Beyond Structured Settlements

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 Consulting - 3

In prior posts about settlement consulting, S2KM:

• Reviewed Joseph DiGangi's discussion at the NSSTA 2009 Winter Meeting titled: "Comprehensive Settlement Consulting in the 21st Century". See: "Settlement Consulting".
• Continued DiGangi's discussion by asking questions and offering comments about "settlement consulting" definitions and scope. See: "Settlement Consulting - 2".

This S2KM post outlines settlement consulting history - from a structured settlement perspective.

S2KM's structured settlement history diagram (developed with graphic artist Keith Burtoft) concludes with the founding of the National Association of Medicare Set-Aside Professionals (NAMSAP) in 2005.

Beginning in 2005, S2KM has continued to monitor structured settlement history by attending and reporting about settlement consulting conferences addressing structured settlements.

For the past three years, S2KM has also published annual reports about structured settlement developments:

• Structured Settlements in 2008;
  
• Structured Settlements in 2007;
• Structured Settlements in 2006.

Using the same categories as S2KM's structured settlement history diagram, here are some of the more recent settlement consulting highlights:

Social Security

• Deficit Reduction Act of 2005 (DRA);
• The Ahlborn Case (2006) - see John Campbell's analysis of the Eighth Circuit's decision which the U.S. Supreme Court unanimously affirmed.
• Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA);
• Additional MSA rules for structured settlements (2008);
• New POMS for Special Needs Trusts (2009) - see David Lillesand's report;

Taxation - see related articles on the Wood & Porter website:

• Banks and Banaitis cases (2005) - attorney fees;
• Murphy case (2007);
• IRS Letter Ruling 200836019 (2008) - Non-qualified 130 assignments and attorney fees.

State Legislation (2005-2008) - see Release 45 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

• Structured settlement protection statutes;
• Uniform Trust Code;
• UCC Article 9 anti-assignment provisions;
• Medicaid annuity rules.

Other Developments

• Academy of Special Needs Planners (ASNP) founded (2007);
• AIG receives $150 billion U.S. Government bailout (2008);
• Joseph Ricci replaces Randy Dyer as NSSTA Executive Director (2008);
• SSP publishes its "Standards of Professional Conduct" (2008) and begins its Registered Settlement Planner (RSP) certification (2008);
• American Association of Nurse Life Care Planners (AANLCP) founded (2008);
• Several annuity providers depart the structured settlement market (2005-2008);
• Structured settlement annuity premium remains level at $6 billion per year (2001-2008);
  
• Structured settlement surveys identify a larger market (2006-2008);
• Settlement consulting bloggers and podcast providers emerge (2004-2009).

For reasons why S2KM views 1982, 2001 and 2008 as strategically important for structured settlements, see "Structured Settlements in 2008 - 1".

Settlement Consulting - 2

In a prior post ("Settlement Consulting"), S2KM reviewed Joseph DiGangi's NSSTA 2009 Winter Meeting discussion titled: "Comprehensive Settlement Consulting in the 21st Century" which S2KM characterized as "provocative" and "important" for the structured settlement industry.

This S2KM blog post continues to promote the strategic importance of DiGangi's discussion about settlement consulting - asking questions and offering after-thoughts about settlement consulting definitions and business scope. Subsequent S2KM posts will address other settlement consulting issues.

• What is the definition of "settlement consulting"?
• How does settlement consulting differ from:
  • Settlement planning?
  • Special needs settlement planning (SNSP)?
• DiGangi, for example, identifies settlement planning as one stage of his settlement consulting model:
  • Needs assessment;
  • Planning;
  • Implementation;
  • Monitoring.
• What are "litigation support services" and how do they fit within the settlement consulting model?
• What constitutes "special needs" in the context of settlement consulting or planning?
• What types of settlements fall inside and outside DiGangi's settlement consulting model?
• For example, are employment cases part of settlement consulting - or special needs settlement planning?
• Or, are there different branches and fields of settlement consulting?
• If yes, what branches of settlement consulting include:
  • Structured settlement annuities:
    • Section 130 Qualified?
    • Section 130 Non-Qualified?
  • Other insurance products - life insurance; variable annuities?
  • Special needs?
  • Qualified settlement funds (QSFs)?
• Whatever definitions apply, what social vocabularies (folksonomy) define "settlement consulting", "settlement planning" and "special needs"?

Addendum February 24, 2009: for related market analysis from a structured settlement perspective: see "Structured Settlement Surveys".  Also, the word "oxymoron" was improperly used in the original post and has been removed.

