Beyond Structured Settlements

Settlement Transfers - Release 39

 Structured Settlements and Periodic Payment Judgments, co-authored by Daniel Hindert, Joseph Dehner and Patrick Hindert,  is a legal textbook first published in 1986 by Law Journal Press, an affiliate of ALM, Inc., and updated semi-annually.

Release 39 features a new chapter entitled Transfers of Structured Settlement Payment Rights.

To order online, see this website.

For highlights of previous releases, see S2KM's website.

Release 39 Highlights:

Since structured settlement transfers (aka factoring) first emerged in the late 1980s and early 1990s, they have been controversial and contested. Internal Revenue Code Section 5891 and structured settlement protection statutes in 44 states now provide definitions and procedures for some structured settlement recipients to sell their rights to receive periodic payments in exchange for a lump sum payment. Release 39 of Structured Settlements and Periodic Payment Judgments features a new chapter titled “Transfers of Structured Settlement Payment Rights” that fully explains the ramifications of these statutes. New Appendix materials include sample forms reflecting the recent legislation as well as a glossary of statutory transfer definitions. Release 39 also expands existing discussions of the following structured settlement transfer topics:

• History of settlement transfers
• Public policy considerations
• Business practices and issues
• Structured settlement protection acts
• Judicial review of transfer applications

Understanding Structured Settlements

(Re)learning resources about structured settlement from S2KM Limited :

• Post 9/11 Structured Settlements - understanding the New Basics for Stage 3 structured settlements.
• "Structured Settlements and Periodic Payment Judgments"
  • Introducing the authors and publisher;
  • Announcing Release 38;
  • Featuring updated Chapter 5: "Role and Responsibilities of Plaintiff Counsel in Structured Settlements".
• How the Internet impacts structured settlements including
  • Knowledge Management - with thanks to Denham Grey and Eric Tsui.
  • Social Network Technologies
  • Podcasting - with thanks to Mark Wahlstrom and Ed Vogt.
  • Concept Maps (Example: Podcasting) - with thanks to Barbara Bowen.
  • Standards
• IRC Section 5891 - How the Victims of Terrorism Tax Relief Act impacts structured settlements 
  
  • Provides the Internal Revenue Code definition for structured settlement;
  • Authorizes state processes for completing structured settlement transfers;
  • Clarifies tax treatment of structured settlement transfers.
• Medicare Set-aside Arrangements - how the Medicare Secondary Payer rules are changing structured settlements and personal injury settlement planning.
• Compensation Disclosure - How the NAIC Model Compensation Disclosure requirements impact structured settlements.
• Settlement Trusts - How to select a trustee
• IRC 468B Funds - The single claimant issue
• Plaintiff Attorney Compensation - The American Jobs Creation Act of 2004
• Structured Settlement Trade Associations
  • National Structured Settlement Trade Association (NSSTA);
  • National Alliance of Medicare Set-aside Professionals (NAMSAP);
  • Society of Settlement Planners (SSP); 

Social Network Technologies

Denham Grey, a leading Knowledge Management (KM) thinker and practioner, takes on the KM lions in their own den when he moderates an online presentation this week for the "Star Series" sponsored by the Association of Knowledgework (AOK).

Entitled "Knowledge Sharing and Social Software", Denham's presentation includes a valuable and related wiki.  Among other resources, the wiki features a concept map of podcasting created by Barbara Bowen for S2KM Limited.

For additional background information about social network technologies, see Denham Grey's weblog, "Knowledge-at-work" as well as the following wikipedia entries:

• Community of practice

• Concept map

• Knowledge management

• Podcasting

• RSS

• Social bookmarking

• Social network

• Weblog

• Wiki

Plus additional information about:

• Podcasting
• Knowledge management and structured settlements.
• Membership in AOK.

"Blog" No. 1 Word for 2004

Dictionary publisher Merriam-Webster has selected "blog" as the "No. 1 Word of the Year for 2004" representing IMHO an historic milestone for Internet publishing.

Settlement Trusts

A trust is a legal entity concerning the ownership, use and distribution of property.  To create a trust, the owner of property (grantor) transfers property (trust corpus) to another person or company (trustee) who is responsible for maintaining and protecting the property on behalf of one or more persons (beneficiary). A trust generally requires a formal document (trust agreement) which states the trust purposes as well as the terms and conditions for administering the trust and for the beneficiary to receive and use trust property. 

