Beyond Structured Settlements

Structured Settlement Metrics - 2

Why should defendants or liability insurers ever agree to settle a personal injury case using a structured settlement?

Although this question may seem counter intuitive to current structured settlement stakeholders, it represented a fundamental issue when structured settlements were introduced in the late 1970s and early 1980s.

The historic sales rationale for defendants and liability insurers to endorse, promote and fund structured settlements:

• Studies show 9 out of 10 lump sum recipients "squander" their entire settlement within five years.
• Structured settlements enable recipients to live free of public benefits.
• Structured settlements reduce claim costs.
• Structured settlements help defendants settle cases that would otherwise go to trial.
• Structured settlements represent good public policy.

Although still marketed by some sales persons, the first two justifications for defendants and liability insurers to promote and fund structured settlements have been exposed as "myths" by Jeremy Babener and David Lillesand respectively. No studies exist that show 9 of 10 lump sum recipients dissipate their lump sums within five years. Worse, frequent use of the pejorative term "squander" in the context of this dissipation study myth attaches an unfair and unwarranted stigma to injury victims. Even assuming injury victims dissipate lump sums, the reasons could be as varied as payment for justifiable expenses with inadequate settlements (compared with actual lost wages, medical expenses and inflation) or pay down strategies to qualify for Medicaid.

The idea that seriously injured structured settlement recipients can survive without public benefits is nonsense - a Tea Party pipe dream. At least prior to health care reform, no insurance company would offer medical insurance at any price for brain damaged babies, serious burn victims, or quadriplegics. Medicaid represents the only medical insurance available for seriously injured (special needs) claimants whether they settle with a lump sum or a structured settlement. As underscored by Lillesand, "without Medicaid, seriously injured accident victims die" because they cannot gain access to our medical system without an insurance card. Completely contrary to this public benefit myth, how best to integrate structured settlements with Medicaid and Medicare represents an increasingly important focus for personal injury settlement planning.

Based upon the above sales rationale, however, most U.S. liability insurers and self-insured defendants have developed structured settlement programs. According to a 2011 "National Litigation Management study" commissioned by the Council on Litigation Management (Litigation Management Study), structured settlement represents the "most penetrated external initiative" among 30 litigation-related service areas analyzed based upon interviews with leading litigation management executives.

Many structured settlement programs endorsed and promoted by liability insurers and self-insured defendants (defense structured settlement programs) share certain common characteristics including:

• Approved lists of annuity providers (life companies).
• Approved "brokers" who also serve as agents for the approved life companies.
• Proactive case identification of "good candidates" for structured settlements.
• "Early involvement" by the defense structured settlement broker.
• Defense broker attendance and participation at negotiations and mediations.
• Structured settlement funding by defendants or their liability insurers utilizing annuity financing ("buy and hold') or qualified assignments.

Some defense structured settlement programs also feature:

• Defense funding utilizing an affiliated annuity provider;
• Commission sharing by the defense broker with the defendant or liability insurer. Note: such commission sharing generally utilizes a life insurance agency affiliated with the defendant or liability insurer and may or may not be disclosed to injury victims, their attorneys, mediators and/or judges.

The National Litigation Management Study also found that "litigation executives are not happy with the metrics and analytics available to them." When asked "how effective are your metrics in measuring the effectiveness of your litigation program", more than 74 percent of the study's participants rated their available metrics as "Fair" or worse. In the words of Mike Saltman, President of Esquire Corporate Solutions: "to be truly successful, national service programs must be able to deliver the very metrics and analytics that participants said they are seeking: quality, performance, and satisfaction levels. These are the metrics that a national service provider must be able to give to its clients in today's environment."

Many defense structured settlement programs do include performance metrics of which the most common are:

• Annuity premium generated by the structured settlement program; and
• Success ratio - the percentage of targeted structured settlement cases that ultimately settle with a structured settlement.
• Note: some defense structured settlement programs also attempt to measure the cost savings resulting from the use of structured settlements.

Why, when and how should defendants or liability insurers ever agree to settle a personal injury case using a structured settlement?

Bottom line: to answer that question and to evaluate the "quality, performance and satisfaction" of their structured settlement programs, defendants and liability insurers should analyze (and perhaps re-think):

• Program justification
  • Structured settlements reduce claims costs.
  • Structured settlements help defendants settle cases that would otherwise go to trial.
  • Structured settlements represent good public policy.
• Program characteristics
• Program metrics
  • Annuity premium generated by the structured settlement program.
  • Structured settlement success ratio.
  • Cost or cost savings.

S2KM will continue to discuss "structured settlement metrics" in subsequent blog posts which also will be featured on the structured settlement wiki.

Joseph Dehner Interview

Joseph Dehner is a partner in the Frost Brown Todd law firm and co-author of "Structured Settlements and Periodic Payment Judgments" (S2P2J). He has been studying and writing about structured settlements since 1977 and agreed to be interviewed for this S2KM blog post.

S2KM: Your Frost Brown Todd biography highlights your expertise in multinational securities and business disputes. How do structured settlements fit into your legal practice?

Dehner: Through some of my clients, I was part of the birth of the structured settlement industry many years ago. It is great to see the structured settlement industry evolve into a robust part of the U.S. economy. I continue to advise attorneys and firms on structured settlement and periodic payment judgment issues. One example was the honor of serving as the U.S. Government’s expert witness in the criminal trial of James Gibson, who besmirched the good names of structured settlements and US Government bond trusts, and is now serving a long prison term.

S2KM: William T. Robinson lll, your Frost Brown Todd partner and President-Elect of the American Bar Association (ABA), was be a featured speaker at the NSSTA 2011 Annual Meeting. In addition to Robinson and yourself, does Frost Brown Todd have other attorneys with structured settlement expertise?

Dehner: We have a large litigation department, but I am the primary person specializing in structured settlement matters within our firm.

S2KM: You and your co-authors have been writing and updating S2P2J since 1986. Who is your target audience and how to you track new developments?

Dehner: Our target audience includes attorneys, as well as structured settlement consultants, judges and funding providers. We review on a monthly basis all reported cases and news reports about structured settlements and periodic payment judgments, and follow information as it flows about case and other developments.

S2KM: Having recently completed S2P2J Release 49, what important legal issues and developments do you see emerging?

Dehner: There is a growing experience of post-settlement issues emerging from a variety of directions – including fights among beneficiaries of holders of structured settlement rights, factoring company fights and disputes arising from Protection Act hearings, tax rulings (e.g., wrongly incarcerated persons can receive tax-free payments, despite prior uncertainty whether they suffered a “physical” injury), rights in bankruptcy, whether structured settlement rights are marital property, and many other issues that are being resolved over time by individual case rulings. The growing use of structured settlements outside the “tax-free” arena represents recognition that settlement is a time to put into place good financial planning.

S2KM: How do structured settlements in the United States differ from structured settlements in other countries?

Dehner: Many countries have more of a safety net philosophy and less of a litigation-driven means of addressing the needs of injured persons. But for common law countries, many have moved well ahead of the USA in insisting that compensation meet needs – meaning that payments should correspond over time to the actual needs of injured persons. So, in the UK, Ireland and elsewhere, we are seeing a conversion from the ancient lump-sum one-time system to what we in the USA would find normal in the workers compensation context. This is a real sea shift in thinking.

