of structuring, and the accurate matching of future payments
to future needs, the use of QSFs will prevent premature dissipation
(and the need to factor) in many cases.
S2KM: When and where will your QSF paper be published?
Babener: The paper will be published by the NYU Journal of Legislation & Public Policy in March, 2010.
S2KM: What other structured settlement issues, if any, interest you?
Babener:
The processes of settling, structuring, and factoring raise many
practical and policy questions from the perspectives of plaintiff,
defendant, and society alike. A previous S2KM post listed several
issues that neither of my papers have addressed, such as structured
settlement public policy in relation to government benefits such as
Social Security, Medicare, and Medicaid. These are subjects of
increasing importance, and I hope to join the ongoing discussion.
Thank you, Jeremy, for this interview and for sharing your QSF paper. Good luck with your professional career.
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