Beyond Structured Settlements

ASNP 2009 Annual Meeting

The Academy of Special Needs Planners (ASNP) hosted its Third Annual Meeting March 6-7, 2009 at the Rancho Bernardo Inn in San Diego, California. Titled "Special Needs Planning in an Era of Change", the program devoted one day of educational discussions to "special needs settlement planning" (SNSP) which ASNP characterized as a "new opportunity" for special needs attorneys.

The ASNP speakers included leading special needs attorneys and plaintiff structured settlement consultants who provided detailed analyses of the following SNSP topics:

• Anatomy of a SNSP Case - Frank Johns, Kevin Urbatsch and Patrick Hindert;
• Structured Settlement Annuities in SNSP Practice - Jack Meligan and Michele Whitmore;
• IRC 468B Qualified Settlement Funds (QSFs) - Jason Lazarus and Richard Risk;
• Integrating SNSP with an Elder Law Practice - Tim Nay and Sandy Conley;
• Medicare Secondary Payer Compliance - Mark Popolizio;
• Lien Resolution Strategies - William Browning, Mark Popolizio and Sylvius von Saucken;
• Marketing to the Trial Bar - Frank Johns, Jason Lazarus, and Kevin Urbatsch.

The SNSP program highlighted three basic issues:

• What is SNSP?
  
• What changes are impacting SNSP?
• What new opportunities does SNSP create for special needs attorneys?

What is SNSP?

Surprisingly, none of the speakers attempted to specifically define SNSP. Hindert recommended web 2.0 knowledge maps, wikis and folksonomies as a strategy for defining and growing SNSP.

Meligan and Whitmore described the related topic of "settlement planning" as both a profession and a process. According to Meligan and Whitmore: "Settlement planning is a profession that helps recipients of settlement proceeds use their proceeds to achieve their post-loss goals and transition successfully into their post-settlement financial lives". Meligan and Whitmore recommended utilizing settlement planning professionals with: credentials; loyalty to plaintiffs; planning approach; and experience. Meligan and Whitmore also described "settlement planning" as part of a three-part process preceded by litigation and followed by financial planning.

von Saucken also described "settlement planning" as a process or "continuum" subject to changing rules that require adjustments in settlement planning prototypes. von Saucken presented a settlement planning timeline:

• Agreement on settlement amount;
• Lien reimbursement;
• Medicare/Medicaid preservation trust;
• Structured settlement paperwork;
• Disbursement.

By comparison, during his recent presentation at the NSSTA 2009 Winter Meeting, Joseph DiGangi defined "settlement consulting" as a four-stage process:

• Analysis
• Planning
• Implementation
• Monitoring

Most of the ASNP presenters identified and addressed "structured settlements" as an essential component of SNSP. As part of his 468B QSF comments, Risk reviewed several structured settlement definitions including the tax definition in IRC section 5891(c)(1). To S2KM's knowledge, Risk thereby becomes the first structured settlement primary market participant to review the IRC section 5891 tax definition for "structured settlement" during a national conference. By comparison, not a single NSSTA or SSP conference speaker has reviewed the IRC Section 5891 definition for "structured settlement" since IRC 5891 was enacted in 2001. Risk also becomes, to S2KM's knowledge, the first conference speaker to link IRC 468B and 5891 which S2KM views as a strategic SNSP construct.

Several ASNP speakers addressed various types of settlement trusts in the context of SNSP. Browning highlighted settlement trust "due diligence" as an increasingly important SNSP issue. Three settlement trust providers, but not one structured settlement annuity provider, exhibited at the SNSP conference.

What changes are impacting SNSP?

ASNP speakers identified and highlighted the following changes impacting SNSP:

• Deficit Reduction Act of 2005 (DRA);
• The Ahlborn Case;
• 468B qualified settlement funds (QSFs);
• Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA);
• Recent MSA rules promulgated by CMS;
• The structured settlement secondary market;
• State structured settlement protection statutes;
• Transition of knowledge and knowledge work to the Internet.

Additional changes referenced by ASNP speakers which deserve more detailed analysis in future SNSP discussions:

• Transitional SNSP business models:
  • How the claim management SNSP model differs from the 468B QSF SNSP model; and
  • How to develop multi-professional SNSP teams and knowledge networks.
• How the current financial crisis impacts SNSP;
• Proposed and/or needed SNSP legislative and regulatory changes.

What new opportunities does SNSP create for special needs attorneys?

Traditional special needs legal practice and education have focused on special needs trusts, estate planning, government benefits and probate. As the ASNP conference demonstrated, SNSP encompasses traditional special needs expertise, but also new fields of related legal practice.

Four leading SNSP legal treatises (listed alphabetically by title) define these new fields of SNSP legal practice:

• "Negotiating and Settling Tort Cases" - by Matt Garretson and Guy O. Kornblum;
• "Qualified Settlement Funds and Section 468B" - by Robert W. Wood;
• "Structured Settlements and Periodic Payment Judgments" - by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert;
• "Taxation of Damage Awards and Settlement Payments" - by Robert W. Wood.

The ASNP presentation by speakers Johns, Lazarus and Urbatsch titled "Marketing to the Trial Bar" offered valuable advice for special needs attorneys as well as other SNSP stakeholders. S2KM's structured settlement transaction diagram, developed in 2005 with graphic artist Keith Burtoft, may help special needs attorneys identify other potential SNSP clients and roles. In addition, as S2KM's blog post "Structured Settlement Surveys" demonstrates, further market research would be useful to define and grow the SNSP market.

Congratulations to ASAP and SNSP program Chairperson Tim Nay for the timely and educational SNSP program. Prior S2KM blog posts about ASNP:

• 2008 ASNP Conference;
• 2007 ASNP Conference.

For additional information about settlement consulting, see S2KM's four-part blog series "Settlement Consulting".

Settlement Consulting - 3

In prior posts about settlement consulting, S2KM:

• Reviewed Joseph DiGangi's discussion at the NSSTA 2009 Winter Meeting titled: "Comprehensive Settlement Consulting in the 21st Century". See: "Settlement Consulting".
• Continued DiGangi's discussion by asking questions and offering comments about "settlement consulting" definitions and scope. See: "Settlement Consulting - 2".

This S2KM post outlines settlement consulting history - from a structured settlement perspective.

S2KM's structured settlement history diagram (developed with graphic artist Keith Burtoft) concludes with the founding of the National Association of Medicare Set-Aside Professionals (NAMSAP) in 2005.

Beginning in 2005, S2KM has continued to monitor structured settlement history by attending and reporting about settlement consulting conferences addressing structured settlements.

For the past three years, S2KM has also published annual reports about structured settlement developments:

• Structured Settlements in 2008;
  
• Structured Settlements in 2007;
• Structured Settlements in 2006.

Using the same categories as S2KM's structured settlement history diagram, here are some of the more recent settlement consulting highlights:

Social Security

• Deficit Reduction Act of 2005 (DRA);
• The Ahlborn Case (2006) - see John Campbell's analysis of the Eighth Circuit's decision which the U.S. Supreme Court unanimously affirmed.
• Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA);
• Additional MSA rules for structured settlements (2008);
• New POMS for Special Needs Trusts (2009) - see David Lillesand's report;

Taxation - see related articles on the Wood & Porter website:

• Banks and Banaitis cases (2005) - attorney fees;
• Murphy case (2007);
• IRS Letter Ruling 200836019 (2008) - Non-qualified 130 assignments and attorney fees.