S2KM: Are there any lessons or ideas the United States structured settlement industry can gain from other countries?

Dehner: Sure – read Chapter 1 of our book about other country experiences and approaches.

S2KM: How do you view the secondary market? Are structured settlement transfers good or bad for the industry generally - and more specifically for structured settlement recipients?

Dehner: It’s not a question of bad or good. It’s a question of how individuals react in the real world. People who hold structured settlement rights chose to take money over time at one point, and then decide for various reasons to get cash now in exchange for giving up future rights that have greater value overall. But that’s their choice. The reality is that high-pressure tactics, coupled with what would have been viewed as usury and heresy in the Middle Ages, robbed those individuals of a truly fair and efficient secondary market when the factoring industry arose. Protection Acts now exist in 47 states. When you review the reported decisions about transfers of structured settlement rights, virtually every case where a judge wrote an opinion rejects the transfer and recites in pointed language why discount rates and other factors compel denial of a transfer application. Most transfers go through anyway because of no real contest and no real focus by the court on the underlying issues. I would hope that the impact of factoring over time does not dissuade Congress from maintaining favorable government support for structured settlements through a continuation of 104(a)(2) treatment.

S2KM: What factors, in your opinion, have contributed to the recent decline in growth of the structured settlement annuity premium?

Dehner: It’s pretty simple really. Interest rates are so low for so long that structured settlements have not stood out as bargains compared to receiving a lump sum and investing it for potentially greater returns (though the performance of the US equity markets should cause a reasonable observer to think twice).

S2KM: Do you have any thoughts or ideas about how to improve and/or grow the structured settlement industry?

Dehner: Greater focus on its basic point is where to start. Regardless of tax treatment, putting into place a compensation plan that actually aims to match needs with resources makes sense. Although there is no solid statistical evidence to support the concept that recipients of windfalls have nothing left after five years, we all know the realities that confront anyone who obtains a large sum as a first time experience with wealth. Charities, friends and relatives want a piece. It’s easy to spend money sitting in the bank. And then at some point there is nothing left to deal with what in some cases is a lifetime of needs. My favorite structured settlement example was an elderly fellow I represented who was pushed over in a grocery store, broke his hip and ended up in a nursing home that at the time cost about $1100/month. He would have run out of money from his savings in about two years. Instead of getting a small lump sum settlement for what happened, the insurer provided a structured settlement that paid $1400/month for the rest of his life. The cost was minimal, given his age and the magic of actuarial science. He died 15 years later, but never had to worry about his nursing home bills. Keep the focus on this example and what it represents, and the structured settlement industry merits a bright and expanding future.

S2KM: What lessons, if any, do the Spencer v. Hartford and Macomber v. Travelers class action settlements provide for the structured settlement industry?

Dehner: Transparency. As long as underlying economic realities are known and disclosed to those involved, I don’t see an issue. One can argue about Spence and Macomber should ultimately have been decided, but there is an easy solution to the issues that underlay both cases – being up front and clear in documentation and negotiation as to what was going on. When we wrote "Structured Settlements and Periodic Payment Judgments" in 1986 (since updated 49 times), our negotiation chapter talked about how a good structured settlement negotiation should be about how much a claimant would receive when over time. It was not about negotiating an amount first, and then finding out what it would buy. Focusing on what payments will be received when (and the reliability of the financing mechanism) and disclosure of who does what and receives what are consistent with best practices, and should not be subject to later court challenges about what participants earned how much in the process.

S2KM: What impact, if any, would the expanded use of 468B funds in single event tort cases have on structured settlements?

Dehner: It would simplify matters for a defendant, of course, but would require clear IRS or statutory guidance that is missing now. It would give greater leverage to the claimant than exists now, so the defense side understandably is reluctant to embrace the tool generally, and absent clear guidance on the efficacy of single-claimant 468B funds, there is no point in the rhetorical debate that rages about this issue.

S2KM: Assuming federal malpractice reform legislation is enacted, should periodic payment of judgments be included?

Dehner: Of course. Read the recent paper of the Irish judiciary, or the UK Government’s papers that led to widespread use of periodic payment judgments there as a matter of course. Or just think about what the law really accomplishes at its best – matching compensation with actual need. This is not about favoring the defense or plaintiff side of the bar. And it is not about who wins and loses. This is about trying to make sure as well as possible that injured persons receive compensation that meets their needs. If it lowers cost, fine. If it increases cost, fine. I would argue that this is unknowable, but it is obvious to a rational individual that trying to match compensation against need is better than the equivalent of a lottery, where some people lose completely, others win it big, and many get a lump sum that does not last enough to get them through their lifetimes.

S2KM: Are there any opportunities for the structured settlement industry to benefit from proposed changes (including budget decreases) for Medicare, Medicaid and/or Social Security?

Dehner: Yes, and one can expect both further pressures for Medicare and Medicaid reimbursement at settlement time, as well as increasingly sophisticated settlement planning. Our book tries to keep abreast of these rapidly changing areas and how attorneys and other participants in the structured settlement industry can do a good job for their clients (and not make serious mistakes in the process).

S2KM: From an historic legal perspective, what impact have structured settlements and periodic payment judgments had on the U.S. tort system?

Dehner: The rule thought to be enunciated first in England in Fetter v. Beale that an injury should be compensated with a single one-time payment – the lump-sum system – has been met with deviation when it matters most – in workers compensation systems, in vaccine cases, in other applications. And even in England, the lump sum award system is slowly disappearing based on statutory changes. Structured settlements in the US have continued to chip away at lump sum thinking in America. History should show that structured settlements and periodic payment judgments will prove to be a far better alternative to the jackpot theory of litigation. Do we really want injured people to go to courthouse casinos for justice?

Structured Settlements in 2010 - 2

Beginning in 2004, S2KM has utilized this blog ("Beyond Structured Settlements") and related web 2.0 publications to report and analyze strategic developments impacting the structured settlement and special needs settlement planning (aka settlement consulting) industries.

Featuring industry leaders, commentators and professional association conferences, S2KM has attempted to highlight how legal and technology changes are redefining the traditional (pre-2001) structured settlement market including structured settlement public policy as well as structured settlement business standards, business practices and business models.

From S2KM's perspective, the following categories, people and developments defined the structured settlement and special needs settlement planning industries in 2010:

Professional associations

• S2KM attended seven professional educational conferences during 2010 which addressed structured settlement and/or special needs settlement planning issues:
  • National Structured Settlement Trade Association (NSSTA) - 2
  • Society of Settlement Planners (SSP)
  • National Association of Settlement Purchasers (NASP)
  • National Alliance of Medicare Set-Aside Professionals (NAMSAP)
  • National Academy of Elder Law Attorneys (NAELA)
  • Academy of Special Needs Planners (ASNP)
• As a general observation, all of these conferences were valuable and complementary. For S2KM's 2010 (plus historical) conference reports, see S2KM's structured settlement wiki.
• SSP, NASP and NAMSAP deserve special recognition for their 2010 strategic educational discussions featuring industry leaders, commentators and critics who offered alternative perspectives for improving and growing the structured settlement and special needs settlement planning markets.
• By comparison, NSSTA remains reluctant to openly discuss strategic industry issues or to include alternative perspectives in their educational programs. More positively, NSSTA representatives and members increasingly attend and speak at non-NSSTA structured settlement and special needs settlement planning conferences.
• NAELA's educational conferences are noteworthy because they regularly feature sections or entire programs titled "unprograms". NAELA's unprograms are moderated group discussions about specific topics. NAELA's 2010 Special Needs Summit included six separate one hour unprograms with a concluding unprogram wrap-up session. One example of a 2010 NAELA unprogram was titled "Collaboration Opportunities for Special Needs Attorneys and Financial Planners".

