IRC 468B Funds Revisited - 3

Two earlier S2KM blog posts prioritize a new article published in the NAELA Journal by John J. Campbell titled "The Use of Qualified Settlement Funds, Qualified Assignments and Special Needs Trusts in Physical Injury Settlements" to refocus on single claimant 468B funds as a strategic issue for the settlement planning and structured settlement industries. The first blog post recommends educational resources for 468B Funds. The second post summarizes Campbell's article. This post offers additional S2KM analysis and commentary.

As previously reported, Campbell's article is notable because it:

• Supports the argument Congress does not intend the traditional economic benefit doctrine to apply to 468B funds created for a single claimant;
• Helps educate elder law and special needs attorneys about the importance of 468B funds;
• Expands 468B fund analysis beyond tax issues to include government benefits issues - specifically SSI, Medicaid, special needs trusts and the Deficit Reduction Act of 2005 (DRA).

Although Campbell's tax analysis generally follows the analysis of other 468B experts, such as Robert W. Wood and Richard B. Risk, Jr., Campbell's conclusions are more aggressive. According to Campbell, while it is possible the IRS could distinguish single claimant and multiple claimant 468B funds, that likelihood is "a remote possibility at best". Wood and Risk are more cautious in their conclusions. They each urge Treasury and/or the IRS to clarify their positions for single claimant 468B cases.

From S2KM's perspective, Campbell's conclusions about the impact of the Deficit Reduction Act (DRA) on structured settlements used to fund special need trusts are also aggressive - considering the lack of any specific structured settlement legal authority. For example, despite the DRA's prohibition against deferred or balloon annuity payments, Campbell concludes that "SSI and Medicaid do not prohibit the use of either deferred or balloon payments to fund exempt Special Needs Trusts if the annuities comply with Internal Revenue Code 130". There are no direct references, however, to structured settlements or qualified assignments in any SSI nor Medicaid legislation or regulations.

Campbell's article contains one serious omission - his failure to mention or consider the impact of IRC Section 5891. Reasons why IRC 5891 is important for Campbell's analysis:

• Structured Settlement Definition - Enacted as part of the Victims of Terrorism Tax Relief Act of 2001, IRC 5891 includes the Federal tax definition for "structured settlement". A tax analysis of structured settlements should reference the tax definition of a structured settlement.
• Economic Benefit Argument - As Risk points out in his 2004 article titled "A Case for the Urgent Need to Clarify Tax Treatment for a Qualified Settlement Fund Created for a Single Claimant", the ability of structured settlement recipients to transfer their payment rights pursuant to IRC 5891supports the argument that Congress does not intend for the traditional judicial doctrine of economic benefit to apply to single claimant 468B funds.
  
• Secondary Market - Conversely and misleadingly, Campbell's article states: "Once there is a qualified assignment of an annuity funding a structured PI settlement, the plaintiff cannot change the terms of the annuity, including the payment amounts or the payee". To the contrary, IRC 5891 and 46 state structured settlement protection statutes permit a plaintiff, with prior state court approval, to transfer payment rights (including payment amounts to new payees) pursuant to a "structured settlement factoring transaction".
• Medicaid and Structured Settlements - Campbell's commentary about Medicaid qualification and structured settlements does not address two important, strategic settlement planning and structured settlement issues:
  • The DRA requirement that qualifying annuities be "non-assignable"; or
    
  • The "saleable = countable" argument promoted by many state Medicaid agencies.
    

S2KM conclusions - Campbell's article highlights:

• The complexity of structured settlements and important role of structured settlements in personal injury settlement planning.
• Note: for a visual model, consider this S2KM Structured Settlement Transaction Diagram.
• The need for:
  • Treasury and/or the IRS to confirm existing tax authority for single claimant 468B funds;
  • Better legal authority:
    • Specifically: to clarify the rules for structured settlements used to fund special needs trusts and Medicare Set-aside arrangements;
    • More generally, to integrate existing structured settlement laws (including Federal tax legislation and state statutes) with other government benefit laws including Medicaid and Medicare;
    • For additional S2KM analysis, see "Inconvenient Questions".
  • Better industry research and analysis (legal, public policy, market and cost-benefit) about structured settlement and settlement planning issues.