Trusts may be either revocable or irrevocable by the grantor.  Trusts may be created either during the grantor’s lifetime (intervivos) or by will following the grantor’s death (testamentary).  Trusts separate ownership of assets into legal ownership (control by trustee) and equitable ownership (use by beneficiary).  Trusts have many purposes including: wealth accumulation, spendthrift protection, avoidance of probate, and reduction of taxes.

Trusts which are used in connection with personal injury settlements are referred to as settlement trusts.  Settlement trusts are generally irrevocable intervivos grantor trusts with spendthrift features.   Similar to structured settlement annuities, the purposes of settlement trusts include: preventing the claimant/beneficiary from squandering settlement proceeds; insuring that those settlement proceeds are used for their intended purposes; and providing funds in amounts and at times when needed.   

Several types of settlement trusts exist including:

1.      Qualified Government Bond Trust – IRC Section 130 permits a qualified assignee to purchase either annuities or US government obligations to fund structured settlement payments.  When government bonds are purchased, the qualified assignee is usually a trust or a custodial account.

2.      Reversionary Grantor Trust – With a reversionary grantor trust, a defendant transfers assets into a trust which makes distributions for the benefit of the personal injury claimant based upon conditions in the trust agreement.  Upon the claimant’s death, the remaining trust corpus reverts to the defendant.

3.      Settlement Preservation Trust – Settlement preservation trusts provide claimants with spendthrift protected taxable or tax-free payments as well as liquidity and flexibility.  They are especially useful when the timing or amount of a claimant’s future needs are unpredictable or event contingent.

4.      Special Needs Trust – A special needs trust is used to preserve a claimant’s SSI and/or Medicaid eligibility.  For additional information, see “Special Needs Trusts”.

5.      Medicare Set-aside Trust – A Medicare Set-aside trust is used in certain categories of workers compensation and personal injury settlements to set aside money for future medical expenses which would otherwise be covered by Medicare.  For additional information see “Medicare Set-aside Arrangements”.

6.      468B Trusts – 468B trusts are used by defendants to obtain immediate tax deductions in class-action lawsuits and by plaintiffs to control structured settlement funding decisions.  For additional information see “468B Settlement Funds”.

7.      Special Purpose Trusts – Special purpose trusts are used to set aside moneys to pay for specific anticipated expenses such as a child’s future college education.

For Additional information, see

• “Structured Settlements and Periodic Payment Judgments”,
  
• "Selecting a Settlement Trustee",
  
• Settlement Trust Due Diligence,
  
• "Structured Settlement Definition" ,
  
• "Introduction to Annuities", and 
• "Advantages and Disadvantages of Annuities".

Introduction to Annuities

Annuities are insurance contracts which are frequently used to fund structured settlements.  The primary parties to an annuity include:

1.      Owner – The owner is entity or person who purchases the annuity.  Ownership of an annuity generally includes the rights to: designate and change the payee and/or beneficiary; assign the annuity; pledge the annuity as collateral; and, if the policy permits, to commute remaining payments to a lump sum.  Note: however, recent legislation authorizing factoring impacts these ownership rights in the context of a structured settlement.

2.      Annuitant – The annuitant is the “measuring” life for lifetime annuities under which payments continue for the annuitant’s lifetime.  Payments under some lifetime annuities (“life only”) terminate when the annuitant dies.  Other lifetime annuities (life and period certain) provide a certain number of payments regardless of when the annuitant dies.  When an annuitant’s life expectancy is reduced by injury or illness, life companies assign a “rated age” which results in either a lower cost or greater monthly benefits.  Some annuities (“certain only”) end at a specified date and do not include a lifetime feature.

3.      Payee – The payee is the person designated by the owner to receive annuity payments and may be either the annuitant or some other person or entity including a trustee or a bank account.

4.      Beneficiary – The beneficiary is the person designated by the owner to receive any remaining payments following the death of the annuitant.  Beneficiaries are also referred to as “contingent payees”.

Annuities provide many structured settlement design options including: immediate or deferred payments; monthly or annual payments; lifetime or period certain payments; level or increasing payments; fixed or variable payments.  Most structured settlement annuities are fixed as opposed to variable.  Unlike fixed annuities, variable annuities are considered an investment security.

Two alternative financing methods exist for annuities to fund  structured settlements.  Both methods are intended to provide income-tax free periodic payments for the claimant pursuant to IRC Section 104 (a). Under the first method (“annuity financing”), the defendant (or its liability insurer) provides the claimant with an unfounded, unsecured promise to pay money in the future.  The defendant purchases and owns the annuity which provides funding to meet its obligation.   Under the second method (“qualified assignment”), the claimant and the defendant (and/or its liability insurer) agree to transfer the periodic payment obligation to third party with a qualified assignment pursuant to IRC Section 130.  Each alternative financing method requires compliance with statutory requirements and also produces separate and distinct contractual rights and duties for the participants.