Industry leaders

• NSSTA promoted Eric Vaughn, who previously served as NSSTA's lobbyist, to replace Joseph Ricci as NSSTA's new Executive Director effective July 1, 2010. Peter Arnold, previously NSSTA's Marketing Director, was similarly promoted to serve as NSSTA's Associate Executive Director. NSSTA's Board of Directors elected Michael Kelly as its 2010 President and Dan Finn as its President-elect. NSSTA honored Congressman Peter Stark during its Annual Meeting as its 2010 Legislator of the Year. NSSTA also gave special recognition to Karen Meyers and Joseph Bornstein for their contributions to NSSTA's CSSC and NSSTAPAC programs respectively..
• SSP elected Jason Lazarus as its President for 2010-11 and Charles Schell as Vice President. SSP honored Richard Risk with the designation of "life member" for his contributions to SSP and the settlement planning industry. Joseph Tombs continues as Director of SSP's RSP certification program.
• NASP named Matthew Bracy as its new President succeeding Robin Shapiro. Earl Nesbitt continues as NASP's Executive Director.
• NAMSAP elected Michael Westcott as its President.
• NAELA honored Dick Traum as the first recipient of NAELA's Special Needs Leadership Award. Traum is the founder and CEO of Achilles International, a non-profit organization providing community support for athletes with disabilities with members in more than 70 countries.
• Amy Palmiero-Winters, ultra-marathoner and lower-leg amputee, was named during 2010 as the winner of the 2009 James E. Sullivan Award given annually to the top amateur athlete in the United States.

Industry commentators

• For the past several years, Robert Wood has been the preeminent tax commentator and author for the structured settlement and settlement planning industries. Wood's publications appear on the Wood & Porter website.
• During 2010, Jeremy Babener emerged as an important new structured settlement tax commentator and author specializing in public policy and proposing an expanded structured settlement tax subsidy. In addition to authoring several structured settlement articles for tax and legal journals, Babener participated as a featured speaker at both the SSP and NASP 2010 Annual Meetings and authored two blog posts for S2KM during 2010. Babener discussed his structured settlement writing (accessible on S2KM's structured settlement public policy wiki and Babener's Tax Structuring website) in this 2010 S2KM interview.
• Additional authors who wrote and published 2010 legal articles about structured settlement and special needs settlement planning issues included: Daniel Hindert, Matt Garretson, Sylvius von Saucken, Peter Wayne, Mark Popolizio, Gregg Polsky and Brant Hellwig.
• Both the Legal Broadcast Network and Ringler Radio continued to produce and distribute podcasts featuring structured settlement commentators during 2010.
• An increasing number of structured settlement and special needs settlement planning professionals published blogs during 2010 joining industry blogging pioneers such as John Darer, Mark Wahlstrom, Matthew Bracy and Jack Meligan.
• Incisive Media published two new updates (Release 47 and Release 48) for "Structured Settlements and Periodic Payment Judgments" during 2010.

Legislation

• Both the Patient Protection and Affordable Care Act (Health Care Reform) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) redesign the legal environment in which the structured settlement and personal injury settlement planning markets operate.
• Among the anticipated strategic consequences of health care reform:
  • An estimated 16 million more Medicaid participants - and therefore:
  • More special needs trusts;
  • More special needs attorneys;
  • More structured settlement annuities payable to trustees.
• Dodd-Frank re-writes federal banking law and creates a new Bureau of Consumer Financial Protection. A key question, as yet unanswered, is whether the sale and/or purchase of structured settlement annuities constitutes a "financial product or service" under Dodd-Frank requiring regulatory supervision by the Bureau.

Regulations

• The United States Department of Treasury held a public hearing on February 23, 2010 focused on proposed new regulations for Internal Revenue Code section 104(a)(2). The proposed regulations, if enacted, would:
  • Eliminate the requirement that damages be based on “tort or tort type rights” in order to qualify for the section 104(a)(2) tax exclusion, and
  • Incorporate 1996 legislation requiring that personal injuries and sickness damages be “physical” in order to qualify for the section 104(a)(2) tax exclusion.
  • A subsequent S2KM interview featured John McCullough and Richard Risk, two of the structured settlement industry members who spoke at the hearing.
• The Centers for Medicare and Medicaid Services (CMS) continued to issue administrative guidance during 2010 for enforcement of the Medicare Secondary Payer (MSP) Act of 1980 and the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) reporting requirements for insurers. Featured discussions during the NAMSAP 2010 Annual meeting highlighted:
  • The increasing importance and complexity of the MSP statute for all personal injury stakeholders;
  • The need for these personal injury stakeholders (and their professional associations) to cooperate politically and educationally;
  • The challenges of integrating structured settlements, including rated ages, with Medicare set-aside arrangements (MSAs) in the context of health care reform, CMS MSA regulations and related judicial rulings;
  • The evolving business models, claim management strategies and professional skill sets which are now emerging to address these challenges.

Case law

• The Spencer v. Hartford class action lawsuit which settled in 2010 represents one of the most important legal developments in the history of the structured settlement industry.
• Hartford's gross settlement payment of $72.5 million represents 4.5% of total premium dollars Hartford used to purchase structured settlement annuities for class members from January 1, 1997 to June 7, 2010.
• Among the plaintiffs allegations:
  • Hartford and its attorneys, brokers and agents violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and committed common law fraud in structuring its settlements.
  • Hartford's structured settlements were priced so Hartford retained 15% of the value of the structured settlements.
  • Hartford and its attorneys, brokers and agents misrepresented structured settlements including explicit or implicit reference to:
    • The "cost" of the annuity or structured settlement or portion of the settlement being structured; and/or
    • The "value" of the annuity or structured settlement or portion of the settlement being structured.
• Hartford, which stopped writing new structured settlement business in 2009, denied the allegations.

Technology

• Despite the accelerating technology advances revolutionizing society generally, the structured settlement and special needs settlement planning industries have been slow to study and incorporate these advances into their educational programs and business models.
• The best industry-sponsored technology education programs during 2010 were offered by Mark Miller during a NAELA webinar and Harry Margolis at the ASNP 2010 Annual Meeting. Both presentations provided introductory overviews of web 2.0 and including recommendations for integrating specific social networking tools into special needs legal practices.
• NSSTA initiated a NSSTA blog during 2010 and offered an educational program about Internet marketing during its 2010 Fall Education program.