State Legislation (2005-2008) - see Release 45 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

• Structured settlement protection statutes;
• Uniform Trust Code;
• UCC Article 9 anti-assignment provisions;
• Medicaid annuity rules.

Other Developments

• Academy of Special Needs Planners (ASNP) founded (2007);
• AIG receives $150 billion U.S. Government bailout (2008);
• Joseph Ricci replaces Randy Dyer as NSSTA Executive Director (2008);
• SSP publishes its "Standards of Professional Conduct" (2008) and begins its Registered Settlement Planner (RSP) certification (2008);
• American Association of Nurse Life Care Planners (AANLCP) founded (2008);
• Several annuity providers depart the structured settlement market (2005-2008);
• Structured settlement annuity premium remains level at $6 billion per year (2001-2008);
  
• Structured settlement surveys identify a larger market (2006-2008);
• Settlement consulting bloggers and podcast providers emerge (2004-2009).

For reasons why S2KM views 1982, 2001 and 2008 as strategically important for structured settlements, see "Structured Settlements in 2008 - 1".

Structured Settlements in 2008 - 3

This S2KM blog post, the third of three analyzing structured settlements in 2008, highlights the challenges facing the structured settlement industry as it enters 2009.

Two prior S2KM blog posts evaluated 2008 from an historical perspective (Structured Settlements in 2008 -1) and summarized the conferences S2KM attended throughout the year (Structured Settlements in 2008 - 2).

Who does your client trust? The National Structured Settlement Trade Association (NSSTA) spotlighted the "trust issue" during its 2007 Winter meeting when NSSTA also reported the results of its structured settlement survey of injury victims and attorneys. Structured settlements require trust by injury victims and their attorneys that:

• Structured settlement consultants are qualified professional financial advisers; and
• Annuity providers will pay promised future periodic payments.

Traditionally important to structured settlements, issues of trust have been magnified in 2008 by the widespread financial collapse that required a federal bailout of AIG and called into question the reliability of financial rating assessments as well as the protection afforded consumers and investors by government regulators. A corollary issue for structured settlement consultants is "professionalism" - one of four strategic priorities NSSTA President Chris Diamantis identified during the NSSTA 2008 Annual Meeting.

• Should injury victims and their attorneys trust structured settlement consultants and engage them as financial advisers?
• What are the professional qualifications and services of individual structured settlement consultants?
• Are structured settlement consultants problem solvers or product pushers?
• Do they understand their own product - an increasingly complex transaction as visualized in this structured settlement diagram ?
• Are structured settlement consultants capable of objectively and comprehensively advising injury victims and their attorneys about such fundamental structured settlement issues as:
  • IRC 468B;
  • IRC 5891;
  • State-specific structured settlement protection statutes;
  • The Medicare Secondary Payer Statute; and
  • The Deficit Reduction Act?
• Are individual structured settlement consultants licensed and educated to sell non-insurance investment products?
• Are they professionally capable of recognizing, and do they proactively communicate, their own conflicts of interest?
• Do they proactively disclose their structured settlement compensation arrangements and obtain an injury victim's informed consent for such compensation?

How strong are structured settlements? The structured settlement industry should expect injury victims and their attorneys to demand additional assurances in 2009 about the financial security of structured settlement annuities. If "sophisticated" investors and financial institutions are hoarding cash and/or buying U.S. government securities, why should injury victims and their attorneys accept long term financial promises with limited or no liquidity? Will these traditional industry arguments continue to successfully drive structured settlement annuity sales in 2009:

• Except for United States treasury obligations, life insurance annuities are among the most secure long term investments.
• Fixed annuities are especially secure because they do not depend upon the vagaries of interest rates and securities markets.
• Fixed annuities, however, require the obligating party(s) to remain in business for the duration of the annuity obligation.
• The 30 year performance record of structured settlement annuities (to date) has been close to perfection.
• With strong support from legislators, regulators and judges, the structured settlement industry has survived its worst potential disasters.
• These potential disasters include the failures of AIG, Executive Life; Confederation Life; Capital Life; and Monarch Capital.
• By contrast, the most spectacular structured settlement failures have not involved annuities.
• These failures, which include SBU and Stanwich, involved IRC 130 structured settlement treasury bond trusts - i.e. (poorly or criminally) managed assets.
• Life insurance companies that issue structured settlement annuities are regulated by state insurance departments.
• State insurance guarantee funds provide a safety net for individual company failures.
• Life insurance companies that issue structured settlement annuities, therefore, are among the strongest of the financially strong.
• If injury victims want income tax-free periodic payments with lifetime security, they should include a structured settlement annuity as part of their settlement plan.

Competing business models - two alternative business models will continue to compete in 2009 for the future of structured settlements:

• The traditional claim management (defense-controlled) business model characterized by:
  • IRC 130 as a funding model;
  • Single product (annuity) orientation;
  • Defendant "approved" structured settlement agents;
  • Defendant "approved" structured settlement annuity providers;
  • Defendant "right of last refusal" to match funding alternatives;
  • Defendant "right" to deny structured settlements to injury victims;
  • Opposition to single claimant 468B;
  • Failure to fully inform injury victims about settlement transfers;
  • Failure to promote full disclosure and informed consent of structured settlement compensation.
• The emerging settlement planning (plaintiff-controlled) business model characterized by:
  • IRC 468B and 130 as a two-step, court-approved funding model;
  • Multiple product (annuity and trust) alternatives;
  • Integration of structured settlements with other government benefits;
  • Claimant selection of structured settlement consultants;
  • Claimant selection of structured settlement annuity providers;
  • Claimant's right to a structured settlement;
  • Claimant's right to information about the secondary market prior to settlement;
  • Claimant's right to full disclosure and informed consent about structured settlement compensation.

Primary vs. secondary structured settlement markets

• The National Structured Settlement Trade Association (NSSTA) and the National Association of Settlement Purchasers (NASP) cooperated in 2000 and 2001 to draft the Model State Structured Settlement Protection Act and to help enact IRC section 5891.
• Relatively limited educational, marketing and transactional interaction, however, has occurred historically between the primary and secondary markets.
• S2KM's 2006 concept map ("How the Primary Market Views Factoring") highlights the generally hostile attitude many primary market participants continue to express toward the secondary market and factoring companies.
• Among other results, the primary market's attitude has limited:
  • The education structured settlement stakeholders have received about settlement transfers;
  • The advice and assistance structured settlement consultants offer their customers about settlement transfers.
• One of the continuing industry challenges in 2009 will be whether various factions within the primary and secondary markets are able to work collaboratively to improve and expand structured settlements.
• As a positive developments:
  
  • NSSTA, the Society of Settlement Planners (SSP), and the Academy of Special Needs Planners (ASNP) each offered educational programs about settlement transfers during 2008;
  • Representatives of the primary and secondary markets jointly addressed improving structured settlement business practices at both the SSP and NASP 2008 Annual Meetings as well as the 2008 Structured Settlement Thought Leadership Conference.

Structured Settlements and Government Benefits

• A traditional structured settlement industry argument, promoted by defenders of the claim management business model, proclaims "structured settlements enable injured victims to live free of reliance on government assistance".
• This promotional statement is false and misleading. Many, if not most, structured settlement recipients depend upon government benefits in addition to structured settlements to address basic financial needs.
• These government benefits include: Social Security, Medicaid, Medicare, Veterans Benefits and Federally Assisted Housing.
• As David Lillesand, a leading social security and special needs attorney, stated at the SSP 2008 Annual Meeting: Medicaid alone represents a "life or death issue" for disabled persons including structured settlement recipients.
• The challenges of maximizing and successfully integrating government benefits are more complicated with a structured settlement than with a lump sum benefit in part because of a lack of legal authority.
• With anticipated budget cuts and reforms for Medicaid and Medicare in 2009, the structured settlement industry must improve and expand its educational and lobbying strategies if it expects structured settlements to play a vital role in this changing legislative and regulatory landscape.

