Beyond Structured Settlements

NSSTA 2016 Annual Conference

Len Blonder is a structured settlement pioneer now beginning an unprecedented third term as President of the National Structured Settlement Trade Association (NSSTA). It may seem counterintuitive, therefore, or perhaps wishful thinking, but one could describe NSSTA's 2016 Annual Conference, which occurred April 6-8 in Palm Beach Gardens, Florida April 6-8, as a "New Beginning."

Following the transformative leadership of Michael Goodman, NSSTA's immediate past President, however, the opportunity for such a new beginning now exists and the 2016 NSSTA Annual Conference Educational Program outlined some of the future possibilities.

TOPICS AND SPEAKERS

• Opening Remarks - Michael Goodman
• NSSTA Objectives - Len Blonder
• Settlement Experiences and Aftermath - Michael Goodman (Moderator); Tania Root; Todd Falzone, Esq.
• Wrongful Imprisonment: Claimant Story - Michael Goodman (Moderator); Kwame Ajamu
• Structuring Wrongful Imprisonment Claims - John McCulloch and Ryan Jandreau
• Trusts and Structured Settlements - Dan McCarthy (Moderator); Phillip Krause; Tim Denehy
• Mediators and Structured Settlements - Connie Klingler (Moderator); Hyram Montero; Len Blonder
• Projecting Future Economic Damages After the ACA - Roger Bernstein; Noah Katz; Nichole Segal
• Property & Casualty Insurance Program Growth - (Michael Goodman and Len Blonder - Moderators); David Crowe; Richard Woollams
• Legislative and Political Update - Eric Vaughn
• NSSTA Growth Initiative Update - Sean Coleman (Moderator); Jim Early; Melissa Evola Price; Ryan Jandreau
• SSPA Success Stories - Michael Goodman (Moderator); Andy Prindable; Sally Greenberg
• NSSTA Legal Update - Tim O'Driscoll; Peter Vodola; Steve Harris

S2KM COMMENTARY ON SELECTED TOPICS

NSSTA Growth Initiative

During Goodman's Presidency, NSSTA revised its historic and defensive "protect and preserve" strategy by embracing a new "Growth Initiative" which already appears to have generated new energy and improved "community" spirit. Progress reports for preliminary "Growth Initiative" priorities [re-starting P&C programs; convertible lump sums; and Federal Employee Compensation Act (FECA) amendment(s)] were all positive. Equally important, the overall theme was forward looking asking: "How can we move forward? How can we change the dialogue?"

Supporting its "Growth Initiative", NSSTA has also expanded its industry outreach and networking with other professional associations. Improved relationships among NSSTA, the Society of Settlement Planners (SSP) and the National Association of Settlement Purchasers (NASP) has helped unify the structured settlement market. Working together, NSSTA and NASP have added important consumer protection provisions to five state structured settlement protection statutes. As one result, Goodman declared in his Opening Remarks: "we can no longer use factoring as an excuse for not growing the industry."

Len Blonder Presidency

How will Blonder, a 38 year plus industry veteran who, as much as any single individual, has been personally responsible for "protecting and preserving" the tax foundation for structured settlements, respond to NSSTA's current leadership challenges and market opportunities?

"The times are changing and we must change", Blonder stated, as he addressed NSSTA's membership to begin his third term as President. "The business is more complicated. We must determine how the parts fit together. Despite plaintiff growth, defendants remain indispensable to structured settlements. Defendants must continue to play a key role."

Unless NSSTA faces an unexpected crisis, Blonder said his plans for NSSTA include continued industry and community growth. Based upon the preliminary success of the "Growth Initiative", Blonder announced it would become a permanent NSSTA committee and expand its current list of priorities. As a result of recent state legislative successes, Blonder stated he expects NSSTA to spend less time on factoring legislation and more time on judicial education during his term as president.

Among NSSTA's challenges and priorities, Blonder highlighted: growing NSSTA's membership and increasing membership diversity; continuing to improve relationships with outside associations; and improving public relations generally for both NSSTA and structured settlements.

Re-starting P&C Programs

Speaking as part of a panel discussing Property and Casualty Company Program Growth, Richard Woollams, President of Claims for AIG Commercial Insurance, provided a contrarian perspective concerning future structured settlement growth and industry change. Asked to predict what the structured settlement market will look like in five years, Woollams opined: "the same as today with more broker consolidation and better technology."

Woollams also identified reasons why some P&C companies have reduced their structured settlement program participation: "competing priorities; increasing compliance requirements; and inertia". Woollams further challenged NSSTA's membership by stating: "in workers compensation cases, the savings for defendants is obvious. Can you quantify the cost savings with liability cases? Even a couple of points pays for program compliance and administration."

Woollams' challenge concerning "cost savings for liability cases" echoes findings about "metrics and analytics" from a 2011 study (titled: "National Litigation Management Study") commissioned by the Claims and Litigation Management (CLM) Alliance (formerly "the Council on Litigation Management") as well as NSSTA's own 2014 survey of Senior Claim Advisors conducted by CLM Advisors.

Based upon interviews with leading litigation management executives, the 2011 CLM Alliance study identified structured settlement as the "most penetrated external initiative" among 30 litigation-related service areas analyzed. Another "key finding" that emerged from the answers to the more than 160 questions covered in that 2011 CLM Alliance study: "litigation executives are not happy with the metrics and analytics available to them."

Also relative to metrics and analytics, NSSTA's 2014 survey of senior claims executives found:

• Only 20 percent of the participants reported having any set of objectives around the use of structured settlements.
• A majority of the participants did not measure referral volume and only half measure the volume of successfully written structures.

Affordable Care Act

A separate NSSTA conference panel discussion about the Affordable Care Act (ACA) titled "Projecting Future Economic Damages After the ACA and Collateral Source Rule Changes" highlighted one way NSSTA members can utilize structured settlements to quantify potential cost savings for defendants. That being part of an expert team that provides defendants with two-tier (with and without ACA coverage) case specific calculations of future economic damages.

As NSSTA's ACA panel pointed out, the admissibility of ACA coverage for trial purposes (both for evidence and damage calculation) depends upon the common law collateral source rule which not only varies by state, but also is subject to current, state-specific post-ACA legal disputes as to applicability. This contested claims environment, plus the applicable expert damage team recommended by the NSSTA panel (featuring a structured settlement broker), represents both a strategic growth opportunity for NSSTA members as well as a priority for continued in-depth education.

Trusts and Structured Settlements

The NSSTA conference panel discussing "Trusts and Structured Settlements" provided another window for viewing potential structured settlement change and growth. Contrary of traditional structured settlement perspectives, which view trusts as competitive products in a zero sum settlement game, panelist Tim Denehy (who identified himself as a "settlement planner" offering trusts and structured settlement annuities) insisted: "A structured settlement does not solve every problem. However, by offering additional products, I can sell more structures."

Fellow trust panelist Phillip Krause, who also sells multiple settlement products, stated: "I analyze products as an investment fiduciary." He added, however: "There is more potential liability with a multi-product model." As an alternative to a multi-product model, Krause suggested structured settlement brokers might partner with, or delegate product sales to, a trust provider. Moderator Dan McCarthy supported a more traditional approach saying he continues to defer to plaintiff attorneys' relationships with banks and trust companies.

NSSTA has been slow to explore and/or embrace the evolving settlement planning profession in which structured settlement annuities, as well as trusts, represent strategic, interactive products. Other professional associations, especially SSP and the Academy of Special Needs Planners (ASNP), have been more proactive than NSSTA in analyzing settlement planning issues. As more plaintiff brokers offer trusts and other non-structured settlement products, and share commissions with defense brokers, NSSTA should consider helping its members better understand how settlement planning impacts the sale of structured settlements - creating new opportunities as well as risks.

