Beyond Structured Settlements

Death and Damages

Jeremy Babener has written a new tax article titled "Death and Damages Can be Taxing" which appears in the April 2011 issue of Trusts & Estates magazine. Written for estate planning professionals, Babener's article addresses both income and estate tax issues involved with lump sum and structured settlements.

Babener's article considers physical and emotional damages resulting from three categories of cases: wrongful death, survivor lawsuits, and pre-death causes of action. In addition to his tax analysis, Babener provides three instructive case examples plus practice tips, a summary table and extensive footnotes.

Babener's article re-affirms, from S2KM's perspective, several important settlement planning lessons:

• The complexity of settlement planning and the importance for many recipients of personal injury and wrongful death settlements to receive timely and related tax advice from tax professionals. Although Babener's audience consists of estate planning professionals who may not always contribute to case-specific pre-settlement planning, they may be called upon post-settlement to address income or estate tax problems created by a poorly planned settlement. Classic "red flag" structured settlement cases include large periodic payouts with long certain periods or large deferred lump sums.
• The importance, when planning settlements, to consider potential future tax changes including estate tax rates and/or the amounts of allowable estate tax exclusions and deductions. Recent estate tax exemptions that shelter extensive sums from any estate tax may not exist when current structured settlement recipients die with still-to-be paid periodic payments.
• The role of allocations in settlement tax planning and tax calculations. As one example, Babener discusses a wrongful death preceded by substantial pain and suffering related to the accident causing the death. Although proceeds from a wrongful death settlement are not subject to estate tax, proceeds related to the pain and suffering will be included in the decedent's estate and will be subject to a potential estate tax. In another example involving co-plaintiffs, Babener suggests naming the more injured party as the primary structured settlement payee and the less-(emotionally) injured plaintiff as contingent structured settlement beneficiary.
• The potential estate planning problems created by structured settlements including valuation of any periodic payments remaining when the primary payee dies and the potential lack of liquidity to pay estate taxes. Babener highlights a current judicial controversy potentially applicable to structured settlements related to Treasury regulations issued in 1995. These regulations provide that a "restricted beneficial interest subject to any contingency, power or other restriction" will be valued for estate tax purposes based on all facts and circumstances rather than by Treasury tables. Whether structured settlement payments are considered to be "restricted beneficial interests" (due to non-assignability clauses) becomes financially significant in calculating estate tax liability. Babener also points out the potential value or need for commutations or factoring transactions to pay estate taxes resulting from structured settlements.
• The risks for claimants and their attorneys in relying on non-tax professionals for settlement planning tax advice. This caveat was highlighted in Adrian v. Mesirow Financial Structured Settlements, a 2010 judicial decision (not mentioned in Babener's article) where a claimant alleged she was mislead by a defense broker about the favorable tax consequences of a structured settlement. In holding that the defense owed no duty to the claimant, the court found that the broker's education, certifications and years of experience related only to her work in life insurance and structured settlements and did not and should not suggest any expertise or special knowledge of tax law.

For additional tax and structured settlement articles by Jeremy Babener, see his Tax Structuring website and S2KM's structured settlement public policy wiki.

For additional information about the taxation of structured settlements, see Chapter 2 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Business Standards and Practices - 2

A prior S2KM blog post (Business Standards and Practices-1) asserted that structured settlement business standards and practices must improve before the industry can achieve its public policy and revenue potential. The prior post also highlighted historical events that help explain the development of traditional structured settlement business and professional models. This post continues S2KM analysis of traditional and transitioning structured settlement business and professional models and their related business standards and practices.

Before the structured settlement industry can improve and grow, the primary market must address these strategic issues:

• What are the traditional structured settlement business and professional models?
• What problems have traditional structured settlement models created that have restricted industry growth?
• What new business and professional models are competing with traditional structured settlement models?
• How will the business standards and practices of these new models differ from traditional structured settlement models?