Growing the structured settlement market

• As evidenced by annuity premium, the primary structured settlement market has not grown since 2001.
• Several structured settlement annuity providers have left the market since 2006. Concurrently, the number of individual structured settlement consultants remains relatively constant while their average age continues to increase.
• Recent structured settlement surveys and market studies by NSSTA, AIG, J.G. Wentworth and Towers Perrin confirm opportunities exist to grow the structured settlement market and suggest the structured settlement market is underperforming.
• Some of the important issues related to structured settlement market growth:
  
  • Managing transition and change
  • Structured settlement advocacy
  • Marketing to plaintiff attorneys
  • Problem solving vs. product sales
  • Building settlement planning teams
  • 468B as a standard funding model
  • Integrating structured settlements with settlement trusts
  • Improving industry Internet applications and skill sets
  • Continuing market research
• In a 2008 S2KM interview, paralympic champion Randy Snow offered the following advice for successfully transitioning and growing the structured settlement industry: listen to the customer; design the best products; surround yourself with the best people; have fun.

Thank you and best holiday wishes to all structured settlement stakeholders who followed S2KM's blog reports during 2008. The New Year should be interesting and challenging for the financial markets generally and the structured settlement industry more specifically.

Structured Settlements in 2008 - 2

This S2KM blog post, the second of three analyzing structured settlements in 2008, summarizes conferences S2KM attended throughout the year. A prior post evaluated 2008 from an historical structured settlement perspective. A subsequent post will discuss challenges facing the structured settlement industry in 2009. Conferences and associations are listed alphabetically. For more detailed reports about these conferences, check the parenthetical links for related S2KM blog posts. For S2KM's complete historical review of professional associations and conferences, see S2KM's structured settlement wiki.

Academy of Special Needs Planners (ASNP) - The second annual ASNP conference underscored the strategic nexus that exists between special needs planning, settlement planning and structured settlements. ASNP's "extra-curricular" program featured a social service project where 30 ASNP conference attendees assisted Families Helping Families of Southeast Louisiana repair and improve its office headquarters. The ASNP conference confirmed for this author why special needs attorneys and financial planners, as opposed to former life insurance salesmen and claim managers, represent the future of structured settlements and settlement planning. Although several NSSTA and SSP members attended and/or participated as speakers, most of the structured settlement industry missed this valuable conference.

American Association for Persons with Disabilities (AAPD) - Structured settlement leaders from both NSSTA and SSP attended the 2008 AAPD Leadership Gala dinner in Washington, D.C. - in addition to many Congressional and Disability leaders. NSSTA was one of the event sponsors and had earlier featured Andrew J. Imparato, AAPD President and CEO, as a speaker at NSSTA's 2007 Fall Meeting. Imparato, a visionary and inspirational leader, is dedicated to transitioning disabled persons from poverty to economic self-sufficiency. AAPD's strategy includes uniting disabled persons as a political block and business market. AAPD's political priorities include changing the social security statutory definition of "disability" from "unable to work" to address "barriers to work" for disabled persons. Imparato's message for structured settlement professionals: involve yourselves at the local level with independent living centers.

National Academy of Elder Law Attorneys (NAELA) - NAELA's Mission is "is to establish NAELA members as the premier providers of legal advocacy, guidance and services to enhance the lives of seniors and people with disabilities". NAELA's membership consists of 4400 attorneys in the United States, Canada, Australia and the United Kingdom. Most of the members of ASNP and the Special Needs Alliance (SNA) are members of NAELA including many NAELA founders and former Presidents and Directors. S2KM developed a "Web 2.0 for Lawyers" wiki for the NAELA 2008 Symposium which was also featured in a Legal Broadcast Network (LBN) podcast interview by Scott Drake with S2KM's Managing Director, Patrick Hindert. S2KM also published a 2008 blog post analyzing NAELA and NAELA's CELA certification program from a knowledge management and web 2.0 perspective.

National Alliance of Medicare Set-Aside Professionals (NAMSAP) - Founded in 2005, NAMSAP is a non-profit organization devoted to improving Medicare set-aside arrangements (MSAs) and to facilitating compliance with Medicare conditional payment recovery.

• Background - MSAs are administrative and funding mechanisms utilized in certain categories of settlements to protect Medicare's interests as "secondary payer" under the Medicare Secondary Payer (MSP) statute. Although the MSP rules were enacted by Congress in 1980, CMS did not begin to enforce the MSP statute until 2001 based upon a series of CMS policy memoranda for workers compensation cases, several of which address structured settlement issues.
• MMSEA - On December 29, 2007, President George W. Bush signed into law the "Medicare, Medicaid and SCHIP Extension Act of 2007" (MMSEA). Beginning July 1, 2009, MMSEA requires liability insurers (including self-insurers, no-fault insurers and workers compensation insurers) to determine Medicare status for all claimants and report all claims involving a Medicare beneficiary to CMS when those claims are resolved. If the reporting for any claimant is not done in a timely manner, MMSEA authorizes CMS to enforce a civil penalty against liability insurers of $1000 per day per claimant. These information requirements and penalty provisions provide the basis for expanded enforcement by CMS of the MSP statute.
• MARC - One of the featured presenters at the NAMSAP 2008 Annual meeting was Roy Franco, Director of Safeway's Risk Management Strategies and Chairman of the Medicare Advocacy Recovery Coalition (MARC).
  • In discussing the MMSEA requirements for liability cases, Franco said "the issue is not just about reporting" and predicted a "claim freeze" as liability insurers and self-insureds wait for resolution and approval before they pay claims.
  • Franco characterized the MMSEA MSP rules as an attack on traditional best practices for liability claim management. He predicted legal challenges and criticized MMSEA rules.
  • Franco outlined MARC's priorities for MMSEA which include changing the law or, alternatively, obtaining an injunction to stop its July 1, 2009 implementation.
• S2KM reporting - S2KM published seven blog posts in 2008 highlighting recent MSA and MMSEA developments that impact structured settlements including several developments that have occured during 2008.
• S2P2J analysis - S2P2J Release 44 features an extensive update of MSA rules for structured settlements as well as a summary of MMSEA.

National Association of Settlement Purchasers (NASP) - At the NASP 2008 Annual Meeting, Patrick Hindert, S2KM's blog author, moderated a panel discussion titled "How to Improve and Grow the Structured Settlement Market". Participants included: Jack Meligan, Michael Upchurch and Matthew Bracy. As settlement planners, both Meligan and Upchurch described their view of the secondary market as a "mixed-bag" of bad and good. The "bad" part of factoring results from non-professional ("cash now") advertisements promoted by many factoring companies.

Not only do plaintiff attorneys dislike "cash now" advertisements, according to Meligan and Upchurch, they are also less likely to recommend structured settlements if they believe their clients will eventually sell their payment rights.

The potential liquidity provided by settlement transfers improves the structured settlement annuity product. Lives change. Unexpected events occur. Even the best personal injury settlement plans need to be reviewed post-settlement and sometimes adjusted. Settlement transfers, which must be reviewed and approved by state judges, are appropriate in some cases.