Public policy

• Both SSP and NASP featured specific discussions and presentations about structured settlement public policy during their 2010 Annual Meetings. The discussions included industry commentators representing diverse viewpoints and priorities.
• Jeremy Babener followed his 2009 paper debunking industry myths concerning "structured settlement dissipation studies" with several 2010 articles and papers addressing structured settlement public policy issues. Babener's public policy writing is featured on S2KM's structured settlement public policy wiki.
• Release 47 of "Structured Settlements and Periodic Payment Judgments" re-examined several structured settlement public policy issues related to single claimant 468B funds, structured settlement factoring transactions, dissipation by personal injury victims, the Deficit Reduction Act of 2005, special needs trusts and Medicare set-aside arrangements.
• In a 2010 Boston College Law Review article, professors Gregg Polsky and Brant Hellwig challenged the application of any structured settlement tax benefit for deferring attorney fees or payments to non-physically injured tort plaintiffs under general common law tax principles.

Business standards and practices

• The Spencer v. Hartford case raises many issues about structured settlement business standards and practices which require greater education and analysis if the primary market expects to improve and grow. For example;
  • Is the primary structured settlement market capable of self-regulation?
  • Why shouldn't key elements of the state structured settlement protection statutes (judicial approval; best interest test; compensation disclosure) be applied to primary market transactions?
  • As an additional requirement, or as an alternative, why haven't plaintiff attorneys and plaintiff consultants insisted upon a claimant's written informed consent before entering into a structured settlement?
  • Why haven't the SSP's Standards of Professional Conduct received more public discussion and analysis within the structured settlement industry?
• "Cash now" advertising represents one of the most highly criticized secondary market business practices. Although this practice continues to exist, NASP took an important educational step during its 2010 Annual Meeting by highlighting this issue and inviting secondary market critics to participate in the discussion.

Business models

• While other segments of, and products within, the special needs settlement planning market have expanded and improved in recent years, the structured settlement primary market in general has stagnated and retrenched.
• During 2010, however, representatives of the primary structured settlement market increasingly recognized their interdependency, and interacted, with other settlement planning professionals and professional associations such as special needs attorneys, life care planners, Medicare set-aside professionals and secondary structured settlement market participants.
• Future industry improvement and growth will require even greater appreciation and identification of shared interests as well as expanded implementation of shared political strategies, educational programs and business models.

Prior S2KM annual reports about the structured settlement industry and reports about industry association conferences are available on S2KM's structured settlement wiki.

Structured Settlement Public Policy - 1

The Society of Settlement Planners (SSP) has invited Patrick Hindert, Managing Director of S2KM Limited and The Settlement Services Group (TSSG), to organize a discussion about "Structured Settlement Public Policy" for the SSP 2010 Annual Meeting May 3 in Washington, D.C.

For additional information about the SSP and NSSTA 2010 Annual Meetings, see this prior S2KM post.

S2KM's objectives:

• Improve and grow the structured settlement market.
• Promote public discussions about structured settlement public policy. S2KM has previously published a structured settlement public policy wiki featuring Joseph Dehner, Robert Wood and Jeremy Babener.
• Invite and challenge the best and brightest structured settlement knowledge experts to:
  • Attend the SSP 2010 Annual Meeting; and
  • Participate in a public discussion about structured settlement public policy.

Preliminary public policy questions - also posted on S2KM's public policy wiki.

• What is a structured settlement?
  • Google search
  • wikipedia definition
  • transaction diagram
• What does "public policy" mean generally - and specifically for structured settlements?
• Why is public policy important for structured settlements?
• Who and what defines structured settlement public policy?
• What changes have occurred in structured settlement public policy?
  • Before 1982
  • Between 1982 and 2000
  • Since 2001
• Based upon existing structured settlement public policy, what constitutes best business practices, bad business practices and illegal business practices?
• What are the most important structured settlement public policy issues?
• Does structured settlement public policy support:
  • Single claimant IRC section 468B qualified settlement funds?
  • Court-approved structured settlement factoring transactions pursuant to IRC 5891 and state structured settlement protection statutes?
  • Tax exclusions for non-physical injuries as well as physical?
  • Tax credits rather than the current tax exclusion?
• How many structured settlement recipients pay federal income taxes - or gain any financial advantage from the structured settlement tax exclusion?
• Do personal injury victims have a greater propensity to dissipate their financial resources than non-personal injury victims?
• Or, does public policy actually require and promote dissipation by injury victims and other disabled persons? For example, Medicaid asset requirements and resulting asset "pay down" strategies.
• Should the existence of the secondary market disqualify annuities as a funding option for special needs trusts?
• Does the Deficit Reduction Act of 2005 apply to structured settlement annuities?
• Why should structured settlement annuities cost less than lump sum alternatives to fund Medicare set-aside arrangements (MSAs)?
• How has health care reform changed structured settlement public policy?
• Does public policy support expanded use of the Internet for marketing, communication, education and collaboration? If yes, how does the Internet and Internet public policy impact the future of structured settlements?
• How can SSP members and attendees influence structured settlement public policy?
• How can members of NSSTA, SSP, NASP, NAMSAP and NAELA better identify and promote their collaborative public policy knowledge and shared public policy interests?
• Should the structured settlement industry encourage public policy analysis and promote best business practices in the context of public policy?
• Does public policy analysis and promotion of best business practices strengthen or weaken the structured settlement industry?

For additional S2KM reporting about SSP and NSSTA, see:

• S2KM's blog post titled "SSP and NSSTA 2010 Annual Meetings" and
• S2KM's structured settlement wiki.

Jeremy Babener Interview - 2

Since first meeting Jeremy Babener at the SSP 2009 Annual Meeting, S2KM has reviewed, analyzed and featured his writing about structured settlements. For prior S2KM blog posts about Jeremy Babener and his structured settlement writing, see S2KM's structured settlement public policy wiki.

S2KM published an advanced summary ("Babener Proposes Expanded S2 Tax Subsidy") of Babener's most recent structured settlement article (titled "Expanding the Structured Settlement Tax Exclusion") which is featured in this week's edition of Tax Notes. The article also appears on Babener's website TaxStructuring.com. Babener has granted S2KM the following exclusive interview about his most recent article.

S2KM: Greetings Jeremy. Our first and only prior S2KM interview (Jeremy Babener Interview) was published June 23, 2009 and highlighted your research about dissipation studies. What structured settlement articles have you written since your dissipation paper?

Jeremy Babener: I have written several articles since. The first provided context when the Treasury removed the single-claimant qualified settlement fund issue from their Priority Guidance Plan. The second discussed a Treasury hearing on Section 104(a)(2) regulations focused on the different tax treatment for physical and non-physical damages, as well as a recent proposal to eliminate the distinction by the National Taxpayer Advocate. The third, a longer law journal article, provides the history of the structured settlement and factoring industries, and makes the public policy argument in favor of Treasury regulations for single-claimant qualified settlement funds. This most recent piece introduces the possibility of converting the structured settlement tax exclusion into a tax credit.

S2KM: What reactions have you received to your structured settlement writing?

