Special Needs Trusts X

Stetson Law School hosted the 10th Annual Special Needs Trust (SNT) Conference October 16-17, 2008 at the Don CeSar Beach Resort in St. Pete Beach, Florida. More than 300 attorneys, trustees, care planners and structured settlement consultants attended one or both of the basic and advanced educational programs.

Throughout its 10 year history, the Stetson Conference has been recognized as the leading SNT knowledge forum in the United States. Most of the speakers are members of either the Academy of Special Needs Planners (ASNP) or the Special Needs Alliance (SNA) and each of these associations schedule members-only meetings in conjunction with the Stetson Conference.

For structured settlement professionals, the Stetson program titled "The Basics of Special Needs Trusts" offered analyses of several important settlement planning topics and included two presentations specifically focusing on structured settlements:

• Texas Attorney Pi-Yi Mayo spoke about the January 31, 2006 Social Security Administration (SSA) letters to attorneys Roger Bernstein and Jay Sangerman ("Bernstein letter") as well as the application of the Deficit Reduction Act of 2005 (DRA) to structured settlements used to fund special needs trusts; and
• Leo Govoni, Director of the Center for Special Needs Trust Administration, provided "An Economic Analysis of Structured Settlements".

In addition, Bradley Frigon ("Basics of Special Needs Trusts") and Bernard Krooks ("Taxation of Special Needs Trusts") each addressed structured settlement issues in their conference presentations.

Mayo's discussion about the Bernstein letter and the DRA highlighted two controversial issues that have not received sufficient attention by either the National Structured Settlement Trade Association (NSSTA) or the Society of Settlement Planners (SSP). For backgound about these issues, see these prior S2KM blog posts:

• The Deficit Reduction Act of 2005
• Inconvenient Questions - summarizing a paper by Sylvius von Saucken.
• SSP 2008 Annual Meeting - 2: specifically David Lillesand's comments that the SSA letters to Bernstein and Sangerman are "inoperative" based upon his discussions with SSA officials including Ken Brown.
• NSSTA 2007 Winter Meeting - 3: specifically Jay Sangerman's statement that the DRA "does not apply to structured settlements" used to fund special needs trusts.

Citing Texas law, Mayo stated that the DRA annuity rules do apply to structured settlements used to fund SNTs - at least in Texas. According to Mayo, the Texas interpretations of the DRA are especially relevant because the DRA annuity rules adopted pre-existing Texas rules almost verbatim. Mayo warned that other states are likely to interpret the DRA annuity rules in a similar fashion - especially because (as other Stetson speakers confirmed): 1) state Medicaid agencies are making a concerted effort to limit SNT uses, flexibility and availability; and 2) many state Medicaid agencies continue to view annuities generally as abusive SNT planning techniques.

As a counterpoint on the DRA, Mayo recommended John Campbell's 2008 NAELA Journal article titled "The Use of Qualified Settlement Funds, Qualified Assignments and Special Needs Trusts in Physical Injury Settlements" in which Campbell argues that the DRA should not apply to structured settlements used to fund a SNT because the funds used to purchase the structured settlement annuities never belong to the SNT beneficiary. For S2KM's review and analysis of Campbell's article, see S2KM's earlier blog posts titled "IRC 468B Funds Revisited" featuring comments by Campbell.
 
As for the SSA's letters to Bernstein and Sangerman, Mayo did not directly address whether he supported Lillesand's assertion that the letters are "inoperative". Instead he cited the following authority to support his opinion that: 1) payments from a structured settlement annuity that are irrevocably assigned to a SNT are not income to the trust beneficiary when paid directly into the trust; and 2) that such annuity payments paid into a SNT after a beneficiary reaches age 65 should be treated the same as annuity payments received before age 65:

• POMS SI 01120.201J.1D which states in part: "a legally assignable payment ... that is assigned to a [SNT] is income for SSI purposes unless the assignment is irrevocable"; and
• CMS' position that additions to a SNT made after the beneficiary reaches age 65 should not be treated differently from prior additions where there has been an irrevocable assignment of structured settlement payments to a properly established SNT.

Mayo emphasized the importance of reciting the irrevocable nature of the structured settlement assignment in settlement documentation and court orders establishing the SNT.  He also agreed with Lillesand about the importance of obtaining SSA POMS that specifically address structured settlements used to fund SNTs. For S2KM's most recent status report about SSA POMS for structured settlements, see Ken Brown's comments under "SSI Rules for Trust Administration" in S2KM's blog post about the 2008 ASNP Annual Meeting.

In the context of the current financial crisis, Govoni's presentation titled "An Economic Analysis of Structured Settlements" appeared to be an important and timely subject. For this author, however, the analysis fell short of expectations for several reasons:

• Govoni was the only presenter at the conference who did not provide handout materials. With some exceptions, in this author's experience, structured settlement handout materials at national conferences repeatedly fall below the highest standards of other settlement planning professionals.
• Although Govoni briefly referenced the current financial crisis, he did not mention AIG, did not discuss financial ratings and did not address the impact of the financial crisis on structured settlements and/or managed assets as funding alternatives for SNTs.
• Govoni focused much of his analysis on relative rates of return and age ratings but never mentioned after-tax investment comparisons or Monte Carlo analysis.
  
• Govoni recommended annuity commutation riders as a strategy to pay potential estate tax obligations but failed to mention the secondary market as a potential source of structured settlement liquidity.

With the exception of a single reference by Mayo to "the grey market", none of speakers who addressed structured settlements discussed the secondary market, IRC 5891 or the 46 state structured settlement protection statutes. This educational neglect mirrors the continuing failure of NSSTA and SSP to educate their members about how to sell structured settlements (and grow the structured settlement market) in the context of IRC 5891 and the 46 state structured settlement protection statutes.

In this author's private discussions with Stetson conference attendees, several mentioned the secondary market as a valuable settlement planning resource. Three attendees informed this author of SNT beneficiaries and trustees who had been forced into the secondary market almost immediately following settlement because their SNTs had been "over-structured". In each instance, the settlement plan contained insufficient cash to permit the SNT trustee to purchase a needed house and/or a vehicle. In one case, the SNT beneficiary and his family have brought a lawsuit against the plaintiff attorney. These attendees each said the over-structuring resulted from defense pressure during settlement negotiations and could have been avoided if a 468B Qualified Settlement Fund had been utilized.

While it was encouraging to see leaders from both NSSTA and SSP attend the Stetson SNT seminar, more educational interaction and legislative collaboration is needed between the structured settlement industry (both the primary and secondary markets) and related professional associations including special needs planners and Medicare set-aide professionals. As NSSTA and the National Association of Settlement Planners (NASP) prepare for their association meetings next week in San Francisco and Las Vegas respectively, such increased interaction and collaboration should represent priorities and opportunities to improve and grow the structured settlement market.

Congratulations to Stetson Law School for continuing its SNT educational leadership and also for focusing increased attention on structured settlement issues that impact SNTs and special needs planning.