Bracy emphasized the need for well-educated plaintiffs and plaintiff attorneys - as well as judges. He noted that many primary market participants have ignored the settlement transfer business. Bracy acknowledged that good and bad business practices exist in the secondary market as well as the primary market. According to Bracy, the potential secondary structured settlement represents between 5% and 7% of the total primary market. Most structured settlement cases, according to Bracy, neither require nor qualify for a settlement transfer.

National Settlement Consultants (NSC) - Patrick Hindert, S2KM's Managing Director and blog author, was privileged to speak at the NSC 2008 Annual Meeting and also to attend NSC presentations and social functions. In addition to Michael and William Goodman, NSC founders and principals, the NSC presenters included representatives from ten (10) structured settlement annuity providers as well as several national settlement planning experts. In retrospect, the "not-for-publication" May 2008 NSC presentations by some of the annuity providers now seem especially interesting and important. Among other topics, these presentations addressed investment exposure to real estate mortgages plus one annuity provider's study of settlement transfers by its own structured settlement recipients. Randy Snow's NSC keynote presentation about change and growth was humorous and thought-provoking. Randy subsequently participated in a series of S2KM blog interviews about change and growth in the structured settlement industry. Hindert provided a structured settlement Medicaid update as part of the NSC educational program.

National Structured Settlement Trade Association (NSSTA) - Founded in 1985, NSSTA is the oldest and largest structured settlement professional trade association. NSSTA's members are primarily structured settlement consultants and annuity providers. In addition to providing education and certification, NSSTA historically has served as the legislative and lobbying voice of the primary structured settlement market. NSSTA's committees, especially NSSTA's legal committee, are among the most valuable sources of information about the structured settlement industry.

• Winter Meeting - Prominent educational themes and presentations at the NSSTA 2008 Winter Meeting included: trial attorneys; disabled persons and disability associations; government benefits; structured settlement legal documentation; legislative and regulatory developments; Internet marketing; and professionalism.
• Annual Meeting - Chris Diamantis, NSSTA's 2008 President, introduced Joseph Ricci as NSSTA's new Executive Director, and identified NSSTA's strategic priorities for 2008: factoring; advocacy and marketing; professionalism; and governance and communication. J.P. Steele announced the results of a Structured Settlement Survey Report sponsored by AIG which S2KM summarized in a November 23, 2008 blog post. Eric Vaughn, NSSTA's lobbyist, provided a "Washington Report" analyzing the then-upcoming federal election from a structured settlement perspective. Legal committee co-chairman, Michael Miller, summarized results from 100 factoring cases in which his law firm, Drinker Biddle, had participated since January 2008. Craig Ulman, NSSTA's General Legal Counsel, provided a State Guarantee Funds primer. Bradley Frigon spoke about special needs trusts. Among other topics, two actuarial presentations discussed structured settlement pricing.
• Fall Meeting - Although S2KM participated in four committee meetings at NSSTA's 2008 Fall Meeting, S2KM did not attend NSSTA's educational program because of a scheduling conflict. S2KM's blog coverage of this meeting therefore was limited to editorial commentary.

Society of Settlement Planners (SSP) - Founded in 2001, SSP is a national nonprofit educational and public policy association of professional structured settlement producers and others who assist injured claimants in the settlement process. At its 2008 Annual meeting, the SSP adopted its "Standards of Professional Conduct for Settlement Planners", a multi-year SSP project initiated and managed by SSP Director and attorney Richard Risk.

Carl A. Pierce, distinguished professor of law at the University of Tennessee, assisted SSP with this ethics project. Pierce served as a reporter for the latest revision of the American Bar Association's Model Rules of Professional Conduct.

Frank Johns, a leading special needs attorney and settlement planning ethicist, also advised SSP on its Standards of Professional Conduct. Johns' 2008 SSP presentation introduced a proposed Request for Proposal (RFP) for settlement planners.

Risk organized and moderated SSP's tax panel that featured Jody Brewster, Glenn Mackies and Michael Montemurro.

SSP devoted three presentations to government benefits, the highlight being David Lillesand, a national leader among social security and special needs trust attorneys. Based upon his discussions with the Social Security Administration (SSA), Lillesand stated that Nancy Veillon's January 31, 2006 letters to attorneys Roger Bernstein and Jay Sangerman representing NSSTA are "inoperative" - a statement Lillesand repeated during his presentation with SSA executive attorney Ken Brown at the ASNP 2008 Annual Meeting.

SSP's panel discussion about the secondary markets included NASP Executive Earl Nesbitt, Stephen Harris and Rhonda Bentzen. Other SSP educational presentations included a legislation and litigation update, settlement planning case studies, and advice about Internet marketing.

Stetson Special Needs Trust X (SSNTX) - Throughout its 10 year history, the Stetson Conference has been recognized as the leading special needs trust (SNT) knowledge forum in the United States. Most of the speakers are members of either the Academy of Special Needs Planners (ASNP) or the Special Needs Alliance (SNA). For structured settlement professionals, the 2008 Stetson program titled "The Basics of Special Needs Trusts" offered analyses of several important settlement planning topics and included two presentations specifically focusing on structured settlements:

• Texas Attorney Pi-Yi Mayo spoke about the January 31, 2006 Social Security Administration (SSA) letters to attorneys Roger Bernstein and Jay Sangerman as well as the application of the Deficit Reduction Act of 2005 (DRA) to structured settlements used to fund special needs trusts; and
• Leo Govoni provided "An Economic Analysis of Structured Settlements".

Structured Settlement Knowledge Leadership Conference (SSKLC) - Focusing on the "needs and best interests of consumers", the first Structured Settlement Thought Leadership Conference, sponsored by J.G. Wentworth, was designed to bring together knowledge leaders who are "redefining structured settlement roles and processes". The Leadership Conference objective was to provide an educational platform and open forum dedicated to growing and improving the structured settlement market. In addition to four panel discussions and two individual presentations, the Leadership Conference featured a brainstorming session to improve the structured settlement process for plaintiffs based upon the subjects discussed in prior sessions. The panel discussions addressed the economic life cycle of a personal injury claim identified by Adam Scales in his 2002 Wisconsin Law Review article titled "Against Settlement Factoring? The Market in Tort Claims has Arrived". One result of the Leadership Conference was the subsequent 2008 structured settlement survey conducted by J.G. Wentworth.

Special Needs Trusts X

Stetson Law School hosted the 10th Annual Special Needs Trust (SNT) Conference October 16-17, 2008 at the Don CeSar Beach Resort in St. Pete Beach, Florida. More than 300 attorneys, trustees, care planners and structured settlement consultants attended one or both of the basic and advanced educational programs.

Throughout its 10 year history, the Stetson Conference has been recognized as the leading SNT knowledge forum in the United States. Most of the speakers are members of either the Academy of Special Needs Planners (ASNP) or the Special Needs Alliance (SNA) and each of these associations schedule members-only meetings in conjunction with the Stetson Conference.

For structured settlement professionals, the Stetson program titled "The Basics of Special Needs Trusts" offered analyses of several important settlement planning topics and included two presentations specifically focusing on structured settlements:

• Texas Attorney Pi-Yi Mayo spoke about the January 31, 2006 Social Security Administration (SSA) letters to attorneys Roger Bernstein and Jay Sangerman ("Bernstein letter") as well as the application of the Deficit Reduction Act of 2005 (DRA) to structured settlements used to fund special needs trusts; and
• Leo Govoni, Director of the Center for Special Needs Trust Administration, provided "An Economic Analysis of Structured Settlements".

In addition, Bradley Frigon ("Basics of Special Needs Trusts") and Bernard Krooks ("Taxation of Special Needs Trusts") each addressed structured settlement issues in their conference presentations.