Structuring Wrongful Imprisonment Claims

John McCulloch and Ryan Jandreau traced the history and explained the significance of IRC 139F which was enacted December 21, 2015 as part of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). "In the case of any wrongfully incarcerated individual," IRC section 139F provides: "gross income shall not include any civil damages, restitution, or other monetary award (including compensatory or statutory damages and restitution imposed in a criminal matter) relating to the incarceration of such individual for the covered offense for which the individual was convicted." Damages paid for wrongful imprisonment, however, which are not derived from a personal, physical injury, are not eligible for an IRC section 130 qualified assignment. Although the exact number of exonerees is not known, McCulloch and Jandreau cited sources estimating approximately 4000 nationally over the past 15 years.

NSSTA DIRECTORS AND AWARD WINNERS - NSSTA announced the election of two Directors: Mal Deener and Ryan Jandreau. In addition, the following individuals were honored during the conference:

• President's Award - Debbie Sink
• Leadership Award - Susan Clark and Robert Caples
• Service to the Industry Award - Andrew McClain

CONCLUSION

Assuming NSSTA's 2016 Annual Conference represents a "New Beginning" for the structured settlement industry, the upcoming year will be one of the most important, if not the most important, in NSSTA's history. Based upon his leadership experience and prior accomplishments, Len Blonder appears uniquely qualified to help NSSTA determine how the parts of an increasingly complicated business fit together in order to continue to grow structured settlement annuity sales and improve the lives of personal injury victims.

CORRECTIONS AND  OMISSIONS

S2KM began receiving valuable feedback to this blog post almost immediately following its publication. Examples:

The second paragraph under "Trusts and Structured Settlements" above has been changed from what originally appeared in this blog post, at the request of Phillip Krause, to clarify that he used the word "investment" and not the word "professional." Krause explained: "An 'investment fiduciary' is a specific role within the management of a Trust. The Trustee delegates or directs investment decisions to the 'investment fiduciary.' The role of 'investment fiduciary,' is separate from the role of a 'structured settlement consultant.' An investment fiduciary uses registered investments with the SEC/FINRA.  A broker dealer may also be involved in the approval of the appropriateness of investments held within the Trust.  The oversight by an OSJ or compliance officer is also common."

S2KM could (still might) write an entire blog post about the informative "Property & Casualty Insurance Program Growth" discussion moderated by Michael Goodman and Len Blonder and featuring Richard Woollams and David Crowe. Some of Woollams' comments appear in the original blog post. Crowe also offered valuable insights and recommendations for re-starting P&C structured settlement programs including the importance of: 1) identifyinging one or more internal structured settlement "champions"; 2) showing the impact on a P&C's bottom line; 3) defense and plaintiff brokers working together for a more efficient settlement process; 4) attracting bright young professionals to the structured settlement industry - a problem, he stated, is shared more generally by the insurance industry.

NSSTA 2015 Fall Conference

Although the National Structured Settlement Trade Association (NSSTA) did not promote a specific theme for its 2015 Fall Educational Conference, one of the speakers succinctly captured the program's overall purpose and accomplishment when he described NSSTA's new Industry Growth Initiative as "changing the focus of our future."

Industry Growth Initiative

NSSTA's website description of its Industry Growth Initiative highlights "a significant decline in production since its peak at $6.3 Billion in 2008" and asserts "we do an excellent job protecting our industry" before announcing that "this year we want all NSSTA members to focus their time, energy and resources on new opportunities to expand the use of structured settlements-to grow our industry."

NSSTA President Michael Goodman utilized his Opening Conference Comments in Phoenix (as well as a preconference interview with S2KM) to describe the status and organizational structure of the NSSTA Industry Growth Initiative.

"My first priority as President of NSSTA," Goodman stated, "is to identify growth opportunities for the structured settlement industry. First, we asked all NSSTA members to submit ideas for growth at [email protected]. . Second, I tried to put together a NSSTA Growth Committee consisting of a highly talented cross section of industry leaders with diverse perspectives. Third, the Committee evaluated all of the 28 (to date) NSSTA member growth proposals and selected three for NSSTA Board of Directors approval to develop immediate implementation plans with success metrics."

Goodman introduced the NSSTA Growth Committee members including co-Chairmen William Goodman, Sean Coleman, John McCulloch and John Arendt. Speaking for the Committee, Coleman enthused: "I love our change of focus. Historically, NSSTA has been reactive, dodging bullets. The Growth Initiative redirects our mindset and focus. It encourages us to become proactive. The Growth Committee has already surpassed by highest expectations."

Goodman and the Committee co-Chairmen identified the following three NSSTA Growth Initiatives already selected and approved:

• Rejuvenate Defense Programs (including casualty insurers, commercial insureds and TPAs) - Originally the prime movers for structured settlements, many defense insurers have reduced or completely abandoned their structured settlement programs citing a variety of reasons. Beginning with three target carriers, the Committee plans to analyze the causes, and ultimately revitalize the programs, to create new prototype defense program models. Note: NSSTA recently commissioned surveys of Senior Claims Executives; and front line Claims Professionals which S2KM summarized and evaluated in prior blog posts.
• Amend the Federal Employee Compensation Act (FECA) - FECA, which provides workers compensation like benefits for federal workers, currently does not permit structured settlements. With payouts totally approximately $4.5 billion per year, FECA represent an attractive potential market for structured settlements with administrative cost savings being one justification for a legislative amendment. Based upon preliminary interviews, the Growth Committee believes FECA stakeholders view structured settlements favorably. The Committee is gathering statistical data to support its proposal and building grassroots support.
• Convertible Deferred Lump Sums - As a sales response to "low interest rates", the Growth Committee is proposing a new structured settlement feature. As envisioned, the convertible deferred lump sum would allow a structured settlement recipient to select a future lump sum that would automatically convert on its payment date into a series of predetermined periodic payments payable at whatever annuity rates offered at the time of conversion by the issuing life company. A Canadian broker attending the NSSTA conference stated that at least one Canadian life company already offers this structured settlement product feature. The Committee anticipates whichever annuity provider introduces this product feature in the U.S. will probably also seek an IRS private letter ruling.
• Note: NSSTA's Growth Committee identified a fourth preliminary initiative (Dissipation Study) - to confirm that injury victims squander lump sums. However, this initiative is currently on hold. For background, see this 2009 S2KM review of Jeremy Babener's legal research paper analyzing historic dissipation studies.

Factoring Update

Goodman also addressed the state of the structured settlement industry including a "factoring update". As part of this report, Goodman confirmed that NSSTA and the National Association of Settlement Purchasers (NASP) have agreed to cooperate legislatively in several states to seek the following consumer protection amendments for state structured settlement protection statutes:

• No forum shopping.
• Payee required to attend hearing.
• Stricter application of approval requirements.
• Advanced notice of transfer.
• Required disclosure of prior transfers.

Supporting this cooperative initiative, NSSTA has begun offering its members a new Judicial Education Training Seminar - taught in Phoenix by John McCulloch and Stephen Harris. Goodman also announced he will be a featured speaker at NASP's 2015 Annual Conference next week in Las Vegas - the first serving NSSTA President to do so. Perhaps anticipating his NASP appearance, and cognizant of the recent Washington Post article ("a perfect storm for factoring"), Goodman advised the NSSTA Conference attendees: "Factoring is not a zero sum game. What is bad for them is not always good for us."

Additional Conference Presentations

Many structured settlement participants believe control of the primary structured settlement market, and future market growth, have shifted from the defense to plaintiff attorneys and their injury victim clients. Although NSSTA has been slow to embrace plaintiff-focused personal injury settlement planning, NSSTA's Fall Conference included two presentation featuring plaintiff representatives:

• A Trial Lawyer Panel - moderated by Ryan Garrison with plaintiff attorneys Julio Zapata and Francisco Gutierrez; plus
• An introduction to the National Association of Trial Lawyers Executives (NATLE) by Gayle Bennett, Deputy Director of the New Mexico Trial Lawyers Association.

Both plaintiff presentations emphasized opportunities to expand the market for structured attorney fees. Both plaintiff attorneys expressed a preference for advisors who are "knowledgeable not just about structured settlements but also other investment vehicles."