Jeremy Babener: I have enjoyed receiving feedback from industry practitioners. Many have contacted me with questions, which I am happy to discuss. In terms of recommendations that I have and am making, while I have received a lot of positive responses, the question is whether those with decision-making powers will consider them.

S2KM: Let's talk about your most recent article. What is the title and where and when was it published?

Jeremy Babener: It is titled, "Expanding the Structured Settlement Tax Exclusion," and was published on April 19th in Tax Notes.

S2KM: Who is your target audience and why should they read your most recent article?

Jeremy Babener: The article is aimed at legislators and those interested in affecting structured settlement policy. It is meant to restructure the 1982 legislation that established the current tax exclusion to better accomplish the purpose of the 1982 Congress. Of course, those in the structured settlement industry are the more practical audience. They would economically benefit from the proposal and are therefore the likeliest group to be interested.

S2KM: What is your core message?

Jeremy Babener: My article focuses on who benefits from the structured settlement exclusion. Like all exclusions, it is of little use to those who, even without the exclusion, would incur no taxable income. The article suggests that a uniform refundable tax credit for structured settlements, or a financial supplement to structured settlement recipients with less income, might better accomplish Congress’ purpose of discouraging premature and inappropriate dissipation.

S2KM: What is the difference between an exclusion and a credit?

Jeremy Babener: Let's say that my taxable income is $100,000, and that I have a 50% tax rate. That means that I pay $50,000 in taxes. A $1,000 exclusion reduces my taxable income to $99,000, and thus I pay $49,500 in taxes. As you can see, the $1,000 exclusion was only worth $500 to me. Tax credits, quite differently, are generally "dollar for dollar." This means that a $1,000 tax credit actually reduces my taxes, not my taxable income, by $1,000. Thus, I would pay $49,000 after the tax credit, rather than $49,500 after the tax exclusion. Of course, someone with a lower tax rate, such as 10% will get even less out of a tax exclusion. For them an exclusion would be worth $100, as opposed to $500 for someone with a rate of 50%.

A refundable tax credit provides the value of the tax credit to someone whether or not they have any tax liability. Thus, $100 of tax credit to someone with no tax liability results in a $100 check from the government. A uniform refundable tax credit provides the same value to all, regardless of tax brackets. Thus, everyone might subtract the same $100 tax credit from their tax liability. A person who owes $50,000 in taxes would subsequently owe $49,900. A person who owes nothing in taxes receives a $100 check from the government ($100 in "negative taxes").

S2KM: Who gets the most out of the structured settlement exclusion, and who gets the least?

Jeremy Babener: Those who generate sufficient income after a settlement to place them in the highest tax-bracket get the most out of the exclusion. As illustrated above, the higher one's tax rate is, the more one gets out of an exclusion. Those who have no tax liability do not benefit at all from the exclusion.

S2KM: Recent estimates state that 47 percent of potentially eligible U.S. taxpayers pay no federal income tax. Is that statistic accurate and, if so, how does that statistic impact your proposal?

Jeremy Babener: Yes. The Tax Policy Center found this to be the case. We do not know how many personal injury victims pay no federal income tax, but since injury often makes work difficult, I would guess that the percentage would be even higher. That means that the current tax exclusion may fail to incentivize half or more of those who could choose to structure, providing them with no economic benefit for doing so.

S2KM: Why does it matter that some structured settlement recipients get more out of the exclusion than others?

Jeremy Babener: The purpose of the exclusion is to prevent premature and inappropriate dissipation of lump sum settlements. Unless Congress believes that such dissipation is more likely among plaintiffs earning higher incomes after their settlements, which seems unlikely, the exclusion’s design is not economically efficient.

S2KM: Should we be particularly concerned that potential structured settlement recipients expecting lower incomes have a weaker incentive to structure?

Jeremy Babener: Probably. We do not have proven data on this, but it seems likely that those with lower income are those more likely to dissipate. A low income after settlement might result from a debilitating injury and high injury-related expenses. It would seem that persons in such a situation are more likely to need every last cent of their settlement compensation because they may not be able to make up for dissipation by working more. Thus, they may be the most likely people to end up requiring government assistance as a result of dissipating.

S2KM: How could the exclusion be modified to incentivise potential structured settlement recipients expecting lower incomes?

Jeremy Babener: If Congress wishes to incentivise all potential structured settlement recipients equally, the exclusion could be turned into a uniform refundable tax credit. Such a credit would provide the same amount of value, whether by reducing tax liability or providing a tax refund, to all structured settlement recipients.

S2KM: If those earning a lower income are more likely to dissipate, why should we not just direct the structured settlement subsidy to them?

Jeremy Babener: Congress could do just that. But, there are reasons not to at this time. First of all, we do not have proven evidence on the matter. Economic literature posits that when we lack such evidence, it is most economically efficient to incentivise all equally. Secondly, not everyone knows what they will be making after a settlement. Since the exclusion is meant to encourage a particular decision at the time of settlement, it may be best to guarantee the benefit to all potential structured settlement recipients.

S2KM: Who would win and who would lose if Congress goes with a uniform tax credit?

Jeremy Babener: Clearly, those who could take advantage of the structured settlement exclusion, who could not before, would benefit. The “loser,” if there is one, depends on the structure of the credit. The tax credit would cost the government, just as the current exclusion does. Since the benefit would go to more people under this proposal, Congress would have to decide whether to allow an increase in lost revenue, or decrease the benefit to potential structured settlement recipients. Of course, allowing an increase in lost revenue may save the government from future increases in government assistance payments due to dissipation.

S2KM: What are you hoping to accomplish by writing this article?

Jeremy Babener: The article is not a sophisticated and ready-to-go proposal for Congress. It introduces an idea that I hope the structured settlement industry will take on and make its own. An expansion of the exclusion could benefit plaintiffs (by increasing their settlement value), defendants (by decreasing their settlement cost), brokers (who will earn more commissions), and insurance companies (who will increase annuity sales). I encourage the National Structured Settlements Trade Association (NSSTA) and the Society of Settlement Planners (SSP) to consider the proposal in the future. In fact, even the National Association of Settlement Purchasers (NASP) might weigh in, as the secondary market would be impacted by such a policy change. When the entire structured settlement industry stands to gain, these three associations should work together to further their mutual interests.

S2KM: Given your previous finding that no empirical data has proven that 90% of lump sum plaintiffs dissipate their money in five years, why would you recommend an expansion of a tax exclusion meant to prevent dissipation?

Jeremy Babener: In my research I found that the many citations to statistical findings of dissipation are not substantiated. However, I have also spoken with many in the industry. The anecdotal evidence certainly exists. It is the responsibility and prerogative of Congress to decide how much evidence is needed to legislate, and this was certainly not the first or last time that anecdotal evidence was relied upon for that purpose. My recommendation for a uniform refundable tax credit is meant to better accomplish Congress' goal.

S2KM: As a participant in the upcoming SSP tax panel (May 3 - Washington, D.C.), what tax issues interest you the most about structured settlements and personal injury settlement consulting?