Mayo's discussion about the Bernstein letter and the DRA highlighted two controversial issues that have not received sufficient attention by either the National Structured Settlement Trade Association (NSSTA) or the Society of Settlement Planners (SSP). For backgound about these issues, see these prior S2KM blog posts:

• The Deficit Reduction Act of 2005
• Inconvenient Questions - summarizing a paper by Sylvius von Saucken.
• SSP 2008 Annual Meeting - 2: specifically David Lillesand's comments that the SSA letters to Bernstein and Sangerman are "inoperative" based upon his discussions with SSA officials including Ken Brown.
• NSSTA 2007 Winter Meeting - 3: specifically Jay Sangerman's statement that the DRA "does not apply to structured settlements" used to fund special needs trusts.

Citing Texas law, Mayo stated that the DRA annuity rules do apply to structured settlements used to fund SNTs - at least in Texas. According to Mayo, the Texas interpretations of the DRA are especially relevant because the DRA annuity rules adopted pre-existing Texas rules almost verbatim. Mayo warned that other states are likely to interpret the DRA annuity rules in a similar fashion - especially because (as other Stetson speakers confirmed): 1) state Medicaid agencies are making a concerted effort to limit SNT uses, flexibility and availability; and 2) many state Medicaid agencies continue to view annuities generally as abusive SNT planning techniques.

As a counterpoint on the DRA, Mayo recommended John Campbell's 2008 NAELA Journal article titled "The Use of Qualified Settlement Funds, Qualified Assignments and Special Needs Trusts in Physical Injury Settlements" in which Campbell argues that the DRA should not apply to structured settlements used to fund a SNT because the funds used to purchase the structured settlement annuities never belong to the SNT beneficiary. For S2KM's review and analysis of Campbell's article, see S2KM's earlier blog posts titled "IRC 468B Funds Revisited" featuring comments by Campbell.
 
As for the SSA's letters to Bernstein and Sangerman, Mayo did not directly address whether he supported Lillesand's assertion that the letters are "inoperative". Instead he cited the following authority to support his opinion that: 1) payments from a structured settlement annuity that are irrevocably assigned to a SNT are not income to the trust beneficiary when paid directly into the trust; and 2) that such annuity payments paid into a SNT after a beneficiary reaches age 65 should be treated the same as annuity payments received before age 65:

• POMS SI 01120.201J.1D which states in part: "a legally assignable payment ... that is assigned to a [SNT] is income for SSI purposes unless the assignment is irrevocable"; and
• CMS' position that additions to a SNT made after the beneficiary reaches age 65 should not be treated differently from prior additions where there has been an irrevocable assignment of structured settlement payments to a properly established SNT.

Mayo emphasized the importance of reciting the irrevocable nature of the structured settlement assignment in settlement documentation and court orders establishing the SNT.  He also agreed with Lillesand about the importance of obtaining SSA POMS that specifically address structured settlements used to fund SNTs. For S2KM's most recent status report about SSA POMS for structured settlements, see Ken Brown's comments under "SSI Rules for Trust Administration" in S2KM's blog post about the 2008 ASNP Annual Meeting.

In the context of the current financial crisis, Govoni's presentation titled "An Economic Analysis of Structured Settlements" appeared to be an important and timely subject. For this author, however, the analysis fell short of expectations for several reasons:

• Govoni was the only presenter at the conference who did not provide handout materials. With some exceptions, in this author's experience, structured settlement handout materials at national conferences repeatedly fall below the highest standards of other settlement planning professionals.
• Although Govoni briefly referenced the current financial crisis, he did not mention AIG, did not discuss financial ratings and did not address the impact of the financial crisis on structured settlements and/or managed assets as funding alternatives for SNTs.
• Govoni focused much of his analysis on relative rates of return and age ratings but never mentioned after-tax investment comparisons or Monte Carlo analysis.
  
• Govoni recommended annuity commutation riders as a strategy to pay potential estate tax obligations but failed to mention the secondary market as a potential source of structured settlement liquidity.

With the exception of a single reference by Mayo to "the grey market", none of speakers who addressed structured settlements discussed the secondary market, IRC 5891 or the 46 state structured settlement protection statutes. This educational neglect mirrors the continuing failure of NSSTA and SSP to educate their members about how to sell structured settlements (and grow the structured settlement market) in the context of IRC 5891 and the 46 state structured settlement protection statutes.

In this author's private discussions with Stetson conference attendees, several mentioned the secondary market as a valuable settlement planning resource. Three attendees informed this author of SNT beneficiaries and trustees who had been forced into the secondary market almost immediately following settlement because their SNTs had been "over-structured". In each instance, the settlement plan contained insufficient cash to permit the SNT trustee to purchase a needed house and/or a vehicle. In one case, the SNT beneficiary and his family have brought a lawsuit against the plaintiff attorney. These attendees each said the over-structuring resulted from defense pressure during settlement negotiations and could have been avoided if a 468B Qualified Settlement Fund had been utilized.

While it was encouraging to see leaders from both NSSTA and SSP attend the Stetson SNT seminar, more educational interaction and legislative collaboration is needed between the structured settlement industry (both the primary and secondary markets) and related professional associations including special needs planners and Medicare set-aide professionals. As NSSTA and the National Association of Settlement Planners (NASP) prepare for their association meetings next week in San Francisco and Las Vegas respectively, such increased interaction and collaboration should represent priorities and opportunities to improve and grow the structured settlement market.

Congratulations to Stetson Law School for continuing its SNT educational leadership and also for focusing increased attention on structured settlement issues that impact SNTs and special needs planning.

S2P2J Releases 43 and 44

ALM has published and distributed Release 43 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Co-authored by Daniel Hindert, Joseph Dehner and Patrick Hindert, S2P2J is a legal textbook first published in 1986 and updated semi-annually.

S2P2J Release 43 topics:

• Executive Life of New York (ELNY)
• Non-qualified structured settlements
• Single claimant 468B
• Factoring
  • Arbitration cases; and
  • DOJ's sovereign immunity defenses.
• Macomber v. Travelers
• Ohio 2007 laws for suitability and disclosure of annuities
• Constitutional findings on periodic payment statutes

Release 44 is a work-in-progress. Here are some of the highlights:

• Market growth - S2P2J Chapter 1 addresses the history and expanding use of structured settlements and periodic payments. For the past several years, the structured settlement industry has reported flat annual annuity sales of approximately $6 billion. Structured settlement legal developments, however, have continued to expand at an accelerating pace. S2KM's blog has reported recent market surveys sponsored by NSSTA and AIG. These studies, plus the growth of non-qualified assignments, will be addressed in Release 44.
• Settlement Trusts - S2P2J Release 44 will include a new Chapter 3 section titled "Settlement Trusts". This new section will organize and expand existing S2P2J coverage of settlement trusts which already includes detailed reporting about many types of settlement trusts and issues including the SBU and Stanwich debacles. The expanding markets for settlement planning and special needs planning highlight the increasingly important interaction of structured settlement annuities and settlement trusts including: government bond trusts; reversionary grantor trusts; settlement preservation trusts; special needs trusts; Medicare set-aside trusts; and IRC section 468B trusts. As settlement trusts continue to proliferate, criteria for selecting a settlement trustee becomes increasingly important and will be addressed in Release 44.
• Roles and Responsibilities - The NSSTA and AIG structured settlement market surveys each spotlight plaintiff attorneys (and presumably plaintiff structure settlement advisers) as important for future market growth. Release 44 will take a closer look at the structured settlement roles and responsibilities of plaintiff attorneys (in Chapter 5) and plaintiff structured settlement consultants (in Chapter 6). Release 44 will feature an expanded analysis of how the ABA Model Rules of Professional Conduct and SSP Standards of Professional Conduct impact key structured settlement stakeholders.
• Government Benefits - Release 44 will continue to expand and improve S2P2J Chapter 15 (Government Benefits and Structured Settlements). Featured topics will include the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) as well as the continuing problems for structured settlements created by the Deficit Reduction Act of 2005 (DRA). Release 44 will highlight the need for more specific structured settlement legal authority related to Social Security, Medicare and Medicaid.
• Structured Settlement Transfers - The secondary annuity market represents a strategic challenge for the primary structured settlement market. S2P2J Chapter 16 continues to track and analyze secondary market developments. Release 44 will update state structured settlement protection legislation in West Virginia and Rhode Island. Release 44 also will continue to track business conduct of factoring companies including the Fresno County, California cases (Cox and Caldwell) and the Rapid Settlements arbitration cases.