Settlement Consulting

Among other valuable discussions at the NSSTA 2009 Winter Meeting, Joseph DiGangi's presentation titled "Comprehensive Settlement Consulting in the 21st Century" was the most provocative and important. DiGangi's presentation was enhanced by his excellent visual illustrations and diagrams. DiGangi is President of Millennium Settlements and a NSSTA member.

In what he termed "a wake up call for the industry", DiGangi criticized the traditional structured settlement business model and knowledge standards. He also outlined his vision for industry transition, improvement and growth which he termed "comprehensive settlement consulting".

DiGangi characterized the current structured settlement industry as "a stagnant market" based upon an outdated "annuity broker" business model. Structured settlement clients and competitors, according to DiGangi, share negative perceptions about structured settlement consultants. As examples of negative perceptions, DiGangi cited the industry's single product offering and limited knowledge base.

As an alternative to the "annuity broker" structured settlement business model, DiGangi proposed a "consultant" model ("comprehensive settlement consulting") with multiple products and services providing added value for, and with, other settlement stakeholders.

Characteristics of DiGangi's settlement consulting model:

• Planning orientation;
• Solutions before products;
• Blended products and services;
• Product neutrality;
• Compensation disclosure;
• Professional training and designations;
• Comprehensive skill sets and knowledge base.

DiGangi highlighted several transitional issues: licensing; conflicts of interest; collaboration models; and work process infrastructure.

For structured settlement consultants who lack the expertise, licensing or infrastructure to offer comprehensive solutions, DiGangi recommended teaming up with other professionals.

Using a hypothetical case example, DiGangi explained settlement consulting as a multi-stage process:

• Needs assessment
• Design
• Implementation
• Monitoring.

The core financial product for DiGangi's hypothetical settlement plan was a structured settlement annuity. DiGangi characterized structured settlement annuities as the "foundation product" for settlement consulting - and settlement consulting as the new business model for structured settlement growth.

Robert Wood QSF Interview

Robert W. Wood has written a new legal treatise "Qualified Settlement Funds and Section 468B" published by the Tax Institute and available for purchase on the Tax Institute website. Following S2KM's earlier review of Wood's book, the noted author and tax expert provided S2KM with the following exclusive interview.

S2KM:  Welcome Rob. Let's begin with a controversial issue. Why doesn't "one or more" encompass single claimant QSFs?

Wood:  That's a perfectly logical question, and I wish I had a complete (or even a logical) answer. Of course, the question suggests its own answer. After all, given the statutory language, it might seem that this SHOULD be enough. But tax lawyers are (and ought to be) cautious creatures. When we know the IRS has said it is looking at an issue and we are not certain how it will come out, our hackles understandably go up. In the last analysis, I don't think there should be a problem with single claimant funds, but I am risk averse, and I don't want to end up being a test case!

S2KM:  Does public policy support single claimant QSFs?

Wood:  As I have commented previously, I am not sure I see enough of the big picture to consider the public policy implications of anything in the tax world. In the 30 years I have been practicing as a tax lawyer, I have seen lots of things done in the name of public policy that end up getting changed. Here, I think there ought to be a public policy of encouraging structured settlements, since they encourage financial and tax planning, and encourage the conservation of assets. To the extent Qualified Settlement Funds aid in that endeavor (which I personally think they do), we should also encourage QSFs. That is probably so regardless of how many or how few claimants are in the fund.

S2KM:  How does 468B, as a potential settlement planning "standard", impact settlement negotiation, planning and funding?

Wood:  First, at the present time, I don't think Section 468B trusts are a standard. QSFs are certainly being used more and more today, but we are quite a ways away from seeing the use of the QSF as a standard for every case that structures. I doubt we will ever see that. But if I make a big assumption and think about QSFs in this context, I suppose it would be a good thing. Again, regardless of whether there are many or few claimants, QSFs encourage a kind of regimen, a protocol that involves court supervision and court orders. This is good. Plus, QSFs allow the time necessary to develop and implement plans. In the absence of a QSF, there are sometimes hasty decisions made as a case is settling.

S2KM:  Why don't plaintiff attorneys and settlement planners utilize QSFs in more cases?

Wood:  I'm not sure, but I'd guess the primary reason is simple lack of familiarity. Just as structured settlements were not as widely used 25 years ago because many people lacked familiarity with them, today the QSF is in a similar posture. A second reason may be expense. Some lawyers and clients may say: why spend even a few thousand dollars setting up something if you can structure without it? Although QSFs can almost always help the situation, they may simply not be needed in many simple cases, so they don't get used. Of course, a third reason is the whole single claimant controversy, which understandably causes people to have cold feet in cases where there is only one claimant.

