Beyond Structured Settlements

SNTs and Structured Settlements

With declining annuity premium and historically low interest rates, structured settlement stakeholders should be discussing how to improve and grow their business. By substantially expanding Medicaid, Federal health care reform potentially increases the market for structured settlement annuities used to fund special needs trusts (SNTs).

Congress created special needs trusts (self-settled; pooled; and third party) as part of the Omnibus Budget Reconciliation Act of 1993. When properly designed and administered, special needs trusts can receive settlement proceeds, including structured settlement payments, without disqualifying the trust beneficiary from SSI or Medicaid.

Whether a special needs trust is advisable in a specific case requires analysis of many factors including the extent of disability, the availability of government benefits, as well as the nature and amount of available personal and family assets. One complicating factor is shared regulatory authority. Medicaid is a joint federal state program. In addition to two federal agencies (SSA and CMS), state Medicaid agencies and state Medicaid plans also provide state-specific rules for special needs trusts. State and county Medicaid case workers interpret and apply federal and state Medicaid laws to individual cases.

The growth of special needs trusts has coincided with a corresponding increase in the number of special needs attorneys. Three national professional associations (ASNP, SNA and NAELA) now exist for special needs attorneys and several legal textbooks have been written about special needs trusts. Most of these textbooks, however, are generic and do not provide detailed state-specific analysis. One exception is a two volume treatise published in 2008 (with updates) by the California CEB titled "Special Needs Trusts: Planning, Drafting and Administration" (CEB SNT). Edited by Kevin Urbatsch, CEB SNT features 17 chapters separately written by leading California special needs attorneys plus detailed appendices with applicable legal forms plus federal and state statutes, regulations, case citations and other references.

Because California represents a large and strategically important state for both structured settlements and special needs trusts, S2KM recently reviewed CEB SNT to evaluate how this legal treatise addresses structured settlements and what opportunities it suggests for improving and growing the national structured settlement market. Most of the structured settlement discussion in CEB SNT appears under a Chapter 8 section titled "Use of Structured Settlements with First Party SNTs" authored by Donna Bradshaw and Leslie Ann Barnett.

Settlement Planning Team

For personal injury cases involving a special needs trust, Bradshaw and Barnett propose a collaborative settlement planning team consisting of a special needs attorney, a structured settlement broker, a SNT trustee, an independent financial planner and a life care planner. Neither Bradshaw and Barnett, nor other CEB SNT authors discuss this proposed planning team in detail. Arguably, such a discussion goes beyond the scope of this CEB SNT treatise.

The concept of a collaborative professional team, however, is critical for settlement planning and the future of structured settlements. Unfortunately, with only a few exceptions (most notably the ASNP 2009 and the SSP 2011 Annual Conferences both of which featured CEB SNT editor Kevin Urbatsch as a speaker), the following issues have to date received insufficient industry discussion:

• What is a settlement plan?
• Who are the necessary team members and what issues should they address?
• What is the settlement planning role, if any, for the plaintiff trial attorney? for the defense structured settlement broker?
• What work product(s) do each of the team members contribute?
• How are the various work products consolidated and by whom?
• How are conflicting recommendations reconciled and by whom?
• What does a settlement plan cost?
• How are the team members compensated and by whom?
• What disclosures should be made to the injury victim?
• What metrics are needed to evaluate the effectiveness of a settlement plan?
• How important are 468B qualified settlement funds for settlement planning?
• Who is liable, and how are damages apportioned, for settlement planning errors and omissions?

Structured Settlements

In the two volume CEB SNT treatise, structured settlements are the only SNT "funding product" that receives detailed coverage. Chapter 8 authors Bradshaw and Barnett justify devoting 12 CEB SNT subsections to "structured settlements" by stating: "special needs planners need to understand how structured settlements work with first party SNTs to best advise personal injury attorneys, persons with disabilities, and their families."