IRC 468B Funds Revisited - 3

Two earlier S2KM blog posts prioritize a new article published in the NAELA Journal by John J. Campbell titled "The Use of Qualified Settlement Funds, Qualified Assignments and Special Needs Trusts in Physical Injury Settlements" to refocus on single claimant 468B funds as a strategic issue for the settlement planning and structured settlement industries. The first blog post recommends educational resources for 468B Funds. The second post summarizes Campbell's article. This post offers additional S2KM analysis and commentary.

As previously reported, Campbell's article is notable because it:

• Supports the argument Congress does not intend the traditional economic benefit doctrine to apply to 468B funds created for a single claimant;
• Helps educate elder law and special needs attorneys about the importance of 468B funds;
• Expands 468B fund analysis beyond tax issues to include government benefits issues - specifically SSI, Medicaid, special needs trusts and the Deficit Reduction Act of 2005 (DRA).

Although Campbell's tax analysis generally follows the analysis of other 468B experts, such as Robert W. Wood and Richard B. Risk, Jr., Campbell's conclusions are more aggressive. According to Campbell, while it is possible the IRS could distinguish single claimant and multiple claimant 468B funds, that likelihood is "a remote possibility at best". Wood and Risk are more cautious in their conclusions. They each urge Treasury and/or the IRS to clarify their positions for single claimant 468B cases.

From S2KM's perspective, Campbell's conclusions about the impact of the Deficit Reduction Act (DRA) on structured settlements used to fund special need trusts are also aggressive - considering the lack of any specific structured settlement legal authority. For example, despite the DRA's prohibition against deferred or balloon annuity payments, Campbell concludes that "SSI and Medicaid do not prohibit the use of either deferred or balloon payments to fund exempt Special Needs Trusts if the annuities comply with Internal Revenue Code 130". There are no direct references, however, to structured settlements or qualified assignments in any SSI nor Medicaid legislation or regulations.

Campbell's article contains one serious omission - his failure to mention or consider the impact of IRC Section 5891. Reasons why IRC 5891 is important for Campbell's analysis:

• Structured Settlement Definition - Enacted as part of the Victims of Terrorism Tax Relief Act of 2001, IRC 5891 includes the Federal tax definition for "structured settlement". A tax analysis of structured settlements should reference the tax definition of a structured settlement.
• Economic Benefit Argument - As Risk points out in his 2004 article titled "A Case for the Urgent Need to Clarify Tax Treatment for a Qualified Settlement Fund Created for a Single Claimant", the ability of structured settlement recipients to transfer their payment rights pursuant to IRC 5891supports the argument that Congress does not intend for the traditional judicial doctrine of economic benefit to apply to single claimant 468B funds.
  
• Secondary Market - Conversely and misleadingly, Campbell's article states: "Once there is a qualified assignment of an annuity funding a structured PI settlement, the plaintiff cannot change the terms of the annuity, including the payment amounts or the payee". To the contrary, IRC 5891 and 46 state structured settlement protection statutes permit a plaintiff, with prior state court approval, to transfer payment rights (including payment amounts to new payees) pursuant to a "structured settlement factoring transaction".
• Medicaid and Structured Settlements - Campbell's commentary about Medicaid qualification and structured settlements does not address two important, strategic settlement planning and structured settlement issues:
  • The DRA requirement that qualifying annuities be "non-assignable"; or
    
  • The "saleable = countable" argument promoted by many state Medicaid agencies.
    

S2KM conclusions - Campbell's article highlights:

• The complexity of structured settlements and important role of structured settlements in personal injury settlement planning.
• Note: for a visual model, consider this S2KM Structured Settlement Transaction Diagram.
• The need for:
  • Treasury and/or the IRS to confirm existing tax authority for single claimant 468B funds;
  • Better legal authority:
    • Specifically: to clarify the rules for structured settlements used to fund special needs trusts and Medicare Set-aside arrangements;
    • More generally, to integrate existing structured settlement laws (including Federal tax legislation and state statutes) with other government benefit laws including Medicaid and Medicare;
    • For additional S2KM analysis, see "Inconvenient Questions".
  • Better industry research and analysis (legal, public policy, market and cost-benefit) about structured settlement and settlement planning issues.

SSP 2008 Annual Meeting - 1

The Society of Settlement Planners (SSP) has announced the educational program schedule for its 2008 Annual Meeting to take place March 5-7 in Washington, D.C. at the Marriott Hotel at Metro Center. Registration forms and online registration are available on the SSP website.

Patrick Hindert, S2KM's blog author, will moderate two of the SSP seminar discussions:

• "Why We Are Losing the Medicaid Annuity War - and the Surge Needed for Victory" - featuring David J. Lillesand; and
• "The Secondary Markets - What Settlement Planners Need to Know" - featuring Stephen R. Harris; Earl S. Nesbitt; and Rhonda Bentzen.

More detailed descriptions for these programs:

Medicaid Annuities

Medicaid annuities, including structured settlement annuities used to fund special needs trusts, are under attack by federal and state legislators and regulators.  The Deficit Reduction Act and the secondary annuity markets create new issues and challenges for settlement planners and special needs planners.  In a discussion titled "Why We are Losing the Medicaid Annuity War - and the Surge Needed for Victory", David J. Lillesand, a national special needs expert, will provide a provocative review of current Medicaid annuity issues and propose a strategy to address these challenges.

Lillesand's presentation will address:

• Medicaid’s continuing attack on annuities used for nursing home planning and the spill-over impact on structured settlements;
• The SSA’s recent Appeals’ Council decision to cut more than one-third of the tax-free SSI benefits for a special needs trust with a properly assigned structured settlement - what REALLY happened in Pensacola and why the ruling still stands;
• SSA’s massive failure to understand annuities - the “Bernstein letter” notwithstanding;
• How the SSA's misunderstanding of annuities impacts the willingness of attorneys and clients to use structured settlements;
• When we might expect “relief” and/or "clarification" in the form of new SSA POMS or federal regulations;
• The need for the SSA to change deeming rules and/or resource rules so structured settlements can be utilized for spousal and parental personal injury derivative claims - which currently disqualify seriously ill children and spouses for Medicaid;
• How repeated, unannounced political cuts in Medicaid services are impacting structured settlements by creating uncertainty for future care options and, therefore, the demand for greater cash reserves to meet sudden cuts in services;
• And most importantly, how the insurance industry in general, and the structured settlement industry in particular, can benefit by joining with disabled families to stabilize and standardize across states Medicaid services for the seriously ill and disabled who are not insurable through private health insurance plans.