Jeremy Babener: Clearly, I am interested in reactions to this proposal. Among other issues, I am also very interested to discuss the National Taxpayer Advocate's proposal to eliminate the difference in tax treatment between physical and non-physical injury. Currently, the proposal does not take the purpose of the structured settlement exclusion into account. The Advocate's proposal seeks to repeal the 1996 amendment to Section 104(a)(2) limiting the favorable tax treatment of damages to those received on account of "personal physical injury or physical sickness," rather than simply "personal injury or sickness." Unfortunately, the proposal does not seek to repeal the amendment to Section 130 in the Tax Reform Act of 1986 limiting the favorable tax treatment for structured settlement assignment companies to cases "involving physical injury or physical sickness." Thus, while the purpose of the Advocate's proposal is consistent with bringing non-physical damages back into the structured settlement tax-favored fold, it does not.

For prior S2KM blog posts directly or indirectly related to Jeremy Babener, see:

• Babener Proposes Expanded S2 Tax Subsidy
• Legislation to Expand the Structured Settlement Industry
• Jeremy Babener Interview
• SSP 2009 Annual Meeting
• NSSTA 2009 Fall Educational Conference

Babener Proposes Expanded S2 Tax Subsidy

Jeremy Babener, third year law student at NYU School of Law, and author of several recent articles about structured settlements, has proposed an expansion to the structured settlement tax subsidy in an article that will be featured in next week's edition of Tax Notes.

The premise of Babener's proposal is that high-income taxpayers benefit more from the structured settlement subsidy than low-income taxpayers, who sometimes do not benefit at all. Given that low-income taxpayers may be more likely to dissipate, Babener argues the IRC section 104(a)(2) exclusion should be available to all potential structured settlement recipients.

To accomplish this objective, Babener proposes a legislative conversion of the structured settlement exclusion to a refundable tax credit. According to Babener, a refundable tax credit would provide the same incentive value to all structured settlement recipients, whether high-income or low-income.

Following publication of Babener's Tax Notes article, S2KM will feature an interview with Babener about the context and rationale of his proposal.

For prior S2KM blog posts featuring Babener and his writing, see S2KM's structured settlement public policy wiki.

Structured Settlements in 2009 - 2

This S2KM post follows "Structured Settlements in 2009 - 1" and features topical links to S2KM 2009 blog reports.

For 2010 industry updates, please continue to visit S2KM's blog as well as S2KM's structured settlement wiki.

Prior S2KM annual industry reports:

• Structured settlements in 2008
• Structured settlements in 2007
• Structured settlements in 2006

Professional Association Meetings

• NSSTA - National Structured Settlement Trade Association
  • Winter meeting
  • Annual meeting
  • Fall meeting
• SSP - Society of Settlement Planners
  • Preview
  • Annual meeting
• NASP - National Association of Settlement Purchasers
  • Part 1
  • Part 2
  • Part 3
• ASNP - Academy of Special Needs Planners
  • Annual meeting
  • Tim Nay interview

Settlement Consulting

• Part 1
• Part 2
• Part 3
• Part 4

Spencer v. Hartford

• Report 1
• Report 2
• Report 3
• Report 4

IRC 468B Qualified Settlement Funds

• Single Claimant 468B QSF Update
• IRC 468B and 5891
• Robert Wood's QSF Book
  • Summary and Review
  • Robert Wood Interview
• Jeremy Babener's QSF Paper
  • Summary
    
  • Review
    • Part 1
    • Part 2
  • Jeremy Babener Interview
• US Treasury Priority Guidance Plan 2009-2010

Dissipation Studies

• Introduction
• Jeremy Babener's Dissipation Paper
  • Summary and Review
  • Jeremy Babener Interview
  • Jeremy Babener Responds

Structured Settlement Credo

• Part 1
• Part 2
• Part 3
• Part 4
• Part 5

Rapid Settlements

• Pacific Life v. Rapid Settlements
• Allstate v. Rapid Settlements

Fresno County Factoring Cases

• Report 1
• Report 2
• Report 3

Additional S2KM Analysis

• Re-Thinking Structured Settlements
• Structured Settlement 2009 Mid-Year Update
• Structured Settlement 2009 Strategic Analysis
• Structured Settlements and Government Benefits
• Settlement Trust Due Diligence

Additional Primary Market Developments

• Forge Purchases TSSG
• Richard Halpern

Additional Secondary Market Developments

• S&P Withdraws JG Wentworth Credit Ratings
• Structured Settlement Securitizations

"Structured Settlements and Periodic Payment Judgments"

• S2P2J Release 45
• S2P2J Release 46

NASP 2009 Annual Meeting - 2

The purpose of this S2KM blog post is to summarize educational discussions which occurred at the NASP 2009 Annual Meeting. In a prior post (NASP 2009 Annual Meeting-1), S2KM listed the discussion topics, moderators, speakers and panelists and also identified Van Tran as the winner of the NASP 2009 Alexander Hamilton award. In subsequent blog posts, S2KM will provide analysis and feature interviews with selected NASP educational program participants.

2009 Legislative Developments - Matthew Bracy summarized California Senate Bill 510 which Governor Arnold Swarzenegger signed into law October 11, 2009 and which becomes effective January 1, 2010. Among changes to the California structured settlement protection statute, SB 510 adds factors for the court to consider when determining whether a proposed transfer is fair, reasonable and in the payee's best interest. These factors now include the reasonable preference of the payee considering age and mental capacity. Bracy also summarized the new North Dakota structured settlement protection statute which generally follows the NCOIL Model Act. North Dakota becomes the 47th state to enact structured settlement protection legislation.

Legal Case Update - Tricia Laborde's legal case update focused primarily on the Fresno County cases and Rapid Settlement cases. Among other holdings in Scioteco v. Henderson, a California appellate court ruled that public policy supports state court approved structured settlement factoring transactions. In Allstate v. Rapid Settlements, which denied Rapid's appeal, U.S. Third Circuit Judge Joseph F. Weis, Jr. noted: "We are one of the many courts to face Rapid Settlements' transparent attempt to use this arbitration scheme to evade the legislatures' intentions to protect the recipients of structured settlement payments".

What Happened in California? - A panel of legal and political experts provided background and analysis of SB 510 and the Fresno County cases. NASP lobbyist Carl London summarized the collaboration between NASP and Consumer Attorneys of California (formerly the California Trial Lawyers), plus the role of California legislator Van Tran, in securing enactment of SB 510. Linda Morris, General Counsel for J.G. Wentworth, provided background information and strategic commentary about appellate decisions for the Fresno County cases which she characterized as an important victory for the structured settlement industry.

Transactional Structured Settlement Issues - A panel of attorneys discussed practical problems in securing judicial approval for proposed structured settlement transfers. Some of the issues discussed: difficulties in determining the domicile of transient payees; privacy issues including the impact of Pennsylvania Rule 229.2; difficulties in finding independent professional advisers; and what happens when judges attempt to re-negotiate agreed upon transfers.

Structured Settlement Capital Markets - A panel of factoring company executives discussed how the 2008-2009 capital market upheaval has changed the secondary structured settlement market.
The changes:

• The cost of funds today for factoring companies (8 to 9%) equals the best discount rates offered for transfers two years ago;
• Bundling purchases of individual payment rights into a security is financially less efficient and/or available today;
• Marketing and court costs for factoring companies remain high;
• Perceived financial risks for potential insurer failure have increased;
• The impact of a potential ELNY liquidation remains uncertain.