Acknowledging the need to understand how structured settlements work, however, does not mean Bradshaw and Barnett fully endorse structured settlements. To the contrary, they provide several warnings and cautionary notes:

• "Plaintiff's trial attorney may mistakenly believe (or be misled into believing) that a structured settlement annuity is the only effective tool for the major part of the settlement funds."
• "At times a structured settlement is funded for a person with a disability without consideration of the unique needs to that individual."
• "The most common issue is too much cash in the structured settlement and not enough cash outside the structure."
• "It is insufficient to retain just enough cash to purchase a home and a van; there also must be a financial plan to maintain the home and van and consider replacement costs"
• "When a settlement has been funded primarily in a structured settlement annuity, there is little protection from inflation."
• "Annuities purchased in a time of low interest rates are likely to grossly under perform when compared to a well-balanced portfolio of stocks and bonds."
• "If the SNT beneficiary has an emergency or needs cash quickly, the settlement annuity will not advance payments."
• "It is imperative that practitioners insist on a commutation rider whenever there is a possible estate tax situation."
• "Once the structure is funded, [the structured settlement broker's] job is done. It is then left to the SNT trustee and special needs practitioner to work with the structured settlement for the rest of the person with the disability's life."

Without explicitly criticizing structured settlement business standards and practices, these warnings and cautionary notes highlight structured settlement issues S2KM discussed in a recent blog series about "product suitability standards" including the need for full disclosure and informed consent.

Despite 12 CEB SNT subsections discussing structured settlements, Bradshaw and Barnett barely mention three structured settlement-related topics that are important for special needs attorneys:

• Periodic Payment of Judgments - California was the first state to make periodic payment mandatory in certain (medical malpractice) judgments "at the request of either party". Because California's medical malpractice periodic payment statute also influences settlements that include special needs trusts, California special needs attorneys should be familiar with its provisions.
• Structured Settlement Transfers - Structured settlement transfers represent a strategy option for SNT trustees and special needs attorneys to consider if and when they confront some of the potential structured settlement problems Bradshaw and Barnett identify above. California amended its state structured settlement protection statute in 2010 adding factors for the court to consider when determining whether a proposed transfer is fair, reasonable and in the payee's best interest.
• Qualified Settlement Funds (QFS) - Similar to structured settlement transfers, QSFs are controversial within the structured settlement industry. Arguably underused in single event cases, QSFs provide a valuable settlement planning tool that all special needs attorneys should understand and promote.

Conclusion

For a regressive structured settlement industry, first party special needs trusts represent a growing market segment and special needs attorneys provide expanding networks of potential professional allies. Although CEB SNT focuses on California special needs trusts, the subsections discussing structured settlements offer a useful learning resource for all structured settlement stakeholders. Bottom line: the structured settlement industry needs to expand its strategic dialogue with special needs attorneys. The objectives should include better marketing and product feedback plus improved educational programs, business models and business practices.

For additional information about special needs trusts and structured settlements, see the structured settlement wiki and Section 15.04[7] of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

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?

S2P2J Release 49

Publisher American Lawyer Media (ALM) has announced May 1, 2011 as the distribution date for Release 49 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). First published in 1986, S2P2J is co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) utilize S2P2J as an educational resource for their certification programs.

S2P2J Release 49 Highlights

• Expanded guidance on Medicare reimbursement procedures including:
  • A new section on how the Medicare Secondary Payer rules affect plaintiffs, defendants, plaintiffs’ attorneys and insurers; and
  • How each such case participant can comply with increasing government efforts to recoup prior payments from settlements.
• How allocations in settlement agreements affect a claimant's tax treatment.
• Structured settlement tax decisions in recent cases including:
  • No-fault;
  • Emotional distress; and
  • Wrongful incarceration.
• How the Gramm-Leach-Bliley Act privacy rules impact the structured settlement process.
• Discoverability of claimant Social Security numbers
• Impact of structured settlement tax and timing issues on potential legal liability for;
  • Defense and plaintiff attorneys; and
  • Structured settlement consultants.
• How inadequate beneficiary designations create subsequent legal disputes.
• Whether an arbitration award can be converted to a periodic payment judgment.
• Qualifying annuitists as expert witnesses.
• Impact of anti-assignment provisions in:
  • Workers compensation cases; and
  • U.S. government as defendant cases.
• Recent secondary market judicial decisions:
  • Rejecting transfers of structured settlement payment rights for failure to meet the "best interest" test; and
  • Approving the sale of payment rights in a payee’s bankruptcy.
• How structured settlement payment rights are treated in bankruptcy, child support, marital asset and minor cases.
• New structured settlement and periodic payment developments in Ireland, Canada, New Zealand and the United Kingdom.