Secondary Markets

The secondary life and annuity markets are revolutionizing all financial and estate planning including structured settlements, settlement planning and special needs planning.  This discussion, titled "The Secondary Markets - What Settlement Planners Need to Know", will feature three national secondary market experts - Stephen R. Harris, a partner at Drinker Biddle; Earl S. Nesbitt, a partner at Nesbitt & Vassar who also serves as Executive Director of the National Association of Settlement Purchasers (NASP); and Rhonda Bentzen of Bentzen Funding Solutions.  This secondary market discussion will serve as an important introduction and update for settlement planners with special attention on how IRC section 5891 and the state structured settlement protection statutes have changed the structured settlement business.

Secondary issues to be addressed:

• What does a settlement planner need to know about the secondary markets?
• What laws apply - and what are the critical issues under those laws?
• What happens in a specific settlement transfer transaction - beginning to end?
• Who are the key players in a settlement transfer transaction?
• What is the settlement transfer documentation and work product?
• What are the responsibilities and potential roles for settlement planners?
• What issues and potential conflicts exist for settlement planners?
• What should settlement planners tell their clients about the secondary markets:
  • Prior to settlement?
  • Following settlement?   
    
• Who are the major secondary market participants?
• What are the critical issues and current industry developments?
• Where can a special needs planner obtain more information about the secondary markets?

For prior S2KM blog posts about the Society of Settlement Planners, see SSP 2007 Fall Meeting and the incorporated links.

Structured Settlements and Periodic Payment Judgments-Release 41

Release 41 of "Structured Settlements and Periodic Payment Judgments",  co-authored by  Daniel Hindert, Joseph Dehner and Patrick Hindert, is now available from American Lawyer Media (ALM).  Highlights include a new chapter titled "Government Benefits and Structured Settlements".  This chapter provides a primer on government benefits for structured settlement attorneys and other professionals interested in structured settlements.  Release 41 discusses the interaction of structured settlements with:

• Social Security Income and Social Security Disability Insurance
• Medicare and Medicaid
• Medicare Secondary Payer Rules
• Medicare Set-Aside Arrangements
• Medicaid Liens and Paybacks
• Self-settled Special Needs Trusts
• Pooled Trusts

Release 41 also includes:

• Analysis of how the Deficit Reduction Act of 2005 (DRA) impacts structured settlements.  For additional information about the DRA, see: Inconvenient Questions.
• An update on the Murphy v. IRS case.

Inconvenient Questions - 3

Two earlier S2KM blog posts summarize an article titled "DRA of 2005 - What Havoc has Congress Wrought?" that Sylvius von Saucken presented at the SSP 2007 Annual Meeting. 

• Inconvenient Questions-1 summarizes von Saucken's analysis of provisions in the Deficit Reduction Act of 2005 (DRA) that are most important for structured settlements.
• Inconvenient Questions-2 summarizes von Saucken's analysis of arguments for and against applying the DRA annuity rules to structured settlements - including structured settlement payment rights irrevocably assigned to a special needs trust (SNT).

Von Saucken's conclusion: there is little (if any) current direct authority about whether and how the DRA impacts structured settlement annuities, structured settlement factoring transactions or SNTs.

This blog post looks more closely at the "authority" some experts (not including von Saucken) believe exempts structured settlements from the DRA annuity requirements. This authority, according to Jay Sangerman, an elder law and special needs attorney who spoke at NSSTA's 2007 Winter Meeting, consists of separate letters written to Sangerman and attorney Roger Bernstein by the Social Security Administration (SSA) and the Centers for Medicare & Medicaid Services (CMS) in early 2006.

NSSTA has featured the January 31, 2006 SSA letter to Bernstein (SSA letter) on its website beginning March 3, 2006 with an announcement titled "Social Security Reaffirms Role of Structured Settlements in Special Needs Trusts". NSSTA also has posted copies of the SSA letter plus letters to NSSTA from Sangerman and Bernstein. As a NSSTA member, this author has access to those documents. NSSTA has not posted a copy of the CMS letter on its website. Sangerman's cover letter to NSSTA references his legal analysis which accompanied the original submission to the SSA. NSSTA has not posted Sangerman's communications to SSA or his legal analysis for the SSA.

S2KM has not reviewed either the CMS letters to Sangerman and Bernstein or any of Sangerman's and Bernstein's legal analysis - although S2KM welcomes the opportunity to do so. Therefore, this blog post focuses on what NSSTA has distributed to its members - specifically the January 31, 2006 letter from the SSA to attorney Roger Bernstein. SSA's letter to Sangerman apparently is similar to Bernstein's letter or the same.

The SSA letter, dated January 31, 2006, was written to Bernstein by Nancy Veillon, who was then Associate Commissioner for Income Security Programs for Social Security. The letter begins with an apology that it has taken 15 months for the SSA to respond to Bernstein's original letter inquiry of October 15, 2004. Veillon explains: "...it was necessary for us to obtain guidance from our office of the General Counsel..."

Veillon next identifies Bernstein's (presumably NSSTA's) questions which seek clarification of the SSI's program's policy for payments from a structured settlement annuity paid into:

• A "(d)(4)(A)" self-settled special needs trust (SNT); including:

• Payments after the SNT beneficiary reaches age 65 if the funding occurred prior to age 65.

Significant for this discussion: the SSA letter was written prior to enactment of the DRA, does not address the DRA, and makes no reference to the DRA.

Next in the SSA letter, without referencing the statutory definitions of "structured settlement" incorporated in IRC 5891(c)(1) and the Model Structured Settlement Protection Act, Veillon states what the SSA means when the SSA refers to a "structured settlement":

• "an annuity that is purchased by a defendant in a lawsuit to satisfy his or her monetary obligation to the plaintiff as the result of a judgment or settlement.
• "The plaintiff generally has no ownership right in the annuity itself, but is the beneficiary with the right to receive the stream of payments from the annuity.
• "The annuity payments can be paid out over a period of years or the plaintiff's lifetime.
• "In the case of a disabled plaintiff who receives, or intends to file an application for SSI, or other needs-based assistance programs such as Medicaid, annuity payments from structured settlements are often irrevocably assigned to an SNT for which a disabled individual is the beneficiary.
• "Under such an assignment, the Trustee or the trust becomes the owner of the right to receive the structured settlement payments."

Significant for this discussion:

• The SSA structured settlement definition makes no reference to the critical (for the structured settlement industry) statutory definitions in IRC 130, 468B and 5891 or the Model State Structured Settlement Protection Act.
• The SSA letter does not reference tax laws or state structured settlement protection laws.
• The Internal Revenue Code (IRC) and related regulations establish their own rules for structured settlement annuities including laws for structured settlement recipients to qualify for an IRC 104(a)(1) or (2) exclusion.
• IRC 5891(a) imposes an excise tax of 40% if structured settlement payment rights are transferred in a structured settlement factoring transaction without receiving a "Qualified Order" from a state court.
• To date, 46 states have enacted legislation setting forth rules to secure "Qualified Orders" for such transfers.
• According to the SSA definition: "annuity payments from structured settlements are often irrevocably assigned to an SNT". 
  
  • Why doesn't such an irrevocable assignment of structured settlement payment rights qualify as a "structured settlement factoring transaction" as defined in IRC 5891(c)(3)? 
  • Why shouldn't these irrevocable assignments require the legal "blessing" of a "Qualified Order" from a state court to avoid 5891's 40 percent excise tax? 
    