Structured Settlement Court Practices and Issues - Judges Edward Burke of Arizona and Christopher Marshall of Oregon joined a panel of attorneys in discussing settlement transfer court practices and issues including: prior transfers by the same payee; the roles of transfer attorneys and independent professional advisers; privacy concerns for transferring payees; the advantages of utilizing a single state judge for all transfer requests; plus other problems which cause continuing judicial concerns about factoring and factoring companies.

Factoring and the Structured Settlement Tax Subsidy - Jeremy Babener addressed the important role IRC 130 and 104 tax subsidies have played in the growth of structured settlements. He summarized the political and public policy attacks against, and defenses for, structured settlement factoring transactions and questioned whether:

• The tax subsidy prevents dissipation?
• The tax subsidy discourages factoring?
• Factoring undermines the tax subsidy?

Babener challenged NASP to develop better information about who actually sells structured settlement payment rights and why.

Structured Settlement Bankruptcies - Bruce Akerly summarized his recent paper titled "The Impact of an Annuity Servicer's Bankruptcy on the Annuitant and Structured Settlement Purchaser". Akerly's conclusions:

• "The annuity payments received by a structured settlement servicing company, as well as the servicing agreement itself, become property of the bankrupt estate"; and
• "It may be possible to draft provisions in the servicing agreement to anticipate some of the consequences of the servicing company entering bankruptcy and perhaps lessen the impact on all parties."

Re-thinking Structured Settlements - a multi-disciplinary panel of industry experts addressed strategic structured settlement issues:

• What developments in 2009 will most impact the future of structured settlements?
• What are the best (and worst) structured settlement standards and business practices?
• Which structured settlement myths are most out-of-line with reality?
• How will commutations change the structured settlement market?
• What knowledge and skill sets are most important for future success in the structured settlement industry?

For S2KM reports about prior NASP meetings, see the structured settlement wiki.

NSSTA 2009 Fall Educational Conference

Meeting at the Mandalay Bay Hotel in Las Vegas on October 15 and 16, the NSSTA 2009 Fall Educational Conference provided a potpourri of perspectives on the central topic of structured settlements.

Although lacking a unifying theme and failing to provide noteworthy handout materials, the conference did offer a general industry overview and did address several important industry developments without encouraging or generating meaningful discussion or detailed inquiry.

The general overview featured structured settlement perspectives from selected industry stakeholders:

• Plaintiff attorneys - Neil Galatz and Jeffrey Mitchell;
• Defense attorney - Steve Jaffe;
• Special needs attorney - James O'Reilly (with NSSTA member Thomas Spratt);
• Life company executive - Joseph Barnet;
• Annuity agents (discussing mediation) - Tony Robinson; Alice Frisbee; Kathleen Osler; and Traci Kaas;
• Attorney and annuity agent (discussing history, myths and opportunities) - Karen Meyers;
• Congresswoman Shelley Berkley.

Industry developments featured:

• NSSTA General Counsel Craig Ulman;
• NSSTA lobbyist Eric Vaughn;
• NSSTA Legal Committee representatives - Peter Vodola; Ilana Hanau; Michael Miller; and Mark Alpert.

The most important industry developments discussed in Las Vegas:

• Warnings from Vaughn and Congresswoman Berkley about anticipated federal tax reform in 2010;
• Vaughn's report that some federal health care reform proposals include tort reform and periodic payment of judgments;
• Ulman's update about the increasingly precarious financial condition of Executive Life of New York;
• Alpert's summary of PLR 121876-08 permitting a tax-free "restructuring" of periodic payments;
• Hanau's summary of the Henderson v. Sioteco case where a California appellate court reversed earlier Fresno County trial court decisions and declared that public policy now supports state court approved factoring transactions.
• Vodola's summary of California's new structured settlement protection statute (SB 510) which includes a detailed definition for "best interest".

From a critical perspective, NSSTA's 2009 Fall Educational Conference represented a series of "missed opportunities".

Missed opportunity #1 - Karen Meyers, who co-developed and annually presents NSSTA's "Certified Structured Settlement Consultant" (CSSC) program, addressed a NSSTA educational program for the first time in several years - and didn't talk about the CSSC program.

Missed opportunity #2 - Meyers spoke instead about structured settlement myths - yet failed to address the most fundamental and controversial NSSTA myths including "squandering injury victims" (see: "Dissipation Studies") and "how structured settlements enable injury victims to live free of reliance on government assistance" (see: "Structured Settlement Credo")

Missed opportunity #3 - NSSTA's educational program failed to acknowledge, respond to, or apparently understand, two recent strategic challenges which question the focus and scope of NSSTA education:

• Internal challenge - Joseph DiGangi's "Settlement Consulting" presentation at the NSSTA 2009 Winter Meeting;
• External challenge - The Society of Settlement Planners (SSP) Registered Settlement Planner Certification Program.

Missed opportunity #4 - related to missed opportunity #3: NSSTA's educational programs continue to ignore the strategic relationship among structured settlements, financial planning and life care planning.

Missed opportunity #5 - although NSSTA's legal committee has successfully expanded the scope of NSSTA's structured settlement legal education (from "Tax Posse" to "All Things Considered"), their programs tend to be repetitive (e.g. "Contracts 101") and fail to translate current legal developments into broader topical presentations.

Suggested future legal committee educational topics:

• What NSSTA members need to know (and tell their clients) about IRC 5891, state protection statutes and structured settlement factoring transactions;
• What NSSTA members need to know (and tell their clients) about IRC 468B qualified settlement funds;
• Comparative business standards and practices for various structured settlement stakeholders and "competitors" - insurance agents; financial securities salespersons; attorneys; trustees.
• Transactional analysis - what does a structured settlement look like in the context of 468B qualified settlement funds; special needs trusts; Medicare set-aside arrangements; and secondary market transfers?
• Integrating annuities with settlement trusts - how do integrated products impact traditional structured settlement planning, documentation and education?

Many structured settlement leaders no longer attend NSSTA educational conferences - especially those leaders who are defining the future of the structured settlement industry. When those industry leaders do attend NSSTA conferences, they attend primarily for networking opportunities or committee meetings - not for the educational programs.

With some exceptions, NSSTA's educational programs are no longer educational. They are mundane, repetitive and suitable primarily for persons new to the industry. Controversial subjects do not appear on the program - or they are circumscribed to avoid controversy. Debate is discouraged. Speakers rarely face tough questions - or provide handout materials.

Perhaps it is time for NSSTA to re-think structured settlements and structured settlement education. What will it take to attract a new generation of structured settlement leaders to join and participate in NSSTA? What will it take to re-engage the industry's best and brightest professionals in NSSTA's educational programs? The NSSTA Fall 2009 educational conference in Las Vegas highlighted those issues without providing any answers.

For prior S2KM reports about NSSTA educational programs, see S2KM's structured settlement wiki.