In addition to the Judicial Education Training session mentioned above, three other NSSTA presentations addressed educational issues and programs:

• Best Practices for Structured Settlement Case Resolution - During her excellent review of structured settlement fundamentals, Betty Gregware expressed serious concern about the general quality of structured settlement documentation and the need to increase competence across the industry.
• Professional Broker Education - Gregware, Melissa Price and Debbie Sink introduced a new educational program NSSTA is developing primarily for individuals who are new to the structured settlement industry. They also provided an administrative overview of "NSSTA University" whereby NSSTA partners with members to secure CE credits for member-sponsored educational seminars for insurance claims departments or law firms.
• MSSC Paper Presentation - Mal Deener moderated a panel featuring Trish Fairhurst, Richard Carroll and other members of the first graduating class of NSSTA's new Masters Structured Settlement Consultant (MSSC) professional designation. Each MSSC graduate is required to submit a paper and these papers will be published on NSSTA's website. NSSTA will offer its next MSSC program beginning April 27, in conjunction with its Certified Structured Settlement Consultant (CSSC) program, at the University of Notre Dame

Separate from, but related to, NSSTA Growth Initiative, NSSTA's Board of Directors has appointed a Special Needs Attorney Task Force to develop strategic relationships with special needs attorney professional associations and to identify collaborative marketing opportunities with special needs attorneys more generally. NSSTA member Carola Davis and Special Needs Alliance attorney Patty Sitchler initiated a NSSTA presentation/discussion in Phoenix which hopefully will continue and expand to the benefit of both professional communities.

A critical factor, both challenge and opportunity, for growing the primary structured settlement market concerns succession planning. What new generation of distributors, or distribution channel(s), or business models, will emerge (and when) to replace and build upon the accomplishments of the pioneering generation (now in their 60s and 70s) who originated the structured settlement market in the late 1970s? NSSTA's Fall Conference featured two presentations addressing these issues:

• Succession Planning - Presenter Jim Early looked at the succession issue primarily from the point of view of the individual producer. Among his observations: "nepotism works in the structured settlement industry" and "a lack of capital has prevented the primary market from bringing in and training new people."
• Diversity Discussion - Angel Viera and Stacy McCall offered a convincing case for promoting greater diversity among new structured settlement professionals as a key component for future growth. Their presentation included and elicited several thought-provoking observations including: 1) "From a demographic perspective, our industry should mirror the people we serve" and 2) "Our industry suffers from a lack of diversity of thinking. Where do we find new voices and perspectives?"

Lifetime payments represent a valuable, optional structured settlement benefit which can be further enhanced from a pricing perspective when rated ages are applicable. Kevin Puckett and Ken Kiefer expounded on these important issues during their presentation about Mortality, Morbidity & Rated Ages.

NSSTA members Susan Clark and Robert Caples introduced Arnie Begler and Scott Henry, representing Pipitone Group, NSSTA's new public relations firm, and together they discussed NSSTA's Communications Program. Because journalists, as well as their readers, frequently confuse the primary and secondary structured settlement markets, Pipitone's "first test" was responding to the aforesaid Washington Post article. Pipitone's stated assignment is "to find the best communications practices and bring them to NSSTA" which will include designing a new NSSTA website. Among NSSTA's priorities, and Pipitone's challenges, will be attempting to reclaim the "structured settlement" brand inclusive of Google searches which currently are dominated by secondary market companies.

NSSTA Executive Director Eric Vaughn concluded NSSTA's Fall Conference with a Government Relations Update - his characteristically insightful and energizing overview of structured settlement legislative and regulatory activities. Among other accomplishments, Vaughn was recently named Vice Chairman of the American Association of People with Disabilities (AAPD).

Other recent NSSTA-related S2KM blog posts:

• Michael Goodman Interview
• NSSTA Marketing Surveys
  • Senior Claim Executives
  • Claim Professionals
  • Plaintiff Attorneys
• NSSTA 2015 Structures 202 Conference
• NSSTA 2015 Annual Conference

NSSTA 2015 Annual Meeting

Continuing to advance a theme of "industry unity", which now appears to encompass some collaborative political lobbying as well as education, the National Structured Settlement Trade Association (NSSTA) hosted its 2015 Annual Meeting April 22-24 in Washington, D.C.

Incoming NSSTA President Michael Goodman highlighted these developments during his introductory address when he listed among other recent NSSTA successes: 1) a strong relationship with the American Association for Justice (AAJ); 2) improved dialogue with the Society of Settlement Planners (SSP); 3) guest educational participation involving SSP and National Association of Settlement Purchasers (NASP) representatives; as well as 4) successful cooperation with NASP to enact revised structured settlement protection legislation in Illinois.

The new Illinois legislation provides an antidote for problems created by the Brenston case. Among other changes to the prior Illinois statute, the new legislation also includes provisions to: 1) restrict forum shopping; 2) require the seller of payment rights to appear in person at the court hearing (unless the court determines that good cause exists to excuse the payee from appearing); and 3) require disclosure of prior transfers.

Representatives of both NSSTA and NASP have expressed their intent to cooperate in pursuing similar legislative reforms in other states including Florida, Tennessee, Virginia and Wisconsin.

Goodman also identified several goals for NSSTA during his term as President. These include: 1) modifying NSSTA's traditional "protect and preserve" message to inspire primary market growth; 2) moving beyond "interest rate selling"; 3) moving beyond a focus on factoring; 4) identifying and pursuing new markets for structured settlement annuities; 5) adding one or more new life company providers; 6) engaging new, younger structured settlement brokers; 7) providing a new and improved training initiative.

Goodman will be joined on the NSSTA Board by two newly-elected Directors: Jim Early and Geoff Kissel. They replace retiring Directors John Machir and Dan Goodmann. John McCulloch was re-elected to a new three year term of directorship. McCulloch was also honored as NSSTA's annual President's Award winner. Karen Meyers and Bill Wakelee were named recipients of NSSTA's annual Leadership Award.

NSSTA Executive Director Eric Vaughn updated members on the Structured Settlement Caucus which is co-chaired by Congressmen John Lewis and James Sensenbrenner and currently consists of 53 congressional members. The objectives of the Caucus include: 1) expanding the base of Congressional support for structured settlements; 2) educating new members of Congress about structured settlements; and 3) protecting and promoting structured settlements.

As an important auxiliary portion of its meeting, Vaughn and 125 NSSTA members "Took the Hill" to meet with Senators and Representatives. Their efforts received strong encouragement from Congressman Lewis who exhorted NSSTA members "to make some noise."

"Stand up! Speak up!" Lewis urged. "Structured settlements have always enjoyed strong bipartisan Congressional support. They are the right and necessary thing to do. They work by providing long term financial security for injury victims to live with dignity."

NSSTA and its Education Committee face a continuing challenge: how best to educate its members, who possess varying degrees of experience and who market to a diverse group of structured settlement producers and decision makers, to deliver high value services to their respective clients. NSSTA has addressed this challenge with multiple new initiatives:

• Structures 202 provides a comprehensive program of case management fundamentals and business development opportunities. Unlike Structures 101 (a prior NSSTA educational program for case managers), Structures 202 is also designed for structured settlement brokers who are new to the market and therefore includes an important, primarily plaintiff-oriented, business development component.
• Complementing and extending its Certified Structured Settlement Consultant (CSSC) Professional Certification Program, NSSTA has added a new Master's Certificate in Structured Settlement Consulting (MSSC). NSSTA recognized and honored the most recent graduates of both programs during its 2015 Annual Meeting.
• During its Fall 2014 Conference, NSSTA announced a new "NSSTA University" service whereby NSSTA will partner with any member to secure CE credits for member-sponsored educational seminars or insurance claims departments or law firms.
• In partnership with CLM Advisors, NSSTA's Marketing Committee has commissioned a three part survey project to provide its members with valuable marketing tools for discussions with the audiences surveyed. Part 1 (claims executives) and Part 2 (claims adjustors) have been completed. Part III will survey plaintiff attorneys.

In addition, from S2KM's perspective, NSSTA continues to upgrade its traditional educational conferences.