The traditional primary market structured settlement business model is a "claim management model" including some or all of the following characteristics:

• IRC section 130 Qualified Assignments as the standard funding model;
• Single product (annuity) predominates;
• No requirement to define injury victim (customer) "best interests" or structured settlement product "suitability";
• Defendant "approved" structured settlement agents;
• Defendant "approved" structured settlement annuity providers;
• Defendant "right of last refusal" to match funding alternatives with affiliated annuity provider quotes;
• Defendant "right" to deny structured settlements to injury victims;
• Defendant strategies to appropriate the structured settlement tax benefit to save costs and/or generate profits;
• Opposition to single claimant 468B Qualified Settlement Funds;
• Failure to fully inform injury victims about IRC section 5891, settlement transfers or case-specific structured settlement protection statutes;
• Failure to promote "full disclosure" and "informed consent" of structured settlement compensation and/or conflicts of interest;
• Misrepresentations including (but not limited to) the "cost" and/or "value" of structured settlements.

The traditional structured settlement "professional" typically refers to himself (or herself) as a "structured settlement broker" or "structured settlement consultant". By background, he or she generally is a life insurance agent or insurance claims representative licensed to sell life insurance and typically sells one product: a single premium fixed payment life insurance annuity.

"Advanced training" for those structured settlement broker/consultant/agents who are members of NSSTA ("America's largest association of structured settlement professionals") may include a one-time one weekend "certification" program (CSSC) at the University of Notre Dame plus continuing education credits at NSSTA-sponsored education conferences. NSSTA's Code of Ethics (a Statement of Ethics and Professional Responsibility) was approved by NSSTA in 1997 "to provide guiding principles to its members and member organizations".

For many structured settlement stakeholders, including some NSSTA members and many structured settlement recipients, the problems with the traditional structured settlement business and professional models are apparent if not obvious:

• For example, NSSTA sponsored a Broker Relations Initiative beginning in 2006 to improve the reputation and public image of structured settlements by establishing more effective broker to broker communication and understanding. Despite many featured presentations and progress reports, however, the Broker Relations Initiative has not yet produced any final report or noticeable industry changes.
• During NSSTA's 2009 Winter Meeting, NSSTA member and speaker Joseph DiGangi addressed problems resulting from the structured settlement industry's traditional "annuity broker" business model. These problems, according to DiGangi, include a stagnant market, negative perceptions of structured settlement participant roles and value, a limited knowledge base and knowledge resources as well as a single product offering. DiGangi proposed an alternative "consultant" business model, which he termed "settlement consulting", with multiple products and services providing added value.
• During NSSTA's 2010 Annual Meeting, featured speaker Dan Clark highlighted NSSTA's stagnating revenue growth. As a remedy for structured settlement industry problems, Clark challenged NSSTA to change from within. According to Clark, "to improve industry performance, NSSTA must discuss both sides of every issue and do what is right."
• DiGangi's proposal and Clark's admonition create challenges that NSSTA historically has been unwilling to acknowledge or address. For example, during NSSTA's 2009 Winter Meeting, featured speaker Rev. Oliver Williams challenged the NSSTA audience to identify structured settlement business conduct that caused "shocked disbelief" among NSSTA members. Noone mentioned Macomber v. Travelers or Spencer v. Hartford or allegations by structured settlement recipients of fraud, Rico violations, misrepresentations, and rebating by primary market participants. Instead, the NSSTA members identified "structured settlement factoring" and how factoring companies have "stolen" the structured settlement brand.
• Staying focused on NSSTA, "shocked disbelief" and "structured settlement factoring", what should be surprising is how NSSTA has attempted to ignore (from their business practice and responsibility perspective) and simultaneously demonize the secondary structured settlement market. Consider, for example, the NSSTA website. If you want to "Learn More" about structured settlements:
  • NSSTA encourages you "to contact a structured settlement broker or life insurance company in your area".
  • However, if someone has offered to purchase your structured settlement payments, NSSTA advises you to contact someone else - "a trusted attorney" or "the office of your state's attorney general" - adding that "advocates for consumers and the disabled have publicly called attention to the practices of firms engaged in the purchase of structured settlement payments".
  • NSSTA's identification of structured settlement tax rules highlights IRC 104(a)(2) and 130 while omitting IRC 5891 - which includes the only Federal tax definition for a structured settlement.
• Consider also NSSTA's Code of Ethics and Professional Responsibility, which provides the following guiding principles for NSSTA member companies, their employees and individual members: integrity, fidelity, honesty, candor, competence, faithfulness, fairness, disclosure, due diligence, knowledge, skills, honesty, dignity, courtesy, professionalism and compliance with applicable federal and state laws.
• How do NSSTA's "guiding principles" square with:
  • Allegations of primary market illegal activities by structured settlement recipients in the Macomber v. Travelers and Spencer v. Hartford class action lawsuits;
  • A stagnant primary structured settlement market with negative stakeholder perceptions of participants' roles and value, a limited knowledge base and resources plus a single product offering; and/or
  • Peripheral markets such as special needs attorneys, life care planners, Medicare set-aside professionals and the structured settlement secondary market that are growing?
• The answer is they don't square. A fundamental mismatch exists between NSSTA's Code of Ethics and Professional Responsibility and traditional structured settlement business practices and standards. The reasons include:
  • NSSTA's Code of Ethics and Professional Responsibility does not contain any enforcement procedures and NSSTA has made no attempt to enforce its Code of Ethics and Professional Responsibility.
  • NSSTA adopted its Code of Ethics and Professional Responsibility in 1997. More recent structured settlement laws and related market developments have substantially changed the structured settlement market. NSSTA's Code is outdated and largely irrelevant for the transitioning structured settlement market.
  • The traditional structured settlement "claim management" business model and "annuity broker" professional model include flaws and conflicts as outlined above. Those flaws and conflicts are being exposed and punished in class action lawsuits.