Jeremy Babener Interview - 2

S2KM introduced, summarized and reviewed a paper written by Jeremy Babener  titled "Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History" (QSF paper), in four prior blog posts:

• Single Claimant 468B QSF Update;
• Jeremy Babener's QSF Paper;
• S2KM Reviews Jeremy Babener's QSF Paper - 1;
• S2KM Reviews Jeremy Babener's QSF Paper - 2.
  

S2KM previously interviewed Babener (Jeremy Babener Interview) as part of the S2KM blog series "Dissipation Studies" which featured Babener's paper titled "Justifying the Structured Settlement Tax Subsidy: The Use of Lump Sum Settlements".

This S2KM post publishes an exclusive interview with Jeremy Babener about his QSF paper. S2KM also features Babener in S2KM's structured settlement public policy wiki.

S2KM: Jeremy, what are the principle conclusions and recommendations in your QSF paper?

Babener: The paper focuses on the Treasury’s treatment of single-claimant QSFs, recommending their explicit eligibility for the structured settlement tax subsidy. In order to properly consider the subject, however, one must view the present question in the context of three decades of structured settlement tax and policy history.

The paper narrates a pattern of increased economic control being allowed to structured settlement recipients, the most well known example being factoring. It also analyzes previously made arguments in the single-claimant QSF debate. Doing both provides the legal and interpretive bases for future Treasury action.

The paper describes the historical benefits that defendants and casualty insurers have captured by using structured settlements, arguably at the expense of personal injury claimants. The paper explains how single-claimant QSFs are currently being used, and how such use helps to achieve the structured settlement tax subsidy’s purpose. Doing both provides the policy rationale for future Treasury, or perhaps legislative action.

S2KM: What surprised you most about your findings?

Babener: I was quite surprised by the methods used by some plaintiff representatives to avoid defendants' detection of QSF use (so as to avoid defendant opposition to the QSF's creation). Representatives sometimes arrange for QSFs to be created in a state different from that in which the personal injury action was filed, and direct the defendant to write a lump sum check to a name not typically associated with a QSF. In fact, because QSF regulations merely require that a government entity create the QSF, some have contemplated petitioning non-judicial entities.

S2KM: What caused you to focus on single claimant QSFs?

Babener: I clerked at the U.S. Department of Justice’s Federal Tort Claims Act Section during the summer of 2008. After being introduced to structured settlements there I began researching their use, purpose, and the policy behind Congress’ subsidy for them. In my research I focused on the effectiveness of the subsidy.

The subsidy’s purpose is to decrease premature dissipation by encouraging long-term planning (by committing to periodic payments over time). It is important to ask if the plaintiff-defendant negotiation table, where settlements are typically structured, is the opportune place for long-term planning to occur.

This led me to QSFs, which offer defendants a fast and permanent settlement option, and plaintiffs an unhurried and less combative option. Thus, my work addresses the great deal of uncertainty among practitioners as to whether their single-claimant clients can use QSFs and still benefit from the structured settlement tax subsidy.

S2KM: Did you write your QSF paper for a specific class or seminar?

Babener: I wrote both my papers – the dissipation paper and the QSF paper – for a course called Tax and Social Policy.

S2KM: What were the primary resources for your research?

Babener: I set out to use all relevant sources that I could find on structured settlements and QSFs. The paper relies on treatises, articles, textbooks, cases, memos, presentations, web sites, and interviews.

S2KM: How many persons did you interview and how did you select them?

Babener: I contacted as many within the structured settlement industry as I could, and spoke with any who were willing. I formally interviewed some two-dozen individuals, including representatives of the National Structured Settlements Trade Association, the National Association of Settlement Purchasers, and the Society of Settlement Planners. Among those interviewed were plaintiff and defense attorneys, plaintiff and defense side structured settlement brokers, casualty and life insurance representatives, factoring attorneys, QSF administrators, structured settlement commentators, law professors, treatise authors, and a state court judge.

S2KM: What linkage, if any, exists between your QSF paper and your dissipation paper?

Babener: The dissipation paper was actually the result of research for the QSF paper. In order to explain the justification for the structured settlement tax subsidy I needed to find the basis for the claim that lump sum recipients frequently dissipate their settlements. In time, I realized that the empirical work cited could not be found.
The dissipation paper observes that there is no empirical foundation for the structured settlement tax subsidy, though much anecdotal evidence exists. The QSF paper looks to increasing the effectiveness of that subsidy by structuring in a non-combative and less hurried context.

S2KM: Why, in your opinion, has Treasury delayed clarifying the application of 468B to single claimants?

Babener: The issue has been in the Treasury’s Priority Guidance Plan since 2004. It is not unclear why it has not been addressed. I cite to work recommending against such clarification in the paper, and to disagreement within the Treasury. However, needed regulations are delayed all the time for any number of reasons.

S2KM: What are the strongest public policy arguments for and against single claimant QSFs?

Babener: The public policy argument for allowing single-claimant QSF structured settlements to benefit from the tax subsidy is very strong. Settlements are often hurried and contentious. In addition, the parties, including the plaintiff, are likely concerned with the final amount more than scheduling future periodic payments to accurately match future needs. QSFs, as Robert Wood has observed in his work, provide a “tax free way station” for settlement monies. This allows the plaintiff, hopefully with the help of informed advisers, to properly structure the receipt of future monies. It may also enable plaintiffs to capture more of the benefits of structuring, including more of the tax subsidy, by removing the defendant from the structuring process.

Opponents of such Treasury action argue that the use of single-claimant QSFs will lead to less structured settlements, and therefore more premature dissipation of settlement monies. Because defendants have historically been able to decrease settlement costs by structuring, they have had an incentive to push for using a structured settlement during negotiations. By removing defendants from the structuring process, QSFs may result in many plaintiffs not being pushed to structure.

However, there are at least two problems with this argument. First, it must be remembered that while defendants have an economic incentive to structure, they do not have an economic incentive to structure accurately, matching the timing of plaintiff’s future payments with future needs. Second, just as defendants have an incentive to structure to mitigate settlement costs, other parties have an economic incentive to encourage plaintiff to structure even outside of plaintiff-defendant negotiations. These are structured settlement advisers (and possibly QSF administrators), whose business depends upon plaintiffs understanding the benefits of structuring.

There will surely be plaintiffs whose use of single-claimant QSFs ends in a lump sum distribution rather than structuring. But, there are likely many more who will structure, who otherwise would not have as a result of the plaintiff-defendant settlement process. By increasing the frequency of structuring, and the accurate matching of future payments to future needs, the use of QSFs will prevent premature dissipation (and the need to factor) in many cases.

S2KM: When and where will your QSF paper be published?

Babener: The paper will be published by the NYU Journal of Legislation & Public Policy in March, 2010.

S2KM: What other structured settlement issues, if any, interest you?

Babener: The processes of settling, structuring, and factoring raise many practical and policy questions from the perspectives of plaintiff, defendant, and society alike. A previous S2KM post listed several issues that neither of my papers have addressed, such as structured settlement public policy in relation to government benefits such as Social Security, Medicare, and Medicaid. These are subjects of increasing importance, and I hope to join the ongoing discussion.

Thank you, Jeremy, for this interview and for sharing your QSF paper. Good luck with your professional career.