SPEAKERS AND TOPICS - NSSTA 2015 Annual Meeting

• Kevin Silo - Opening Remarks
• Congressman John Lewis - Keynote Speaker
• Michael Goodman - NSSTA Agenda and Objectives
• Sally Greenberg - Consumer & Legal Protections for Injury Victims
• Mike Montemurro and John Stanton - Internal Revenue Service Update
• Taylor Smith, Ronna Ruppelt, Robert Sampson - Delivering High Value Services to Claims Professionals
• Karen Meyers, Anne Marie VonBank, Cody Shively - Trigger Trusts
• Christi Fried, Paul Hansen, Phil Sanders - Trust Asset Allocation and Structured Settlements
• Stephen Harris, Timothy O'Driscoll and Peter Vodola - Judicial Education
• Susan Clark and Melissa Price - NSSTA Took the Hill
• Michael Miller, Earl Nesbitt, John McCulloch - Factoring Panel Discussions
• Dr. Quincy Krosby - Macro Economics and the Financial Markets
• Nancy Bond - Life Care Planning

For additional S2KM reporting about past NSSTA conferences, see the structured settlement wiki.

NSSTA 2014 Fall Educational Conference

Although David Ringler was unable to attend the National Structured Settlement Trade Association (NSSTA) 2014 Fall Educational Conference October 29-30 in La Jolla, California, he had an apparent impact. Ringler, NSSTA's first president, previously re-stated his original vision for NSSTA during NSSTA's 25th anniversary celebration in 2011:

"Although we do need to constantly be on the watch for legislative change, I still believe having a place where everyone and anyone can sit down with each other and discuss the issues and viewpoints regardless of beliefs is the most important reason for NSSTA. I have called it a common “talk table”, although I agree that is not exactly a very elegant term. If we can continue this tradition, there is no problem we cannot overcome."

Many industry participants, including some NSSTA members, have questioned whether NSSTA has lost sight of this original purpose and tradition. For the past several years, NSSTA's leadership has superimposed a political litmus test for membership, as well as for topics and speakers at its educational conferences. As one result, structured settlement industry participants with alternative issues, viewpoints, beliefs and educational interests have founded two other national structured settlement associations: the National Association of Settlement Purchasers (NASP) in 1996 and the Society of Settlement Planners (SSP) in 2000.

NASP and SSP Participation

Perhaps responding to Ringler's clarion call, NSSTA opened its members-only educational program in La Jolla by inviting NASP President Patricia LaBorde and SSP President Neil Johnson to speak.

LaBorde was featured on a Secondary Market Panel, moderated by John McCulloch, which also included Stephen Harris and Patrick Hindert as panelists. McCulloch's questions targeted primary market concerns such as the prevalence of secondary market transfers, consequences of transfer company advertising and secondary market discount rates. The resulting discussion captured the audience's undivided attention and hopefully will result in expanded educational dialogue between NSSTA and NASP to include shared political and business interests.

Johnson and current NSSTA President Kevin Silo jointly addressed "Industry Challenges", a panel discussion moderated by NSSTA President-elect Michael Goodman. Repeating portions of his SSP 2014 keynote speech, Johnson proposed the following solutions for achieving industry unity: 1) recognizing and accepting product diversity; 2) focusing on client and customer service; 3) identifying and pursuing permanent shared interests without necessarily agreeing on all issues; 4) engaging all perspectives to discuss industry problems and issues; 5) improving relationships among stakeholder groups; 6) promoting and practicing settlement planning not settlement selling.

Generational Change and Challenges

NSSTA and the primary structured settlement market face multiple challenges (see below) - perhaps none greater than succession. What new generation of distributors, or distribution channel(s), will emerge (and when) to replace and build upon the accomplishments of the pioneering generation (now in their 60s and 70s) who originated the structured settlement market in the late 1970s?

In addition to generating more than $140 billion of annuity premium, the legacy of NSSTA's retiring generation includes enactment of the existing structured settlement legislative framework: current IRC sections 104(a)(1) and (2) and 130 plus multiple state periodic payment of judgment statutes and (with NASP) enactment of IRC 5891 and the state protection statutes. More recently, however, NSSTA's aging leadership has focused on defense - with "protect and preserve" its principle mantra.

NSSTA attempted to addressed this generational succession issue at its Fall conference by juxtaposing panels featuring past NSSTA Presidents and "Next Generation" brokers. The impression that emerged: NSSTA and the primary market have reached an historic crossroads - with multiple stakeholders, issues and options, but no clear future direction.

Whatever next generation of NSSTA leaders emerges will face several challenges:

• Stagnant growth - Since achieving $6 billion of annual annuity sales in 2001, structured settlement premium growth has stagnated with 2013 sales totaling $5.1 billion.
• Polarized market(s) - NSSTA's leaders have been unable, and/or unwilling, to unify the structured settlement market(s) around such shared interests as: primary market growth; preservation of existing legislation; and consumer protection - which prioritizes maintaining promised periodic payments.
• Alternative business models - Can alternative structured settlement models (traditional defense vs. emerging plaintiff) continue to co-exist and collaborate?
• Complexity - Structured settlements represent a strategic product within the larger and more complex personal injury settlement planning (settlement planning) market.
• Product features - Will Pacific Life's recent private letter ruling encourage structured settlement annuity providers to expand their product offerings to include "equity-indexed" annuities and "hardship conversions"?
• Competition. Within the settlement planning market, the growth and leadership of other product and service providers has increasingly exceeded the growth and leadership of structured settlement participants.
• Success factors. To expand sales within the evolving settlement planning market, NSSTA's leaders must re-think and re-engineer historical success factors - backgrounds and skill sets; educational programs; business models; product enhancements; sales and marketing strategies.

KNOWLEDGE MANAGEMENT

The settlement planning market is knowledge-intense and increasingly Internet-based. To continue, and increase, their historical success within the evolving settlement planning market, NSSTA and its members must improve their knowledge management capabilities. One preliminary step is to identify and evaluate existing strategic knowledge. NSSTA and its members possess three primary types of strategic knowledge:

• Product knowledge - The "Tax Posse", the ACA summary, and even the Non-traditional Products presentation at NSSTA's Fall conference represent good examples of NSSTA's product knowledge. Perhaps more important, and more valuable, than explicit product knowledge, NSSTA members possess tacit (intuitive, experiential) knowledge of how structured settlements work. In the context of the secondary market, however, NSSTA member knowledge of its own product is arguably much weaker, and, therefore, incomplete and less valuable.
• Relationship knowledge - Much of NSSTA's Fall conference related to, and re-enforced, NSSTA's and NSSTA members' settlement planning relationship knowledge about and with: 1) plaintiff attorneys; 2) insurance associations; 3) insurance claims adjustors; 4) national consumer associations; 5) U.S. Congressional members; 6) MSA administrators; 7) SSP; and 8) NASP. In settlement planning, as in life more generally, it is not what you know but who you know that counts the most.
• Market knowledge - Compared with other settlement planning market segments, NSSTA (and NASP) appear to have developed and maintained more accurate market metrics including quarterly and annual premium and cases in total and for each member product provider. To further expand structured settlements into the settlement planning market, NSSTA and its members might begin to track additional metrics. For examples: what percentage of structured settlements are utilized to fund MSAs, SNTs and settlement trusts more generally. Which categories of structured settlement recipients are most likely to sell payment rights and why?

MARKETING INITIATIVES

NSSTA conference speakers introduced multiple new marketing initiatives including:

• "NSSTA University" - NSSTA's Debbie Sink announced a new "NSSTA University" service whereby NSSTA will partner with any member to secure CE credits for member-sponsored educational seminars or insurance claims departments or law firms.
• CLM Survey Part II - In partnership with CLM Advisors, NSSTA's Marketing Committee summarized CLM Survey Part II (claims adjustors) of an eventual three part survey project. Part I surveyed claims executives. Part III will survey plaintiff attorneys. These surveys provide NSSTA members with valuable marketing tools for discussions with the audiences surveyed.