For S2KM's continuing analysis of structured settlement business standards and practices, see S2KM's structured settlement 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

S2KM Reviews Jeremy Babener's QSF Paper - 2

While researching his paper "Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History" (QSF paper), Jeremy Babener interviewed many structured settlement industry leaders including Patrick Hindert, Managing Director of S2KM Limited.

This S2KM blog post features Jeremy Babener's research interview with Patrick Hindert - with emphasis (bold type) added subsequently by Patrick Hindert for this publication.

Prior S2KM blog posts about Babener's QSF paper:

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

Secondary market

• Babener: How frequently do structured settlement consultants discuss the secondary market with injury victims?
• Hindert:
  
  • While some settlement planners may discuss the secondary market with their clients, most primary market structured settlement advisers do not.
  • Most structured settlement annuity providers and their agents are not qualified to advise anyone about "structured settlement transfers" (aka "factoring").

Anti-assignment clauses

• Babener: Do courts enforce anti-assignment clauses in structured settlement documents?
• Hindert:
  
  • Structured settlement anti-assignment clauses are generally enforceable but not self-executing.
  • A party to the related documents (eg. annuity provider) must act to enforce the clause.
  • Since IRC 5891 was enacted, relatively few annuity providers attempt to enforce structured settlement anti-assignment clauses except in unusual circumstances.

Annuity commissions

• Babener: What is the typical commission for structured settlement annuities?
• Hindert:
  
  • The "standard" structured settlement annuity commission is four (4%) percent of premium which is paid by the product provider to its agents (aka "consultants" or "brokers") .
  • Frequently, multiple agents share the four percent commission.
  • Such "commission sharing" creates conflicts of interests which are rarely disclosed to the structured settlement recipient or his/her attorneys.

Taxing structured settlement recipients

• Babener: Many structured settlement consultants believe the majority of structured settlement recipients pay taxes - or would otherwise pay taxes but for the structured settlement tax subsidy.
• Hindert: Where is the objective proof? Many structured settlement industry "beliefs" don't square with the facts or the law. Your dissipation and QSF papers help to prove this thesis.

Do defendants save money using structured settlements?

• Babener: Have defendants and their liability insurers historically saved money using structured settlements by negotiating based on nominal rather than present values?
• Hindert:
  • Many structured settlement agents and intermediaries proclaim defendants save money using structured settlements.
  • Where is the independent, objective proof?
  • If true, what are the reasons:
    
    • Misrepresentation?
    • Failure to disclose?
    • Unauthorized practice of law?
  • Most structured settlements are negotiated using lump sums which are subsequently transitioned into structured settlements.
  • Why would any informed plaintiff attorney ever knowingly accept a lower fee from his client for a structured settlement settlement costing defendants less than an alternative cash settlement?
  • Under current CMS rules for workers compensation Medicare set-aside agreements (WCMSA), annuities are valued more cost advantageously for defendants than lump sums because of the CMS required "set-off" method for calculating present value.
  • This CMS valuation method also means that annuities underfund WCMSAs because the annuities do not include any inflation provisions.