S2KM:  How best can QSF performance metrics be defined and improved?

Wood:  Every case is different, so I am not sure there is a one-size-fits-all kind of answer. Still, you seem to be implying that QSFs will become the standard for structuring settlements in the future. I personally find it hard to imagine that will happen. That is, I think we will see lots more QSFs going forward, but I doubt we will ever see a QSF for every structured settlement. But if it does happen, then it should encourage structured settlements, and the thoughtful and orderly implementation of plans. I may be wrong, but I suspect that in the vast number of cases, the plaintiff/claimant feels enormous pressure to make a decision quickly about structured settlements at settlement time. These structured settlements end up being locked in place for many years and potentially for life. QSFs can release the pressure by allowing more time for decision making.

S2KM:  How can QSFs improve and grow the structured settlement and settlement planning markets?

Wood:  First, to reiterate my answer to the prior question, I think QSFs can act as a safety valve to allow more time, so claimants can fully evaluate and tailor their structured settlements. I don't have any statistical evidence to back this up, but I would bet that more time would produce more (and more carefully constructed and personally tailored) structured settlements. To begin with, though, I suppose there needs to be a critical mass, more use of QSFs, so more lawyers, brokers, insurance companies and defendants become more comfortable with them. That includes class action administrators too, although many in that context are already familiar with QSFs. Even so, someone needs to consistently remind all these people about structured settlements - and I mean structures of tax-qualified Section 104 payments, as well as structures of taxable monies. Regardless of the context, in almost every case, SOMEONE ought to be asking whether there is interest in structuring all or part of the recovery. We all need to make sure we are offering adequate choices and adequate disclosure.

S2KM:  What are the most important QSF educational priorities and opportunities?

Wood:  I guess it depends on where you are in the industry, on what your role is, and who your contacts are within that sphere. I think we can all start small, and attempt to at least discuss the concept with people with whom we work. We can start by using the QSF concept and discussion as a way to bridge difficulties. Regarding the sensitive topic of commissions, I think brokers on the plaintiff side, brokers on the defense side, and the life companies themselves all need to cooperate. No one likes to have the rug pulled out from under them. It may sound like a Rodney King remark, but we all ought to be able to get along!

S2KM:  Rob, thank you for your insightful comments and continued success with your new QSF legal treatise.

Additional S2KM blog posts featuring Robert Wood:

• Robert Wood and 468B Funds
• Single Claimant 468B Funds
  
• Structured Attorney Fees
  
• Factor vs. Commute
  

IRC 468B and 5891

Both IRC 468B and 5891 challenge and change the traditional structured settlement claim management model.

To improve and grow structured settlements as part of the emerging settlement planning model, industry leaders must refocus their strategic analysis beyond defense of IRC 130 and 104(a)(2) with more positive and proactive thinking about IRC 468B and 5891.

This strategic re-focus should:

• Re-prioritize 468B and 5891 as critical for industry growth.
• Re-analyze 468B and 5891 utilizing perspectives and knowledge experts from outside the traditional "structured settlement box".
• Re-set educational targets, priorities, objectives, content and methodologies for 468B and 5891.
• Study how to market structured settlements to settlement planning stakeholders and decision makers by featuring 468B and 5891.
• Develop a settlement planning legal and business framework protecting structured settlements and incorporating 468B and 5891.
• Build a settlement planning lobbying coalition and strategy to grow structured settlements with 468B and 5891.

IRC 468B

• As Robert Wood states in his new 468B legal treatise: the benefits of a QSF "seem to be of staggering proportions" and "QSFs are definitely not tax shelters".
• Wood asks: "how could [anyone] not do handstands over a simple trust that essentially abrogates the fundamental tax concepts of constructive receipt and economic benefit"?
• No one disputes that QSFs can be used to implement qualified assignments and annuity-funded structured settlements.
• The 468B dispute is whether "one or more" means "one or more" - without any existing tax rulings or case law that deny or contradict the obvious meaning.
• Instead of doing handstands over QSFs, traditional claim management structured settlement stakeholders have spent hundreds of thousands of dollars to preserve a stagnant business model.
• Instead of QSFs serving as a platform for growth, the structured settlement industry collectively has created 468B confusion and conflict where otherwise none exists.
• Structured settlement transition and growth should be predicated upon QSFs and structured settlements becoming a standard and integrated claim resolution model.