TOPICS AND SPEAKERS

• Introduction and Welcome - Eric Vaughn.
• Industry Challenges - Michael Goodman (Moderator), Kevin Silo, Neil Johnson.
• Next Gen Brokers - Louis Masry (Moderator), Kristen Chess, Ryan Garrison, Tony Robinson.
• Financial Issues for People with Disabilities - Sally Greenberg and Mark Perriello.
• AAJ Treasurer Elect - Elise Sanguinetti.
• MSA Professional Administration - Tom Adams (Moderator), Marques Torbert, Joe Anderson.
• Affordable Care Act - Jordan Bossler.
• Past NSSTA Presidents - Moderators (Kevin Silo; Eric Vaughn); Jeff Bowers, Len Blonder, Joe Costello, Mal Deener, Dan Durbin, Randy Dyer, Dan Finn, Patrick Hindert, John Machir, Henry Strong.
• Factoring Panel - John McCulloch (Moderator), Stephen Harris, Patrick Hindert, Patricia LaBorde.
• Non-Traditional Products - Erin Muller (Moderator), John Arendt, Ryan Jandreau, Jeff Reinhold, Chris Shumate, Ravi Vaswani.
• American Insurance Association - Peter Foley.
• CLM Survey Part II - Taylor Smith, Susan Clark, Jeff Livingston.
• Tax Posse - John McCulloch, Timothy O'Driscoll, Tom Ronce.
• NSSTA CE News - Erin Muller and Debbie Sink.

Congratulations to NSSTA and conference chairperson Erin Muller for re-establishing NSSTA's tradition of educational programs featuring speakers with multiple viewpoints on industry issues "regardless of beliefs". David Ringler and other structured settlement pioneers should feel gratified - and hopeful for NSSTA's future success.

For S2KM's reports about prior NSSTA educational conferences, see the structured settlement wiki.

Taxation of Emotional Distress Damages - 1

Some of the most challenging federal income tax issues for settlement planners and their clients involve damages related to emotional distress and, even more specifically, damages compensating for stress-induced physical ailments.

This blog post summarizes federal legislative and regulatory tax history related to emotional distress damages and highlights recommendations for related legislative changes. In a subsequent blog post, S2KM will review articles by Jeremy Babener and Robert Wood analyzing recent related case law and offering their advice to settlement planning stakeholders.

Before enactment of the Small Business Job Protection Act of 1996, IRC section 104(a)(2) exempted from federal income tax payments received from settlements or judgments resulting from claims for personal injuries or sickness.

As the result of the 1996 amendment, however, Section 104(a)(2) now exempts from federal income tax “damages (other than punitive damages) received … on account of personal physical injuries or physical sickness.” Section 104(a) now also provides "emotional distress shall not be treated as a physical injury or physical sickness" for purposes of subsection (2). However, damages received on account of emotional distress that are attributable to a physical injury or physical sickness are excludable. The related legislative history provides that “emotional distress” includes “physical symptoms (e.g., insomnia, headaches, stomach disorders) which may result from such emotional distress.”

Since 1996, there have been many tax cases and many IRS rulings addressing damages for emotional distress. In a private letter ruling issued in 2000 (“the bruise ruling”), the IRS established “the observable bodily harms” standard in a case involving sexual assault and harassment in an employment context: “we believe that direct unwanted or uninvited physical contacts resulting in observable harms such as bruises, cuts, swelling and bleeding are personal physical injuries under section 104(a)(2).”

The United States Treasury did not issue new regulations for IRC section 104(a)(2), to address the 1996 amendments, until proposed regulations were published in 2009. A public hearing followed on February 23, 2010. On January 20, 2012, Treasury published final regulations for IRC section 104(a)(2) which were essentially the same as the 2009 proposed regulations.

Although the 2012 regulations confirm that damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2), they do not provide any explanation to help define “physical” or “physical sickness”.

In addition to the tax rules outlined above, recipients of damages related to emotional distress, and their advisers, should also consider the following:

• IRS Form 1099 - When defendants settle cases involving taxable damages, they are required to complete an IRS Form 1099 and send copies to the claimant and the IRS. Most section 104(a)(2) cases, according to Robert Wood in his article "Tax-Free Physical Sickness Recoveries in 2010 and Beyond", have said a Form 1099 means the defendant/payer thought the damages were taxable. Conversely, Wood states, some courts have noted that the failure to issue a Form 1099 does not make a payment tax free.
• IRC Section 6661 - IRC Section 6661 establishes a 25% penalty for “substantial understatement of income tax.” However, according to case law cited in section 2.03 of “Structured Settlements and Periodic Payment Judgments”, (S2P2J) where a taxpayer reasonably relies on the advice of professionals in claiming a tax exclusion for emotional distress damages, the taxpayer may be able to escape application of an accuracy-related penalty - even though the exclusion was not accepted,
• Medical Care Exception - IRC section 104(a) excludes from gross income “damages not in excess of the amount paid for medical care … attributable to emotional distress.” In his article titled "Maximizing the Medical Care Exception to the Tax on Emotional Distress Damages", Jeremy Babener points out: "...when a client plans to receive damages on account of emotional distress, taking advantage of the medical care exception requires deliberate planning." Babener adds, however, "... while excluding damages based on past medical care expenses is relatively straightforward, excluding damages based on future medical care expenses is anything but."

During and/or concurrent with the February 23, 2010 public Treasury hearing related to the section 104 (a)(2) regulations, multiple persons recommended changes to the "physical" requirement added by the 1996 amendments including:

• The National Taxpayer Advocate - The National Taxpayer Advocate (NTA) addresses taxpayer considerations from inside the IRS. In a 2010 report to Congress, NTA representative Nina Olson recommended that section 104(a)(2) exempt non-physical damages, specifically emotional distress, mental anguish, and pain and suffering. To support her recommendation, Olson offered scientific data (that depression and other psychological illnesses included physical elements) and argued that existing tax law conflicts with public policy (the nondiscrimination requirement in the Mental Health Parity and Addiction Equity Act of 2008).
• John McCulloch - During the Treasury hearing, McCulloch proposed that damages received by victims of prolonged sexual abuse or false imprisonment should always be deemed “physical” for purposes of IRC section 104(a)(2) whether or not evidence is available to demonstrate physical injury.
• David Higgins - In a written submission for the Treasury public hearing, Higgins argued that the IRS’ definition of "physical" is inadequate: “direct unwanted or uninvited physical contacts resulting in observable bodily harm such as bruises, cuts, swelling, and bleeding.” Higgins recommended a broader definition, including damages for:
  • A doctor’s misdiagnosis resulting in death or serious injury from delayed or missing treatment;
  • Child neglect resulting in starvation or illness;
  • Rape committed under threat of bodily harm; and
  • Other situations where traditional physical injury torts occur without unwanted or uninvited physical contact or observable bodily harm.

For more detailed information about taxation of structured settlement payments, including emotional distress damages, see Chapter 2 of "Structured Settlements and Periodic Payment Judgments" (S2P2J).

Treasury Publishes New IRC 104(a)(2) Regs

The United States Treasury has published new regulations for IRC section 104(a)(2) relating to the exclusion from gross income for amounts received on account of personal physical injuries or physical sickness.

Published January 20, 2012, the new section 104(a)(2) regulations make two primary changes to the current regulations. First, they incorporate amendments to 104(a)(2) made in Small Business Job Protection Act of 1996 (1996 Act). Second, they eliminate the previous regulatory requirement that damages must be based upon “tort or tort type rights” to qualify for the tax exclusion.

The 1996 Act included two legislative amendments narrowing the applicability of the 104(a)(2) exclusion. The first amendment prevents any punitive damages from qualifying for the tax exclusion in the personal injury context. The second amendment requires that injury or sickness damages must result from “physical” origins to be excluded. Although emotional distress is not considered a physical injury or physical illness, the new regulations confirm that damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2).

The new section 104(a)(2) regulations also eliminate the previous regulatory requirement that damages must be “based on tort or tort type rights” to qualify for exclusion. In a 1995 case (Commissioner v. Schleier), the United States Supreme Court interpreted this requirement to disallow the exclusion of damages where the relevant law (a "no-fault" statute) provided a contractual remedy even though the claimant suffered a personal physical injury or physical sickness as a result of a breach of contract. The new regulations eliminate this prior requirement and allow the tax exclusion to apply even when the physical injury or sickness does not constitute a tort under state or common law.