Defendant savings - 2

• Babener: How frequently would you estimate that defendants save money using structured settlements?
• Hindert:
  • If and when defendants save money today using structured settlements, the primary reasons are misrepresentations, failure to disclose, unauthorized practice of law and/or undue sales pressure to fund using affiliated companies and agents.
  • Plaintiff attorneys should be, and probably will become, more aggressive in discovery to elicit information from defendants about structured settlement compensation, conflicts of interest, and company policies as well as more accurate cost and present value calculations.
  • When calculating any cost savings from structured settlements, defendants should anticipate and factor in costs from potential lawsuits for bad business behavior resulting from their current structured settlement programs.

Defendant savings -3

• Babener: What is your estimate of the amount of money defendants save using structured settlements?
• Hindert:
  • I have never seen an independent study demonstrating or explaining whether, or more importantly why, defendants save money using structured settlements.
  • Any cost savings result primarily from:
    
    • Misrepresentations;
    • Failure to disclose; or
    • Negotiation pressure to direct annuity sales to affiliated companies.
  • One of the results of high pressure structured settlement sales in a claim management context is to increase the likelihood the recipient will subsequently attempt to sell their payment rights.
  • If you ignore profits from product sales and assume full disclosure of compensation and costs with no misrepresentations and no unauthorized practice of law (agents providing legal services to save defendants legal costs), how do defendants save money using structured settlements?

Approved lists

• Babener: Have defendants and their liability insurers historically saved money on structured settlement costs by insisting on purchasing annuities from affiliates and particular life insurance companies?
• Hindert:
  • For the best evidence of defendant savings from affiliated programs, and the best explanation for such savings, review the allegations of misrepresentation and non-disclosure in the Spencer v. Hartford case.
  • When calculating "defense savings", it is important to differentiate:
    • claim savings - if any;
    • profits from structured settlement annuity sales; and
    • future liabilities resulting from structured settlement annuity sales.

Qualified Settlement Funds

• Babener: Assuming there are no defendant savings, do you think that structuring a settlement with a QSF is superior to structuring directly with a defendant?
• Hindert:
  • Yes, I believe structuring a settlement with a QSF is inherently superior to structuring with a defendant in a claim management model.
  • The objectives, processes and knowledge resources are completely different in these two settings.
  • Both the plaintiff and defendant receive judicial protection and a trustee/administrator whose role is to develop settlement solutions for all QSF beneficiaries.
  • QSFs permit and require allocation among claimant beneficiaries and lien holders - including Medicare and Medicaid.
  • Claimants and their advisers can objectively consider needs, resources and best interests.
  • The primary (only) negative of QSFs for plaintiffs is the cost.
  • Key questions about QSFs are the costs - and how to substantial decrease those costs as well as the time necessary for QSF disbursements and termination.

Spencer v. Hartford - 3

Spencer v. Hartford is a class action civil lawsuit potentially involving more than 9000 plaintiffs who received structured settlement annuities from Hartford insurance subsidiaries. The plaintiffs allege:

• Hartford has conducted a structured settlement program called "Secured Benefit Services" (SBS) since 1992 that violates the federal Racketeer Influenced and Corrupt Organizations Act (RICO) as well as state laws prohibiting fraud.
• Hartford began a "Broker Assistance Program" (BAP) in 1997 using structured settlement brokers selected by Hartford, who are not named as defendants in the civil class action, to further the mission of the SBS program. 

The case is currently on appeal to the U.S. Second Circuit Court of Appeals following a March 10, 2009 decision by the U.S. District Court in Bridgeport, Connecticut granting plaintiffs' Motion for Class Certification and Appointment of Class Counsel .

Prior S2KM blog posts:

• Spencer v. Hartford - 1 summarizes the case to date including chronology, participants, plaintiffs' allegations, District Court decision and defendants' Petition for Appeal.
  
• Spencer v. Hartford - 2 provides S2KM commentary about the plaintiffs' allegations, potential damages, the NSSTA Code of Ethics, and selected educational discussions from the NSSTA 2009 Winter Meeting.