Structured settlement annuities represent a permissible funding alternative for  special needs trusts, medicare set-aside arrangements and 468B settlement funds.

For additional information, see "Structured Settlement Definition" and “Advantages and Disadvantages of Annuities” as well as “Structured Settlements and Periodic Payment Judgments”. 

468B Settlement Funds - Definitions

Congress added IRC Section 468B to the Internal Revenue Code in 1986 as part of the Tax Reform Act of 1986 to allow defendants and their insurers to obtain  immediate tax deductions in tort claims rather than waiting for “economic performance” to occur.  IRC Section 468B and related Treasury regulations define two similar types of funding vehicles, “designated settlement fund” (DSF) and “qualified settlement fund” (QSF) to accomplish this objective.  When used to settle tort claims involving physical injuries, these funds may also incorporate structured settlements.

IRC Section 468B(d)(2) defines a “designated settlement fund” as follows:

“The term designated settlement fund means any fund—

(A) which is established pursuant to a court order and which extinguishes completely the taxpayer’s tort liability with respect to claims described in subparagraph (D),

(B) with respect to which no amounts may be transferred other than in the form of qualified payments,

(C) which is administered by persons a majority of whom are independent of the taxpayer,

(D) which is established for the principal purpose of resolving and satisfying present and future claims against the taxpayer (or any related person or formerly related person) arising out of personal injury, death, or property damage,

(E) under the terms of which the taxpayer (or any related person) may not hold any beneficial interest in the income or corpus of the fund, and

(F) with respect to which an election is made under this section by the taxpayer.”

Treasury Regulation 1.468B-1(c) defines a “qualified settlement fund” as follows:

“A fund, account, or trust satisfies the requirements of this paragraph(c) if—

(1)   It is established pursuant to an order of, or be approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;

(2)   It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability—

(i)                 Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended, 42 U.S.C. 9601 et seq.; or

(ii)               Arising out of a tort, breach of contract, or violation of law, or

(iii)             Designated by the Commissioner in a revenue ruling or revenue procedure; and

(3)   The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related parties).”

Revenue Procedure 93-34 provides additional rules for either type of 468B Fund to qualify under IRC Section 130 as a “party to a suit or agreement” for the purpose of completing a structured settlement:

1.      The claimant must agree in writing to the assumption by a IRC Section 130 Qualified Assignee of the IRC Section 468B Fund’s obligation to make periodic payments;

2.      The Qualified Assignment must relate to a claim “on account of personal injury or sickness (in a case involving physical injury or sickness)”;

3.      Each Qualified Funding Asset purchased by the Qualified Assignee must relate to a liability to make periodic payments for damages to a single claimant;

4.      The Qualified Assignee must not be “related” to the Section 468B Fund;

5.      The Qualified Assignee must not be controlled by nor control, directly or indirectly, the Section 468B Fund; and

6.      The transaction must meet all other requirements set forth in IRC Section 130.

For additional information, see "Structured Settlement Definition", "Settlement Trusts" and "Introduction to Annuities" as well as “Structured Settlements and Periodic Payment Judgments”.   

Special Needs Trusts

In the Omnibus Budget Reconciliation Act of 1993 (OBRA ’93), Congress created three exceptions to the general rule that an individual’s assets held in trust are counted as resources when determining eligibility for Medicaid.  The three exceptions are the “special needs trust”, the disability income trust and the pooled trust.   In addition, assets in special needs trusts and pooled trusts created after January 1, 2000 do not count as resources when determining eligibility for supplemental security income (“SSI”). 

OBRA ‘93 defines a special needs trust as:

"A trust containing the assets of an individual under age 65 who is disabled (as described in § 1382c(a)(3) of this title) and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter."

OBRA ’93 also defines the following basic requirements for a special needs trust:

1.     The trust must be established for the benefit of a disabled individual under age 65.

2.      The beneficiary must be "disabled" under the Social Security definition of  disability.

3.      The trust must be established for the benefit of the disabled individual by his or her parent, grandparent, or legal guardian, or by a court.

4.      Under the terms of the trust, the State must be entitled to receive all amounts remaining in the trust upon the death of the disabled individual up to the aggregate amount of medical assistance paid on his or her behalf under the State Medicaid plan.  Note: unlike Medicaid, SSI does not have a payback right upon the death of the disabled beneficiary.