The new, final regulations for section 104(a)(2) are essentially the same as the proposed regulations the United States Treasury issued in 2009 and which were the subject of a public hearing on February 23, 2010. The final regulations did not adopt any of the recommendations offered by commentators at the public hearing. These recommendations included:

•  Requests by Richard Risk and Jack Meligan that the final regulations address whether a claimant has constructive receipt or the current economic benefit of a damage award that is set aside for the claimant’s benefit in a section 468B qualified settlement fund;

• Requests by John McCulloch and David Higgins that the final regulations confirm several specific types of damages are "physical" and therefore tax-exempt.

For background information about the new section 104(a)(2) regulations and their application to structured settlements, including commentary and analysis by Jeremy Babener, see these prior S2KM blog posts:

• Treasury Hearing on IRC 104(a)(2) Regs
• A Common Cause at the Treasury Regulation Hearing
• Treasury Hearing Commentary
• Voices at the Treasury Hearing
• Speaker Comments at the Treasury Hearing
• Legislation to Expand the Structured Settlement Industry
• Babener Proposes Expanded S2 Tax Subsidy

For a copy of the new section 104(a)(2) regulations, see the structured settlement wiki.

NSSTA 2011 Education Meeting

The National Structured Settlement Trade Association (NSSTA) hosted one of its best-ever educational programs November 2-4, 2011 in Austin, Texas. The conference primarily showcased NSSTA members and NSSTA member executives and encompassed a variety of important industry topics.

Speakers and topics:

NSSTA President Dan Finn - Finn summarized NSSTA's current projects, emphasized NSSTA's improved structured settlement marketing and announced the 2012 NSSTA Annual Meeting which will take place in Washington, D.C. and feature Congressmen Dave Camp and Paul Ryan as Keynote Speakers.

NSSTA Executive Director Eric Vaughn - In addition to reviewing the 112th Congress and Super Committee, Vaughn discussed the following NSSTA challenges and priorities:

• Protect IRC sections 104(a)(2) and 130.
• Defend structured settlements.
• Promote the expanded use of structured settlements.
• Expand the markets for structured settlements.
• Enhance the CSSC designation.
• Provide state court judicial education about structured settlements.

AIG Chief Economist Ardanvan Mobasheri - Mobasheri's economic overview highlighted China's emerging leadership, outlined a "very healthy non-financial business world" and predicted low interest rates for the foreseeable future.

American General Life President Mary Jane Fortin - Describing AIG as "a strong, stable and resilient company dedicated to keeping our promises", Fortin dispelled several "myths" about AIG, summarized AIG's recovery and expressed optimism about the future of life insurance industry and structured settlements.

John McCulloch and Michael Miller - Reprising NSSTA "Tax Posse", McCulloch and Miller introduced the new IRS audit guide for lawsuits, awards and settlements and reviewed recent tax cases addressing employment, factoring and Qualified Settlement Fund issues.

Peter Vodola, Stephen Harris and Amy Ravitz - The co-chairpersons of NSSTA's Legal Committee participated in two separate panels moderated by James Ebel and Michael Kelly and discussed non-tax cases and issues including state structured settlement protection statutes, issues arising from transfer petitions and minors statutes and settlements.

Len Blonder and NSSTA General Counsel Craig Ulman - Blonder and Ulman reported the status of the Executive Life of New York (ELNY) liquidation, discussed the consequences for structured settlements and reviewed hypothetical case examples from the proposed ELNY Restructuring Agreement.

Karen Meyers, LeAnne Sprague, Doug Brand and Kathy Moghadas - In addition to discussing changes to the CSSC designation that will require annual CE credits, NSSTA sponsored a special four hour annuity education session designed to meet the requirements of the new state annuity transaction suitability laws.

CNA Commercial Liability Claims Vice President James Martin - Championing structured settlements as an "important competitive advantage" for liability insurers, Martin also emphasized the importance of linking structured settlements and structured settlement sales to claim department goals and metrics.

Ringler Radio Broadcaster Larry Cohen - When announced co-interviwer Mark Wahlstrom proved a "no show", Cohen glibly volleyed Eric Vaughn toughest questions. Three memorable Cohen quotes: "a lot of a little is a lot"; "vision without execution is hallucination"; and (applying his grandfather's wisdom to Executive Life's annuity rates ) "there is something wrong with this tuna fish."

Liberty Life Chief Underwriter Kevin Smith - Speaking about "Life Company Operating Metrics", Smith pointed out the dearth of structured settlement metrics and announced a collaborative project among multiple NSSTA life company members to develop a preliminary set of structured settlement operating metrics.

Attorney William C Chriss - Author of the new book "The Noble Lawyer", Chriss discussed legal and structured settlement ethics. Among his observations while discussing NSSTA's Code of Ethics:

• "We cultivate beliefs that justify our behaviors, not the other way around.
• "Unconscious bias, as opposed to intentional venality, cannot be deterred by criminal laws or post hoc sanctions.
• "The more people involved, the easier it is to defuse moral responsibility."

Congratulations to NSSTA's speakers and leaders (especially Education Chairpersons Toni Warbington and Don Engels as well as Finn, Vaughn and Associate Director Peter Arnold) for substantially upgrading NSSTA's educational program.

For S2KM reports about prior conferences of NSSTA and other structured settlement and settlement planning professional associations, see the structured settlement wiki.

Expanding Section 104(a)(2)'s Tax Exclusion

In a 2010 article titled "How Plaintiffs Might Receive Emotional Distress Damages Tax-Free After 2010", published in the "North Carolina Lawyers Weekly", Jeremy Babener asked a pointed and strategic question: how can the structured settlement industry encourage more damages to be received tax-free? Doing so, presumably, would expand the structured settlement market.

Several proposals to accomplish these objectives have been offered during the past few months - some of which resulted from a U.S. Department of the Treasury public hearing held on February 23, 2010 to consider proposed new Treasury regulations for IRC section 104(a)(2). If adopted, these proposed new Treasury regulations would make two primary changes to current regulations: 

• Eliminate the requirement that damages be based on “tort or tort type rights” in order to qualify for the section 104(a)(2) tax exclusion, and
• Incorporate 1996 legislation requiring that personal injuries and sickness damages be “physical” in order to qualify for the section 104(a)(2) exclusion.

In the context of these proposed new Treasury regulations, the structured settlement industry would benefit from greater discussion and a better understanding of the following recent tax proposals to expand application of the section 104(a)(2) tax exclusion:

• The National Taxpayer Advocate, which considers taxpayer considerations from inside the IRS, has recommended that section 104(a)(2) exempt non-physical damages, specifically emotional distress, mental anguish, and pain and suffering.
• John McCulloch proposed, during the February 23, 2010 public Treasury hearing, that damages received by victims of prolonged sexual abuse or false imprisonment should always be deemed “physical” for purposes of IRC section 104(a)(2) whether or not evidence is available to demonstrate physical injury.
• Richard Risk and Jack Meligan each recommended, during the same public hearing, that Treasury issue regulations explicitly holding the economic benefit doctrine will not be triggered in the context of single-claimant 468B Qualified Settlement Funds.
• David Higgins has proposed two recent tax recommendations. In a written submission for the Treasury public hearing, Higgins argued that the IRS’ definition of "physical" is inadequate: “direct unwanted or uninvited physical contacts resulting in observable bodily harm such as bruises, cuts, swelling, and bleeding.” Higgins recommends a broader definition, including damages for:
  • A doctor’s misdiagnosis resulting in death or serious injury from delayed or missing treatment;
  • Child neglect resulting in starvation or illness;
  • Rape committed under threat of bodily harm; and
  • Other situations where traditional physical injury torts occur without unwanted or uninvited physical contact or observable bodily harm.
• Higgins directed his second recommendation to Senator Max Baucus (Chairman of the Senate Finance Committee), Congressman Dave Camp (Chairman of the House Committee on Ways and Means), and Michael Mundaca (Assistant Secretary of the Treasury for Tax Policy). In his communication, Higgins recommended a "rollover provision" to replace Section 130 of the Tax Code. Higgins' proposal would allow personal injury plaintiffs to accept a check from defendants and invest the money within a given period (likely limiting the investment options to annuities and Treasury bonds), without losing the tax benefit currently available to them only by agreeing to a structured settlement with a counter-party.
• Jeremy Babener has proposed a legislative conversion of the structured settlement exclusion to a refundable tax credit. 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. A refundable tax credit would provide the same incentive value to all structured settlement recipients, high-income or low-income.