This S2KM blog identifies and recommends:

• Questions;
• Lessons;
• A proposed solution.

Questions:

• Will the plaintiffs' RICO and state fraud allegations in Spencer v. Hartford be adjudicated or settled?
• How does Hartford, recognized as "one of the World's Most Ethical Companies" and honored for "its products, services, research, philanthropy, and programs supporting individuals with disabilities" justify its SBS and BAP structured settlement programs?
• Did any Hartford employees or participating structured settlement intermediaries (incorrectly called "brokers') question the legality of the SBS and BAP programs?
• Has any structured settlement intermediary, defendant or plaintiff, in any Hartford case ever refused to share or receive annuity commissions from Hartford on account of the SBS and BAP programs?
• Will federal authorities initiate criminal RICO charges against Hartford and the structured settlement intermediaries who participated in Hartford's SBS and BAP programs?
• Should federal officials consider Spencer v. Hartford if and when Hartford applies for TARP funds?
• Should trial attorneys who originally represented Spencer v. Hartford plaintiffs in structured settlements with Hartford be held accountable for their incompetency, lack of due diligence, or poor advice?
• How widespread among insurance companies and structured settlement intermediaries are Hartford's allegedly illegal structured settlement business practices?
• Does Spencer v. Hartford reveal a continuing pattern of industry business behavior consistent with allegations in prior lawsuits such as Weil v. Manufacturers and Macomber v. Travelers?
• Regardless of case outcome:
  • What lessons, if any, will the structured settlement industry learn from Spencer v. Hartford?
  • What, if anything, about Spencer v. Hartford causes "shocked disbelief" among structured settlement stakeholders - to borrow a term and line of inquiry from Father Oliver Williams' Ethics Course at the NSSTA 2009 Winter Meeting.
  • Will Spencer v. Hartford promote the structured settlement industry "wake-up call" Joseph DiGangi recommended when he criticized the traditional business model during his "settlement consulting" discussion at the NSSTA 2009 Winter Meeting?

Lessons

• Structured settlements are complex and involve many federal and state laws and potential long-tail legal and financial liabilities.
• If you are a structured settlement participant and/or stakeholder, you should understand, obey and help improve the laws.
• The traditional structured settlement business model ("claim management") is inherently flawed and promotes conflicts of interests which are rarely identified, discussed or disclosed.
• Structured settlement compensation arrangements and relationships generally are not disclosed.
• Most plaintiff trial attorneys lack professional competence to advise their clients about settlement issues.
• Structured settlement stakeholders are not capable of self-regulation.
• The NAIC and state insurance regulators are not capable of regulating structured settlements or settlement planning under current laws, regulatory authority and budgets.

Proposed Solution

• Controlling criteria:
  • Judicial approval of structured settlements;
  • Standards and requirements:
    • Best interest test;
    • Due diligence;
    • Disclosure - compensation and conflicts of interest;
    • Informed consent;
    • Licensing;
    • Certification.
• Laws and regulations
  • Identify, preserve and promote existing structured settlement laws;
  • Improve state structured settlement protection statutes;
  • Apply the state protection statutes to the primary market;
  • Better integrate structured settlement laws with Social Security, Medicare, Medicaid, Veterans' benefits; and Federal housing laws.
• New business models
  • Re-define the "claim management" structured settlement business model:
    • Defendants' first priority in structured settlement cases should be to obtain a full legal release.
    • If defendants want to participate in settlement planning, they should:
      • Study settlement planning;
      • Understand the laws, products, documentation and participants;
      • Re-organize and re-focus their structured settlement business models, objectives, procedures and partners.
  • Grow the "settlement planning" business model featuring:
    • Qualified settlement funds (QSFs);
    • Structured settlement annuities - qualified and non-qualified under IRC 130;
    • Settlement trusts;
    • MSAs;
    • SNTs;
    • New products such as tax-free disability funds;
    • Secondary life and annuity markets.
• Re-learn and re-market structured settlements
  • Re-study structured settlements from a settlement planning perspective;
  • Feature and promote structured settlements as a strategic component for settlement planning learning, certification, products and business standards.
  • Identify settlement planning knowledge experts and learn about their expertise, work product, professional associations, online communities, networks and learning resources.
  • Design new business models utilizing, and compatible with, existing and emerging Internet technologies as well as new settlement planning laws and products.
  • Schedule and require ethics classes focused on structured settlement and settlement planning business conduct;
  • Organize, promote and participate in community service activities with and for disability associations.

