Inconvenient Questions - 3

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

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

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

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

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

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

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

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

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

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

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

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

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

Significant for this discussion:

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

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

The SSA letter concludes:

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

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

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

NSSTA's View of the SSA Letter

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

Significant for this discussion:

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

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

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

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

For additional S2KM blog posts about the DRA, see:

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

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

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