Most recently, McCulloch has incorporated his earlier recommendations into a request to Treasury and the IRS that final regulations under IRC Section 104(a)(2) should clarify the scope of the exclusion for damages received on account of personal "physical" injuries or "physical" sickness. McCulloch's request seeks guidance and a determination as part of Treasury's 2011-2012 Guidance Priority List that sexual abuse cases and long-term wrongful incarceration (at least one year of restraint) are per se physical injuries under Section 104(a)(2).

In support of his proposal, McCulloch states: "There is a significant body of literature that recognizes sexual abuse as a serious medical problem with long lasting and severe physical effects, many of which can only be treated by a licensed medical practitioner or through the prescription of controlled medications. There are similar medical studies that demonstrate the persistent physical damage that results from long-term incarceration."

The purpose of the Treasury's Priority Guidance Plan is to focus United States government resources "on guidance items that are most important to taxpayers and tax administration." In reviewing recommendations and selecting projects for inclusion on the 2011-2012 Guidance Priority list, the Treasury and the IRS have stated they will consider whether the recommended guidance:

• Resolves significant issues relevant to many taxpayers;
• Promotes sound tax administration;
• Can be drafted in a manner that will enable taxpayers to easily understand and apply the guidance;
• Involves regulations that are outmoded, ineffective, insufficient, or excessively burdensome and that should be modified, streamlined, expanded, or repealed;
• Reduces controversy and lessens the burden on taxpayers or the IRS; and
• Whether the IRS can administer the recommended guidance on a uniform basis.

McCulloch maintains his request for guidance satisfies the above criteria:

• Since Section 104(a)(2) was amended in 1996, taxpayers have needed guidance to determine the scope of the terms "physical injury" and "physical sickness" for which no definitions exist.
• The 1996 amendment did not specifically consider its application to victims of sexual abuse and wrongful incarceration and needs modification because it affects a large and growing number of taxpayers:
  • For sexual abuse victims, because of greater opportunities for victims resulting from legislation in many states which extends applicable statutes of limitations.
  • For wrongful incarceration victims, because more widely available DNA-testing absolves wrongfully convicted prisoners.
• The requested guidance would promote sound tax administration by providing an understandable tax rule thereby minimizing the likelihood of future controversies.
• It would also provide consistency in tax treatment among such victims who face uncertainties and expense when they currently attempt to address these issues individually.

In S2KM's opinion, industry support for McCulloch's proposal would provide one immediate answer to Jeremy Babener's strategic question about how the structured settlement industry can cooperate to improve and grow its market by encouraging more damages to be received tax-free under IRC section 104(a)(2).

For additional information about taxation of damages received by personal injury victims, see Chapter 2 of "Structured Settlements and Periodic Payment Judgments" (S2P2J)

Structured Settlements in 2010 - 2

Beginning in 2004, S2KM has utilized this blog ("Beyond Structured Settlements") and related web 2.0 publications to report and analyze strategic developments impacting the structured settlement and special needs settlement planning (aka settlement consulting) industries.

Featuring industry leaders, commentators and professional association conferences, S2KM has attempted to highlight how legal and technology changes are redefining the traditional (pre-2001) structured settlement market including structured settlement public policy as well as structured settlement business standards, business practices and business models.

From S2KM's perspective, the following categories, people and developments defined the structured settlement and special needs settlement planning industries in 2010:

Professional associations

• S2KM attended seven professional educational conferences during 2010 which addressed structured settlement and/or special needs settlement planning issues:
  • National Structured Settlement Trade Association (NSSTA) - 2
  • Society of Settlement Planners (SSP)
  • National Association of Settlement Purchasers (NASP)
  • National Alliance of Medicare Set-Aside Professionals (NAMSAP)
  • National Academy of Elder Law Attorneys (NAELA)
  • Academy of Special Needs Planners (ASNP)
• As a general observation, all of these conferences were valuable and complementary. For S2KM's 2010 (plus historical) conference reports, see S2KM's structured settlement wiki.
• SSP, NASP and NAMSAP deserve special recognition for their 2010 strategic educational discussions featuring industry leaders, commentators and critics who offered alternative perspectives for improving and growing the structured settlement and special needs settlement planning markets.
• By comparison, NSSTA remains reluctant to openly discuss strategic industry issues or to include alternative perspectives in their educational programs. More positively, NSSTA representatives and members increasingly attend and speak at non-NSSTA structured settlement and special needs settlement planning conferences.
• NAELA's educational conferences are noteworthy because they regularly feature sections or entire programs titled "unprograms". NAELA's unprograms are moderated group discussions about specific topics. NAELA's 2010 Special Needs Summit included six separate one hour unprograms with a concluding unprogram wrap-up session. One example of a 2010 NAELA unprogram was titled "Collaboration Opportunities for Special Needs Attorneys and Financial Planners".

Industry leaders

• NSSTA promoted Eric Vaughn, who previously served as NSSTA's lobbyist, to replace Joseph Ricci as NSSTA's new Executive Director effective July 1, 2010. Peter Arnold, previously NSSTA's Marketing Director, was similarly promoted to serve as NSSTA's Associate Executive Director. NSSTA's Board of Directors elected Michael Kelly as its 2010 President and Dan Finn as its President-elect. NSSTA honored Congressman Peter Stark during its Annual Meeting as its 2010 Legislator of the Year. NSSTA also gave special recognition to Karen Meyers and Joseph Bornstein for their contributions to NSSTA's CSSC and NSSTAPAC programs respectively..
• SSP elected Jason Lazarus as its President for 2010-11 and Charles Schell as Vice President. SSP honored Richard Risk with the designation of "life member" for his contributions to SSP and the settlement planning industry. Joseph Tombs continues as Director of SSP's RSP certification program.
• NASP named Matthew Bracy as its new President succeeding Robin Shapiro. Earl Nesbitt continues as NASP's Executive Director.
• NAMSAP elected Michael Westcott as its President.
• NAELA honored Dick Traum as the first recipient of NAELA's Special Needs Leadership Award. Traum is the founder and CEO of Achilles International, a non-profit organization providing community support for athletes with disabilities with members in more than 70 countries.
• Amy Palmiero-Winters, ultra-marathoner and lower-leg amputee, was named during 2010 as the winner of the 2009 James E. Sullivan Award given annually to the top amateur athlete in the United States.

Industry commentators

• For the past several years, Robert Wood has been the preeminent tax commentator and author for the structured settlement and settlement planning industries. Wood's publications appear on the Wood & Porter website.
• During 2010, Jeremy Babener emerged as an important new structured settlement tax commentator and author specializing in public policy and proposing an expanded structured settlement tax subsidy. In addition to authoring several structured settlement articles for tax and legal journals, Babener participated as a featured speaker at both the SSP and NASP 2010 Annual Meetings and authored two blog posts for S2KM during 2010. Babener discussed his structured settlement writing (accessible on S2KM's structured settlement public policy wiki and Babener's Tax Structuring website) in this 2010 S2KM interview.
• Additional authors who wrote and published 2010 legal articles about structured settlement and special needs settlement planning issues included: Daniel Hindert, Matt Garretson, Sylvius von Saucken, Peter Wayne, Mark Popolizio, Gregg Polsky and Brant Hellwig.
• Both the Legal Broadcast Network and Ringler Radio continued to produce and distribute podcasts featuring structured settlement commentators during 2010.
• An increasing number of structured settlement and special needs settlement planning professionals published blogs during 2010 joining industry blogging pioneers such as John Darer, Mark Wahlstrom, Matthew Bracy and Jack Meligan.
• Incisive Media published two new updates (Release 47 and Release 48) for "Structured Settlements and Periodic Payment Judgments" during 2010.