ASNP 2009 Annual Meeting

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

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

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

The SNSP program highlighted three basic issues:

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

What is SNSP?

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

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

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

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

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

• Analysis
• Planning
• Implementation
• Monitoring

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

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

What changes are impacting SNSP?

ASNP speakers identified and highlighted the following changes impacting SNSP:

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

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

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

What new opportunities does SNSP create for special needs attorneys?

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

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

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

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

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

• 2008 ASNP Conference;
• 2007 ASNP Conference.

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

Settlement Consulting - 4

This post continues S2KM analysis and commentary about "settlement consulting" as an alternative business model for structured settlements introduced by Joseph DiGangi at the NSSTA 2009 Winter Meeting.

DiGangi characterized structured settlements as a fundamental settlement consulting product and featured structured settlements in a settlement consulting case example.

DiGangi's discussion identified four stages within the settlement consulting process:

• Analysis - including needs assessment;
• Planning;
• Implementation; and
• Monitoring.

DiGangi raised the issue of whether settlement consulting includes "litigation support" services.

Prior S2KM posts about settlement consulting have:

• Reviewed DiGangi's NSSTA presentation;
• Discussed business definitions and boundaries; and
• Outlined settlement consulting history - from a structured settlement perspective.

This S2KM post republishes and analyzes a structured settlement transaction diagram S2KM developed in 2005 with graphic artist Keith Burtoft. The purposes of the transaction diagram:

• Demonstrate the complexity of structured settlements:
  • In the context of settlement consulting; and
  • From the perspective of an injury victim.
• Provide an analytic framework to:
  • Study the role of structured settlements in settlement consulting;
  • Compare alternative structured settlement business models:
    • Settlement consulting (or planning); and
    • Traditional claim management.
  • Discuss the roles, expertise and work product of various settlement consulting stakeholders;
  • Define "due diligence" and discuss potential professional liabilities;
  • Identify settlement consulting legal entities and improve legal documentation;
  • Improve settlement consulting business standards and performance metrics;
  • Highlight the importance of IRC 468B QSFs;
  • Demonstrate linkage between various settlement consulting components: including
    • Primary and secondary structured settlement annuity markets;
    • Structured settlement annuities and settlement trusts;
    • Settlement trusts and the secondary annuity and life markets.
  • Prioritize legislative and regulatory issues and develop lobbying strategies.

In comparison with 468B QSF settlement consulting, traditional structured settlement analysis (the claim management model):

• Focuses more narrowly on the IRC 130 qualified assignment transaction;
• Assumes structured settlement payees are injury victims - as opposed to trustees and custodians;
• Ignores:
  • IRC 468B qualified settlement funds (QSFs);
  • The secondary structured settlement market;
  • Non-qualified structured settlements.
• Attempts to construct planning strategies and solutions as part of the litigation and negotiation process;
• Encourages "early involvement" by plaintiff and defense structured settlement agents who:
  • Represent the same annuity providers;
  • Collaborate to maximize shared annuity sales;
  • Provide similar "value-added" services (including litigation support) to justify commissions;
  • Lack licensing and training to sell non-annuity products;
  • Fail to disclose their conflicts of interest or their compensation-sharing arrangements.
  • Assume, but fail to address, the "best interests" of injury victims and other structured settlement stakeholders.

Settlement consulting occurs, and will continue to occur, in both the claim management (defense) structured settlement model and the settlement planning (468B QSF) structured settlement model.

• S2KM believes the 468B QSF settlement consulting (and/or planning) model is "vastly superior" to the claim management model for the vast number of settlement consulting stakeholders.
• Settlement Consulting Stakeholders:
  • Injury victims and their families;
  • Federal and state governments including regulators;
  • Judges;
  • Mediators;
  • Guardians;
  • Trustees;
  • Custodians;
  • Defendants and their insurers and re-insurers;
  • Plaintiff trial attorneys;
  • Special needs attorneys;
  • Medicare set-aside professionals;
  • Financial and insurance advisers and intermediaries;
  • Life care planners; and
  • Allocators.
• "Vastly superior" should be (and hopefully will be) defined and demonstrated by industry metrics (including time and money metrics) comparing the claim management and settlement planning models and developing the best alternative with continuing improvements.
• S2KM further believes the 468B QSF settlement consulting model will substantially grow the structured settlement market.