For highlights from past releases of "Structured Settlements and Periodic Payment Judgments", see S2KM's structured settlement wiki.

Using Medical Costs to Lower Taxes on Emotional Distress Damages

Jeremy Babener, author of previous legal articles about structured settlements and taxation of personal injury damages, has published a new article titled "Maximizing the Medical Care Exception to the Tax on Emotional Distress Damages" in the September issue of Practical Tax Strategies.

Babener's new article, available on his Tax Structuring website, continues and expands Babener's analysis of medical expense deductions in personal injury cases. S2KM featured Babener's recent, related article titled "Taking Medical Expense Deductions Before and After a Personal Injury Suit" in this August 30, 2010 blog post,

Synopsis of Babener's new article: settlement attorneys and consultants should be aware that physical injury damages generally are received tax-free. Non-physical injury (e.g. emotional distress) damages without a physical cause, however, generally are not received tax-free. Moreover, damages received for physical symptoms resulting from emotional distress are taxable. However, if structured correctly, damages received to offset medical care costs incurred as a result of the injuries should not generate additional tax liability. Babener's new article explains how to design a settlement to maximize use of the medical care exception in cases involving emotional distress damages.

Babener has been named a 2010-11 NYU Tax Policy Fellow. In that role, he currently works at the U.S. Department of the Treasury’s Office of Tax Policy. Babener anticipates receiving his LL.M. in Taxation from NYU School of Law in Spring 2011. The NYU School of Law Magazine recently featured Babener and his writing about structured settlements.

S2KM has published a compendium of blog posts featuring Jeremy Babener's writing in S2KM's  structured settlement public policy wiki.

S2P2J Release 48

Publisher Incisive Media has announced October 21, 2010 as the distribution date for Release 48 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). First published in 1986, S2P2J is co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) utilize S2P2J as an educational resource for their certification programs.

S2P2J Release 48 Highlights

• How the Spencer v. Hartford and the Macomber v. Travelers class action lawsuit settlements impact structured settlements; and
• More specifically, how these two class action settlements impact structured settlement risk analysis, business strategy, business models, business practices and business standards for various stakeholders and participants:
  • Chapter 4 - Defendants and their attorneys:
    • Whether, when and how to structure
    • Risk and cost analysis
    • Related party transactions
    • Insurance policy issues
    • Financial impact
    • Releases and assignments
    • Multiple defendant cases
  • Chapter 5 - Plaintiffs and their attorneys
    • Settlement planning options and responsibilities
    • Comparing lump sums and periodic payments
    • Investment standards
    • Addressing the risk of non-payment
    • How to control decision making
    • Integrating government benefits
    • Informed consent
  • Chapter 6 - Structured settlement consultants
    • Available resources
    • Products and services
    • Business standards and practices
    • Licensing and certification
    • Agent vs. broker
    • Conflicts of interest
    • Representations and misrepresentations
    • Obligations and potential liabilities
  • Chapter 7 - Structured settlement negotiation strategy
    • Public policy
    • Legal mandates
    • Negotiation guidelines
    • Safe harbors
    • Defense and plaintiff strategies
    • Disclosure and privacy
    • Discovery issues
    • Compensation issues
    • Secondary market issues
    • Minors and incompetents
    • Utilizing 468B funds
    • Drafting settlement documents
    • Court approval
• Release 48 also updates recent developments for:
  • Structured settlement public policy (Chapter 1),
  • 468B settlement funds (Chapter 3) and
  • The secondary market (Chapter 16).

Spencer v. Hartford - 6

Why and when should defendants, and/or their insurance companies and/or their reinsurance companies, ever agree to fund a structured settlement using either a "buy and hold" strategy or an "IRC section 130 qualified assignment" - as opposed to paying cash or using an IRC section 468B Qualified Settlement Fund?

The traditional answer from the traditional structured settlement industry:

• YOU, the defendant, save money using structured settlements - and;
• YOU face no future risk (or almost no future risk) so long as:
• YOU use IRC section 130 qualified assignments.

How does this traditional answer square with the recent Spencer v. Hartford class action lawsuit and proposed class action lawsuit settlement?

What are the most important lessons for defendants, and their insurers and reinsurers, and their attorneys, from the proposed Spencer v. Hartford settlement?

For prior S2KM reporting about Spencer v. Hartford, see S2KM's blog post Spencer v. Hartford - 5.