IRC 5891

• IRC 5891(c)(1) defines "structured settlement" for tax purposes. It references and incorporates IRC 130, 104(a)(1) and (a)(2).
• When QSFs implement structured settlements, the funding must satisfy 5891's "structured settlement" definition.
• IRC 5891 also provides definitions, rules and penalties for a state-run system to review and approve post-settlement transfers of structured settlement payment rights.
• 46 states have enacted structured settlement protection statutes which generally adhere to the Model State Structured Settlement Protection Act.
• With few exceptions, the state protection statutes currently do not apply to the primary market.
• Just as 468B challenges and changes the traditional structured settlement model, so also does 5891 and the state protection statutes.
• Unlike the 468B structured settlement dispute, however, the 5891 dispute does not yet match competing statutory interpretations or divide plaintiff and defense consultants.
• The 5891 dispute exists because the secondary market fundamentally and permanently changes traditional structured settlements.
• Settlement transfers directly attack traditional industry credo: i.e. structured settlements provide permanent solutions and protection for injury victims.
• Instead of proactively adjusting to legislative and business changes, however, the primary structured settlement participants (plaintiffs and defendants) have abandoned their own customers (injury victims) and their own products to the factoring companies.
• Instead of offering alternatives solutions, the primary market's response has featured a public relations campaign highlighting secondary market abuses.
• For the structured settlement market to transition and grow, the primary market needs a more proactive and constructive secondary market strategy.

Court Approval and Protection Statutes

• Court approval and state protection statutes represent two complementary foundations to improve and grow the structured settlement market.
• IRC 468B and 5891 both offer court approval features.
  • The government authority most often responsible for 468B QSFs is a court - although almost any federal or state authority may order and approve QSFs.
  • IRC 5891 requires a state court or responsible administrative agency to approve secondary market transfers.
  • If secondary market transfers require court approval to protect injury victims, why not protect injury victims when structured settlements originate?
  • In addition to other features and benefits, QSFs already provide a court approval process when structured settlements originate.
  • When judges approve QSF-generated structured settlements, why not apply applicable and existing requirements from state protection statutes such as "disclosure" and "best interest"?

Qualifications, Products and Services

• To transition successfully to the settlement planning model, structured settlement leaders must re-think traditional industry standards (qualifications; products; and services) and better address 468B and 5891.
• Questions:
  • What QSF qualifications and licensing should a judge and/or administrator require for structured settlement professionals?
  • Who else is part of the planning team?
  • What QSF products and services are needed beyond traditional structured settlements?
  • Who among the QSF advisers has responsibility for secondary market knowledge and post-settlement transfer services?

Pacific Life v. Rapid Settlements

The Second Circuit Court of Appeals yesterday rejected Rapid Settlement's claim that the Federal Arbitration Act supersedes the New York Structured Settlement Protection Act.

In the case titled "Pacific Life Insurance Company v. Rapid Settlements, Ltd.", Confederation Life Insurance and Annuity Company joined Pacific Life as a Plaintiff-Appellee. Joyce Allen was the structured structured settlement recipient who attempted to transfer payment rights.

The Summary Order from three Second Circuit judges unanimously affirmed a January 5, 2007 order of the United States District Court for the Western District of New York:

• Declaring "void and unenforceable" a purported assignment to Rapid of structured settlement payment rights;
• Declaring "void and unenforceable" an arbitration award purporting to effectuate the assignment;
• Enjoining Rapid from taking any further legal action "in any forum" to recover the structured settlement annuity payments.

In its appeal, Rapid argued:

• Rapid's earlier arbitration award in Texas was valid and enforceable under the Federal Arbitration Act; and
• The Full Faith and Credit Clause in Article IV of the United States Constitution required the New York District Court "to give preclusive effect to a Texas state court judgment confirming the arbitration award".

The Second Circuit Court of Appeals rejected Rapid's argument "for substantially the reasons stated by the District Court in its order". The Court's Order noted the following as "undisputed" when the purported assignment occurred:

• Allen was a resident of New York; and
• The New York Settlement Protection Act accordingly was applicable.

For a summary of the District Court decision, see Drinker Biddle's September 2007 Structured Settlement Update.

Stephen Harris, the Drinker Biddle law partner who represented Pacific and Confederation in the Second Circuit appeal, predicts the case result will become "important judicial precedent" in other Rapid cases now pending in the Third and Fifth U.S. Circuit Courts of Appeal.

For prior S2KM reporting about Rapid Settlements, see:

• Rapid v. Symetra
• CNA v. Rapid Settlements

For more detailed information about structured settlement transfers, see updated Chapter 16 in Release 45 of "Structured Settlements and Periodic Payment Judgments".