5.      The trust must be irrevocable.

6.      The trustee must be independent.

7.      The trustee must be vested with absolute discretion to make or refrain from making payments for the benefit of the disabled beneficiary—specifically, the trustee must be authorized to pay no part, any part, or all of the trust's income and principal.

A pooled trust is an alternative to a special needs trust.  Assuming proper drafting and administration, the assets of a pooled trust, similar to a special needs trust, do not count as resources for purposes of determining Medicaid or SSI eligibility.  Although a pooled trust must maintain a separate account for each disabled beneficiary, the accounts can be commingled for investment and management purposes.

Most of the OBRA ’93 requirements for special needs trusts also apply to pooled trusts.  Unlike a special needs trust, however, a pooled trust:

                1.      Must be established and maintained by a non-profit association;

                2.      Can be established for an individual of any age;

                3.      Can be established by the disabled individual;

                4.      Can retain some or all of the trust funds which remain upon the death of th

State laws and regulations may impose additional requirements for special needs trusts and pooled trusts. 

A special needs trust or pooled trust should be considered as part of any personal injury settlement involving a claimant who is eligible for Medicaid or SSI.   The benefits can be substantial because Medicaid pays for physician services, hospital expenses, prescription coverage, nursing home care, in-home health care services, as well as other medical expenses.   However, special needs trusts and pooled trusts also have negative consequences.  These include loss of direct control of trust funds and restrictions on fund distributions.  Following the disabled beneficiary’s death, a special needs trust must payback to the state as outlined above.

Whether a special needs trust or pooled trust is advisable requires an analysis of many factors including the extent of disability, the availability of government benefits, as well as the nature and amount of available personal and family assets.

Although a structured settlement annuity can be used to fund a special needs trust or pooled trust , the assignment of income from the annuity must be irrevocable or it will count as a resource for Medicaid and SSI determination.  Program Operations Manual System (POMS) SI 011120.201J.1.d provides, “[a] legally assignable payment . . . that is assigned to a trust is income for SSI purposes unless the assignment is irrevocable.  If the assignment is revocable, the payment is income to the individual legally entitled to receive it.”

For additional information, see "Settlement Trusts" , "Selecting a Settlement Trustee".  and : “Structured Settlements and Periodic Payment Judgments”.

Medicare Set-Aside Arrangements

A Medicare Set Aside (MSA) arrangement is an administrative and funding mechanism used in certain categories of workers compensation and personal injury settlements to set aside money for future medical expenses that would otherwise be covered by Medicare. On October 15, 2004, CMS (The Center for Medicare and Medicaid Services) issued a policy memorandum which includes important rules for structured settlements and present value calculations. A new article on S2KM's website entitled "How Medicare Set-Aside Arrangements Impact Structured Settlements" summarizes and analyzes these new rules.  The article is excerpted from Release 36 of "Structured Settlements and Periodic Payment Judgments".

Settlement Planner Definition

A Settlement Planner is a professional educated and trained to advise plaintiffs and their attorneys, as well as judges, mediators and guardians, regarding settlement planning issues and solutions.  A Settlement Planner is one member of the Settlement Planning Team that advises the plaintiff and his/her attorney and may serve on the plaintiff’s post-settlement Advisory Committee.

The subject matter expertise of a Settlement Planner should include the ability to:

1.      Identify information and analyses, as well as other subject matter experts (SMEs), needed to develop an accurate and reliable Settlement Plan;

2.      Diagnose a claimant’s settlement planning needs based upon such information, analyses and SME reports – or based upon whatever information is available.

3.      Design and recommend a settlement plan that:

i.        Considers the recommendations of other SMEs;

ii.      Evaluates those recommendations in the context of the plaintiff’s:

(a)   Personal and Family needs, objectives and resources;

(b)   Responsibilities and obligations to others;

(c)   Rights to private and/or governmental benefits;

(d)   Net settlement proceeds;

(e)   Identifies and cost-justifies the need for additional settlement planning  information, analyses or SMEs;

(f)     Recommends products, services and strategies to accomplish objectives identified in the settlement plan.

4.      Implement recommendations included in the settlement plan;

5.      Monitor and report on developments relating to the Settlement Plan including recommendations for changes in the Settlement Plan.

For additional information, see “Structured Settlement Definition”, “Introduction to Annuities” and “Settlement Trusts”. as well as "Structured Settlements and Periodic Payment Judgments".