25 Questions to Evaluate Pooled Trusts

Health care reform (Patient Protection and Affordable Care Act), enacted on March 23, 2010, has re-defined the structured settlement and personal injury settlement consulting marketplace: whether current participants realize it - or (more probably) do not.

Among the 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.

Without focusing specifically on health care reform (not then enacted), the ASNP 2010 Annual Meeting included valuable presentations and handout resources indirectly related to health care reform, structured settlements and settlement planning/consulting.

Among those valuable presentations was Evan J. Krame's analysis titled "Not Very Special Trusts: Fixing Trusts to be Special and Using Pooled Trusts". As part of his ASNP trust analysis, Krame introduced a document he wrote titled "25 Questions to Evaluate Pooled Trusts".

In addition to his legal practice and teaching activities, Krame serves as President of Shared Horizons, Inc. Shared Horizons is trustee of the Wesley Vinner Memorial Trust (a pooled trust) serving people with disabilities in the District of Columbia and Maryland.

Krame has granted permission for S2KM to re-publish his list of 25 Questions here in S2KM blog format.

Trust Structures

• Check the Trust Agreement and Joinder Agreement? What do the documents say? For example, what powers does the trustee have?
• Is the trust approved and monitored by any state agencies?
• Who/what is really serving as the trustee? Is it the non-profit organization that created the trust or is it a third party hired to administer the trust?

Is this Trust Right for You?

• What are the costs of participation? Is there an initiation fee, an annual fee or a termination fee?
• How are the disbursements approved? What is the ease and method of disbursements? Who signs disbursement checks?
• What is the availability of advocacy on behalf of the beneficiary?
• How do they manage public benefit issues?
• How do they monitor the beneficiaries?
• Will the trust own illiquid or uncommon assets such as cars or homes?

Trust Management

• What is the reputation of the non-profit and/or trust management organizations?
• What is the organizational structure? Check on staff, space and activities.
• Who are the officers of the non-profit? What are their skills and background?
• What is the function of the board of the non-profit trustee?
• How long has the trust been in existence? Is there any reason to believe it could fail? How appropriately is the pooled trust compensated?
• How are the trust assets invested? Is there an investment policy in force that is followed? Is there an independent investment adviser? Is there an investment review committee? Is there an allocation model?
• How do they maintain separate shares? Do they uphold the duty to segregate?
• Is there liability and casualty insurance in place?
• How do they meet their duty to inform? Are statements provided to beneficiaries and state agencies (as required)?
• How do they meet their duty to account?
• How do they maintain their records? Are they precise, complete and accurate?
• How do they meet their duty of confidentiality?
• Do they have and/or employ legal counsel?
• Are there termination procedures in place?
• What is the policy as to funds at the death of a beneficiary?
• How do they handle income tax reporting?

Additional S2KM resources about settlement trusts:

• Settlement trusts re-visited
• Settlement trusts
• Single claimant 468B funds
• Selecting a settlement trustee
• Settlement trust due diligence
• Special Needs Trusts X
• Richard Halpern

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 Settlement Securitizations - 1

Standard & Poor's Rating Services (S&P) has announced a refinement of its methodology and assumptions for rating structured settlement payment securitizations. The revised criteria, effective December 2, 2009 for all new and outstanding structured settlement securitizations, incorporate:

• New corporate default targets and supplemental stress tests to access insurance carrier default targets; and
• Supplemental stress tests to access insurance carrier default risk in structured settlement transactions.

S&P's new criteria for structured settlement securitizations appear in an S&P article titled "Update to Methodology And Assumptions And New Supplemental Tests for U.S. Structured Settlement Payment Securitizations".

S&P's revised ratings for structured settlement securitizations will:

• Use the latest version of CDO Evaluator (version 5.0) when analyzing structured settlement securitizations. The CDO Evaluator is S&P's analytical tool for estimating the defaults and losses of collateralized debt obligation (CDO) transactions at different rating levels.
• Typically apply:
  • the largest-obligor default test to tranches at all rating levels to access a given tranche's ability to withstand specified combinations of insurance company defaults, assuming an immediate flat rate of 50%;
  • the largest-industry default test or the alternative-industry default test, which ever is applicable, to tranches at the 'AAA', 'AA+', 'AA', and 'AA-' rating levels, assuming an immediate flat recovery of 60%.
• Use the results of the two supplemental tests without running cash flows to assess whether the tranche in question is likely to have sufficient credit enhancement to absorb the losses at each rating level.