Robert Wood and 468B Funds

Robert W. Wood has written an important new legal treatise titled "Qualified Settlement Fund and Section 468B" published by the Tax Institute and available for purchase on the Tax Institute website.

Professionals who work with QSFs will immediately recognize the value of Wood's new 468B book which:

• Promotes the benefits of QSFs;
• Maps the technical landscape;
• Addresses strategic and controversial issues.

Wood is a preeminent tax attorney whose specialties include structured settlements and settlement planning.

• Wood also authors "Taxation of Damage Awards and Settlements Payments" plus many valuable articles accessible from the Wood and Porter website.
  
• Wood writes and speaks frequently about QSFs including this January 5, 2009 article about single claimant issues.

Wood's new book offers the first "dedicated guidebook about QSFs".

Wood's target audience (amended listing by S2KM on 02152009)

• Litigators - plaintiff and defense lawyers;
• Judges who approve QSFs;
• Settlement trustees and administrators for:
  • QSFs;
  • Special needs trusts (SNTs);
  • Medicare set-aside arrangements (MSAs).
• Guardians;
• Mediators;
• Settlement planners;
• Settlement allocators;
• Structured settlement annuity providers;
• Structured settlement intermediaries;
• Life care planners;
• Legislators and regulators.

Wood's book provides significantly more QSF information and resources than any previous publication. The book includes 13 chapters plus extensive footnotes, an Appendix, Forms, Glossary, Tables and Index.

Wood's compendium of QSF topics:

• Establishing, drafting, administering, transferring, distributing, and terminating QSFs;
• Tax calculations, payments and penalties; 
• Structured settlements and deferred attorney fees;
• Designated settlement funds (DSFs);
• Other non-QSFs.

Although his new 468B book is comprehensive, Wood acknowledges his analysis "clearly enters unchartered ground". QSF unchartered ground includes:

• Structured settlements;
• Single claimants;
• Structured attorney fees;
• Definitions for claims and claimants.

Both proponents and opponents of single claimant 468B will be disappointed (for different reasons) with Wood's conclusions about single claimant issues.

Wood acknowledges the most obvious interpretation of "one or more" is "one or more". Also that, "the 'one or more' language in 468B [regulations] would seem to trump economic benefit concerns". Wood further states he has not found any tax authority (cases; rulings) denying QSFs for single claimants in otherwise qualifying 468B cases.

Wood also reports "some believe that Revenue Procedure 93-34 leaves unanswered the question whether the economic benefit doctrine will attribute income to a single claimant" thereby potentially disqualifying a subsequent IRC section 130 qualified assignment.

Wood concludes "the foregoing concerns have led some practitioners to seek further guidance from the IRS". To date, according to Wood, "the answer remains unsettled".

Wood recommends avoiding the single claimant controversy by establishing a QSF with multiple claimants - until the single claimant issue is addressed with rulings or case law.

Wood raises the issue of plaintiff attorneys qualifying as separate 468B claimants and offers drafting advice to help achieve that objective.

Although Wood's 468B book does not address non-tax government benefits, other commentators have argued that lien holders with claims against an injury recovery, including Medicare and Medicaid, qualify as 468B claimants.

Wood's analysis of the single claimant controversy highlights "the political and business underpinnings that surround the single claimant controversy" - or to utilize Wood's section title: the "Control and Commissions" of structured settlement annuities.

Wood's discussion of how commissions help drive the single claimant controversy does not pick sides or criticize conduct. His focus is case specific as opposed to debating competing business models and policy disagreements.

Wood nonetheless makes clear his enthusiasm for the benefits and advantages of QSFs which he describes as "an important dispute resolution vehicle possessing remarkable tax efficiency". The benefits of a QSF "seem to be of staggering proportions", according to Wood, and "QSFs are definitely not tax shelters".

Wood asks his 468B readers: "how could one not do handstands over a simple trust that essentially abrogates the fundamental tax concepts of constructive receipt and economic benefit"? Settlement planning professionals who read Wood's new 468B book will agree and benefit from Wood's valuable and timely analysis.

Wood's readers (and settlement planners generally) should continue to expand Wood's strategic QSF discussion:

• Why doesn't "one or more" encompass single claimants?
• Does public policy support single claimant QSFs?
• How does 468B, as a potential settlement planning "standard", impact settlement negotiation, planning and funding?
• Why don't plaintiff attorneys and settlement planners utilize QSFs in more cases?
• How best can QSF performance metrics be defined and improved?
• How can QSFs improve and grow the structured settlement and settlement planning markets?
• What are the most important QSF educational priorities and opportunities?

Related S2KM commentary:

• Robert W. Wood
• 468B QSFs

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?