For additional S2KM analysis:

• Structured Settlement Surveys
• Structured Settlement Credo
• Settlement Trust Due Diligence
  
• Knowledge Management and Structured Settlements
  

Settlement Trust Due Diligence

One of the strategic developments distinguishing the settlement planning structured settlement business model from the claim management model is the interaction of annuities (insurance products) with trusts and custodial accounts (banking products). All structured settlement and settlement planning professionals should understand and utilize settlement trusts.

S2KM has written previously about settlement trusts:

• Settlement Trusts Revisited - 2008
• IRC 468B Funds Revisited - 2008
• Special Needs Trusts X - 2008
• Medicare Set-Aside Update - 2008
  
• Settlement Trusts - 2004
• Selecting a Settlement Trustee - 2004

Releases 44 and 45 of "Structured Settlements and Periodic Payment Judgments" (Section 3.07A), co-authored by Daniel Hindert, Joseph Dehner and Patrick Hindert, feature expanded S2P2J analysis of settlement trusts and structured settlement annuities.

With input from, and thanks to, Benjamin Malsch of First Capital Surety and David Cover of Peoples Bank, S2KM has compiled the following questions and information requests for settlement planning advisers to assist their due diligence about specific settlement trustees. S2KM welcomes additional questions and recommendations.

Trust Company

• What type of company is the trustee?
• How long has the trustee been in business?
• Where is the trustee incorporated?
• Does the trustee have a federal banking charter?
• Where is the trustee qualified to do business?
• Where is the trustee currently doing business?
• Who owns the trustee - or for whom does the trustee work?
• Have ownership changes occurred during the last 5 years?
• Does the trustee have ownership interests in other companies?

Products and Services

• What settlement trust products does the trustee sell or service?
• What non-settlement trusts and/or non-trust products does the trustee sell or service?
  

Legislation and Regulation

• What laws and regulations apply to the trustee's settlement trust products and services?
• What legislative and regulatory authority supports the trustee's settlement trust products?
• Who regulates the trustee?
• How frequently does the regulator audit the trustee?
• When did the last regulatory audit occur?
• What were the results?

Business Conduct

• Obtain and review copies of:
  • Trust company's operating charter;
  • Latest financial, investment and regulatory audits;
  • Internal audit (SAS70);
  • Marketing materials targeting investment returns;
  • Complete information about fees and expenses;
  • References from clients similarly situated to actual or anticipated clients.
• Which bank(s) share custody of the trustee's funds?
• What lawsuits, if any, have involved the trustee during the past 5 years?
• How many trust accounts does the trustee administer?
• How many of these trust accounts are settlement trusts?
• What amount of assets does the trustee manage?
• What type of insurance coverage does the trustee maintain and in what amounts?

Business Policies

• What are the trustee's policies for:
  • Structured settlement annuities;
  • Annuity funding of attorney fees and other non (IRC 130) qualified assignments?
  • IRC section 468B;
  • The secondary life and annuity markets;

• What professional associations does the trustee support?

Performance and Fees

• Review the trustee's most recent audited financial and investment reports;
• Confirm all fees paid to the trustee, the trustee’s affiliated companies and outside vendors and partners.
• How do mutual fund providers compensate the trustee?
• If the trustee utilizes proprietary mutual funds, will management fees be offset against trustee fees?
• Does the trustee assess any penalties, redemption fees, check processing fees, tax preparation fees, termination fees or fees for extraordinary expenses?

Sales and Distribution

• Who sells the trustee's products?
• What licensing is required to sell the products?
• Who regulates the sellers of such products?
• What consumer protections exist for malfeasance or poor performance?
• What insurance do the trustee and its sales network maintain to protect purchasers?
• What educational programs does the trustee provide and/or support for settlement trusts and settlement planning?
• Does the trustee support structured settlement annuities and integrate annuities with  settlement trusts?
• Does the trustee have an “approved list” of structured settlement annuity providers and/or producers?