To achieve an S&P rating, a structured settlement transaction tranche:

• must have sufficient credit enhancement to withstand the level of defaults the CDO Evaluator generates in relation to the asset portfolio under the associated cash flow stresses, and
• must also pass the two supplemental tests applicable at the given rating level.

The complete S&P article is available on RatingsDirect and S&P's website.

This is the first post for a new S2KM series about structured settlement securitizations. For additional information about the secondary structured settlement market, see:

• Wikipedia's entry for "structured settlement factoring transaction"
• S2KM's reports about the NASP 2009 Annual Meeting
• "Structured Settlements and Periodic Payment Judgments" - Release 47.
  

Rapid v. Symetra

A recent, unpublished legal decision (Rapid Settlements v. Symetra Life Insurance Company) from the California Court of Appeals (Fourth Appellate District; Division Two) confirms the general rule that, even following the enactment of IRC Section 5891, courts will enforce a clear and explicit anti-assignment provision in structured settlement agreements provided the interested parties timely object after having been given notice and an opportunity to be heard. In this case, those interested parties were Symetra Assigned Benefits Service Company (SABSCO) and Symetra Life Insurance Company (Symetra Life) - collectively referred to as Symetra.

The decision over-ruled the trial court which had earlier approved the transfer to Rapid of $40,000, one-third of a $120,000 future periodic payment due to claimant Randy L. Griffin pursuant to a structured settlement agreement (SSA) signed in September 1993. In appealing the order approving the transfer, Symetra successfully contended the order should be reversed and the transfer declared void because the $40,000 payment was not assignable under the terms of the SSA. Based upon its ruling in favor of Symetra, the appellate court did not consider Symetra's additional contention that the transfer failed to comply with the requirements of California's structured settlement protection act.

When an interested party objects to the assignment of structured settlement payment rights, there are two basic legal questions: 1) does the structured settlement agreement clearly forbid assignment?  And if so, 2) does state law override a contractual anti-assignment provision?

The appellate ruling in this case is consistent with the majority of prior cases addressing these issues. It rejected the trial court's decision which "relied on the 'general policy favoring the free alienation of contract rights' to payment, as opposed to contractual duties, and indicated that the non-assignment provision appeared to be 'solely for tax purposes.' "

What makes this decision interesting, and controversial, is Rapid's argument that Symetra had itself actively solicited the assignment of Griffin's payment rights despite the anti-assignment language in the structured settlement agreement and that this "establishes that the practical interpretation of the contract, as evidenced by Symetra's words, acts and conduct, is that Griffin's payment rights are in fact assignable and Symetra has objected on a purely competitive basis."

The California appellate court disagreed with Rapid. It reasoned: "...under California law it is clear that non-assignment provisions are for the benefit of the obligor, and only the obligor has the right to waive the provisions...As the obligor, Symetra may choose to enforce or waive the non-assignment provisions of the SSA. That it chose not to waive the provisions in favor of Rapid does not mean Symetra may not waive the provision in favor of itself or an affiliate entity."

Therefore, at least in California, when structured settlement documentation includes clear and unambiguous anti-assignment provisions, an annuity provider such as Symetra appears to have the power: 1) to prevent a proposed transfer; and 2) to restrict a transfer to a specific factoring company including an affiliated factoring company.

This result is similar to a defense insurance company conditioning a structured settlement upon the selection of its affiliated annuity provider.

Both practices are anti-competitive and should be avoided.

For current and future cases, all structured settlement participants should review the settlement language in NSSTA's revised Model Qualified Assignment (MQA) Agreement - paragraph 7 (Acceleration, Transfer of Payment Rights) and the related footnote.

For additional information about anti-assignment language in structured settlements, see "Structured Settlements and Periodic Payment Judgments" - Chapter 16 ("Transfers of Structured Settlement Payment Rights").

For additional S2KM blog posts about factoring, see:

• Structured Settlement Transfers: Good or Bad?
• How the Primary Market Views Factoring
• Self-funded Settlement Transfers
• Review of "Structured Settlements: Factor vs. Commute?" - an article by Robert W. Wood