    • One argument for 5891 exemption: self-settled SNTs are grantor trusts. 
    • Arguments favoring 5891 application: trusts are separate legal entities; and there is no exclusion for SNTs under 5891.
  • Even if IRC 5891 does not apply, why doesn't the irrevocable assignment of structured settlement payment rights to a SNT constitute economic benefit thereby disqualifying the recipient from the 104(a) exclusion? 
• Any NSSTA members who have actually read the SSA letter must be disappointed to learn the SSA structured settlement definition does not include Qualified Assignees or IRC 468B Qualified Settlement Funds as annuity purchasers. By itself, this omission demonstrates the SSA's lack of knowledge and/or concern about existing structured settlement laws, products and business practices.

• Veillon's SSA letter quotes "Black's Legal Dictionary" to define an "annuity". 
  
  • With all due respect to Black, if and when the SSA reviews its structured settlement definition, the SSA should clarify what it means by an annuity "beneficiary".
  • The SSA letter refers to an annuity "beneficiary" when it should state "annuitant".
  • When structured settlement payment rights are irrevocably assigned to a SNT, the annuitant is the SN "trust" beneficiary - not the "annuity" beneficiary.
    
  • The beneficiary issues have become more important and complex as a result of the DRA's "state as beneficiary" requirements.
  • Also note: subsequent to the transfer of structured settlement payment rights to a SNT, the trustee becomes the annuity "payee" and presumably acquires the rights, if any, to transfer structured settlement payments.

The SSA letter concludes:

• "...if the beneficiary of a trust which is not a resource for SSI has no right to anticipate, sell or transfer the annuity payments, the payments from a structured settlement annuity that are irrevocably assigned to an SNT, are not income to the trust beneficiary when paid into the trust. Neither is the right of the trust to receive the payments a resource to the trust beneficiary."

• "...where the trust contains an irrevocable assignment of a structured settlement annuity made when the individual was less than 65 years of age, annuity payments paid to an SNT after an individual reaches age 65 are treated the same as payments made before the individual attained age 65 and do not disqualify the trust from the... SNT exception."

• "The statements of policy above are clarifications of current SSI policy and are applicable to trusts established on or after 1/1/00."

NSSTA's View of the SSA Letter

• According to NSSTA and Sangerman, the SSA letter "reaffirms the role of structured settlements in self-settled SNTs". NSSTA Mission Accomplished!
  
• Perhaps it was the glow from this "victory" that blinded NSSTA to the DRA's enactment on February 8, 2006 - less than 10 days following the SSA letter.
• If and when administrators, regulators, judges or other stakeholders question how structured settlement annuity payments impact Medicaid eligibility, Sangerman advised NSSTA members on January 26, 2007 to "show them the SSA letter".  The SSA letter apparently is NSSTA's trump card.
• When the SSA releases updated POMS addressing structured settlements, the POMS presumably will become NSSTA's trump card.
• Subliminal Message to NSSTA members: don't concern yourselves with the DRA annuity rules, State Medicaid Plans, the 13 "non-SSI states", potential conflicts with other federal and state structured settlement laws, or inconsistent and inaccurate definitions.  If you encounter any difficulties, play your trump card - and keep selling those annuities! The state and local Medicaid agencies will greet you with flowers as "financial liberators".
  

Significant for this discussion:

• A private SSA (or CMS) letter does not represent legal authority. 
  

• Whatever it might signify, the SSA January 31, 2006 letter does not address:

• Whether and how the DRA impacts structured settlements;
• SNTs established before January 1, 2000.
• Rules for funding pooled trusts with structured settlement annuities;
• Structured settlement annuities paid to a community spouse;
• SNTs funded by qualified assignees and/or 468B Qualified Settlement Funds. Note: some legal authorities believe payments to a 468B trust constitute countable resources for SSI eligibility.
• Existing CMS rules for structured settlement annuities including rules for Medicare Set-Aside (MSA) Arrangements.
  
  • See especially the CMS October 15, 2004 MSA memorandum.
  • And note: at the 2007 Annual Meeting of the Academy of Special Needs Planners (ASNP), attorney John Campbell highlighted the growing need for and use of a combined MSA and SNT product that Campbell referred to as a "Medicare Set-Aside Special Needs Trust".
  • Because Medicare claims take precedence over Medicaid claims in resolving tort settlements, perhaps MSA structured settlement rules should "trump" SNT structured settlement rules.
  • On March 24, 2007, at the First Annual Meeting of the Academy of Special Needs Planners (ASNP), Ken Brown of the SSA:
    
    • Announced SSA's plan to publish new POMS in 2007.
    • Stated the 2007 POMS will address structured settlements.
  • Although the POMS are important for determining SSI eligibility, SSA POMS do not represent legal authority - especially in the 13 "non-SSI states" which increasingly insist on determining Medicaid eligibility separately from the SSA.
  • SSA POMS have no impact on tax law and may conflict with tax law.
  • The SSA requirement (quoted above) that prevents a SNT beneficiary from having the right "to anticipate, sell or transfer the annuity payments" requires a much better and more detailed explanation (better legal authority) from SSA and CMS. What does this requirement mean?  And when does it apply?
  • If this requirement applies before the structured settlement payment rights are irrevocably assigned to a SNT:
    
    • How can the structured settlement recipient,
    • Who is the annuitant and original payee, and
    • Who subsequently becomes the SN trust beneficiary,
    • Make an irrevocable assignment of structured settlement payment rights to a SNT in the first place,
    • When he or she cannot have the right "to anticipate, sell or transfer the annuity payments"?
  • Applying this requirement to the SNT beneficiary pre-assignment (before he or she becomes a SNT beneficiary) will also highlight the issue for state and local Medicaid agencies - the people who actually administer Medicaid and determine Medicaid eligibility.
    
    • In a 2003 report to CMS, the National Association of State Medicaid Directors (NASMD) attacked annuities, including structured settlement annuities, as abusive shelters.
    • That 2003 NASMD report first identified the NASMD "saleable = countable" theory.
    • Many state Medicaid agencies claim the existence of a secondary market creates a legal presumption that structured settlement annuity payments are "saleable" and therefore "available" and therefore "countable" in determining Medicaid eligibility.  The court decisions are divided.
  • If this transfer requirement (which focuses on the SNT beneficiary) applies after the structured settlement payment rights are assigned to a SNT:
    • The requirement becomes unnecessary and confusing.
    • After an irrevocable assignment to a SNT, the annuity payments are made to the trustee not to the trust beneficiary.
    • Therefore, the SNT beneficiary will not have any legal right to transfer payments or payment rights.
    • The more important issue is whether the SNT trustee should be allowed to transfer annuity payments?  And, if yes, when do the requirements of IRC 5891 apply?

Conclusion and Recommendations: NSSTA's education and lobbying strategy should include a more detailed and comprehensive analysis of government benefits to ensure consistent and efficient interaction among the various federal and state laws that impact structured settlements - including the integration of tax laws and state protection statutes with federal and state government benefit legislation and regulations. NSSTA's education and lobbying priorities should spotlight the DRA - not ignore it!

For additional S2KM blog posts about the DRA, see:

• Inconvenient Questions - 1
• Inconvenient Questions - 2
• The Deficit Reduction Act of 2005

Release 41 of "Structured Settlements and Periodic Payment Judgments" (available May 2007) includes a new Chapter 15 titled "Government Benefits and Structured Settlements".

Patrick Hindert, the author of "Beyond Structured Settlements", is an associate member and former President of NSSTA.