Legislation

• Both the Patient Protection and Affordable Care Act (Health Care Reform) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) redesign the legal environment in which the structured settlement and personal injury settlement planning markets operate.
• Among the anticipated 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.
• Dodd-Frank re-writes federal banking law and creates a new Bureau of Consumer Financial Protection. A key question, as yet unanswered, is whether the sale and/or purchase of structured settlement annuities constitutes a "financial product or service" under Dodd-Frank requiring regulatory supervision by the Bureau.

Regulations

• The United States Department of Treasury held a public hearing on February 23, 2010 focused on proposed new regulations for Internal Revenue Code section 104(a)(2). The proposed regulations, if enacted, would:
  • Eliminate the requirement that damages be based on “tort or tort type rights” in order to qualify for the section 104(a)(2) tax exclusion, and
  • Incorporate 1996 legislation requiring that personal injuries and sickness damages be “physical” in order to qualify for the section 104(a)(2) tax exclusion.
  • A subsequent S2KM interview featured John McCullough and Richard Risk, two of the structured settlement industry members who spoke at the hearing.
• The Centers for Medicare and Medicaid Services (CMS) continued to issue administrative guidance during 2010 for enforcement of the Medicare Secondary Payer (MSP) Act of 1980 and the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA) reporting requirements for insurers. Featured discussions during the NAMSAP 2010 Annual meeting highlighted:
  • The increasing importance and complexity of the MSP statute for all personal injury stakeholders;
  • The need for these personal injury stakeholders (and their professional associations) to cooperate politically and educationally;
  • The challenges of integrating structured settlements, including rated ages, with Medicare set-aside arrangements (MSAs) in the context of health care reform, CMS MSA regulations and related judicial rulings;
  • The evolving business models, claim management strategies and professional skill sets which are now emerging to address these challenges.

Case law

• The Spencer v. Hartford class action lawsuit which settled in 2010 represents one of the most important legal developments in the history of the structured settlement industry.
• Hartford's gross settlement payment of $72.5 million represents 4.5% of total premium dollars Hartford used to purchase structured settlement annuities for class members from January 1, 1997 to June 7, 2010.
• Among the plaintiffs allegations:
  • Hartford and its attorneys, brokers and agents violated the Racketeer Influenced and Corrupt Organizations Act (RICO) and committed common law fraud in structuring its settlements.
  • Hartford's structured settlements were priced so Hartford retained 15% of the value of the structured settlements.
  • Hartford and its attorneys, brokers and agents misrepresented structured settlements including explicit or implicit reference to:
    • The "cost" of the annuity or structured settlement or portion of the settlement being structured; and/or
    • The "value" of the annuity or structured settlement or portion of the settlement being structured.
• Hartford, which stopped writing new structured settlement business in 2009, denied the allegations.

Technology

• Despite the accelerating technology advances revolutionizing society generally, the structured settlement and special needs settlement planning industries have been slow to study and incorporate these advances into their educational programs and business models.
• The best industry-sponsored technology education programs during 2010 were offered by Mark Miller during a NAELA webinar and Harry Margolis at the ASNP 2010 Annual Meeting. Both presentations provided introductory overviews of web 2.0 and including recommendations for integrating specific social networking tools into special needs legal practices.
• NSSTA initiated a NSSTA blog during 2010 and offered an educational program about Internet marketing during its 2010 Fall Education program.

Public policy

• Both SSP and NASP featured specific discussions and presentations about structured settlement public policy during their 2010 Annual Meetings. The discussions included industry commentators representing diverse viewpoints and priorities.
• Jeremy Babener followed his 2009 paper debunking industry myths concerning "structured settlement dissipation studies" with several 2010 articles and papers addressing structured settlement public policy issues. Babener's public policy writing is featured on S2KM's structured settlement public policy wiki.
• Release 47 of "Structured Settlements and Periodic Payment Judgments" re-examined several structured settlement public policy issues related to single claimant 468B funds, structured settlement factoring transactions, dissipation by personal injury victims, the Deficit Reduction Act of 2005, special needs trusts and Medicare set-aside arrangements.
• In a 2010 Boston College Law Review article, professors Gregg Polsky and Brant Hellwig challenged the application of any structured settlement tax benefit for deferring attorney fees or payments to non-physically injured tort plaintiffs under general common law tax principles.

Business standards and practices

• The Spencer v. Hartford case raises many issues about structured settlement business standards and practices which require greater education and analysis if the primary market expects to improve and grow. For example;
  • Is the primary structured settlement market capable of self-regulation?
  • Why shouldn't key elements of the state structured settlement protection statutes (judicial approval; best interest test; compensation disclosure) be applied to primary market transactions?
  • As an additional requirement, or as an alternative, why haven't plaintiff attorneys and plaintiff consultants insisted upon a claimant's written informed consent before entering into a structured settlement?
  • Why haven't the SSP's Standards of Professional Conduct received more public discussion and analysis within the structured settlement industry?
• "Cash now" advertising represents one of the most highly criticized secondary market business practices. Although this practice continues to exist, NASP took an important educational step during its 2010 Annual Meeting by highlighting this issue and inviting secondary market critics to participate in the discussion.

Business models

• While other segments of, and products within, the special needs settlement planning market have expanded and improved in recent years, the structured settlement primary market in general has stagnated and retrenched.
• During 2010, however, representatives of the primary structured settlement market increasingly recognized their interdependency, and interacted, with other settlement planning professionals and professional associations such as special needs attorneys, life care planners, Medicare set-aside professionals and secondary structured settlement market participants.
• Future industry improvement and growth will require even greater appreciation and identification of shared interests as well as expanded implementation of shared political strategies, educational programs and business models.

Prior S2KM annual reports about the structured settlement industry and reports about industry association conferences are available on S2KM's structured settlement wiki.

Speaker Comments at the Treasury Hearing

After the Treasury hearing on February 23, 2010, S2KM asked structured settlement industry members who spoke at the hearing to comment on their reactions. John McCulloch, Vice-President of Integrated Financial Settlements, and Dick Risk, Attorney at the Risk Law Firm, provided their thoughts below.

John McCulloch, Vice-President, Integrated Financial Settlements

S2KM: The Treasury panel noted that private letter rulings are not “black-letter law” more than once when you discussed the “observable bodily harm” understanding of “physical,” which stems from a 2000 private letter ruling. Did their comments or questions change how you thought about that standard at all?

McCulloch: While PLR’s may not be cited as precedent, courts routinely include them and cite them in their analysis and they are generally a good indication of the Service’s thoughts on a specific issue. The “bruise ruling” has been the only guidance, informal though it may be, on what the Service considers a physical injury. My thoughts on the matter haven’t changed; taxpayers need clarity when it comes to certain types of injuries that fall within a grey area.

S2KM: One member of the Treasury panel asked you if it would be difficult to prove that a tort caused plaintiff an increase in blood pressure. Does this suggest to you that proving that a significant increase in blood pressure resulted from, for example, sexual harassment, could render a portion of sexual harassment damages non-taxable? How might this impact the argument that damages for causing a plaintiff’s mental chemistry to change should be non-taxable because they are on account of “physical” injuries or “physical” sickness?

McCulloch: I was pleased she was open to this line of reasoning, but I think it would be very difficult to sustain. Congressional intent in 1996 was to eliminate the exclusion being used for employment cases. The change in the law shut the door pretty firmly on employment damages and it would likely take a change in the law to open that door again. While the tax arguments can be made, one must balance that with any revenue loss that would be incurred when exempting all non-physical injuries from taxation.

S2KM: In arguing for more damages to be excluded as “physical,” you limited your recommendation to sexual abuse and wrongful imprisonment damages. Why?

McCulloch: These are two types of cases that are clearly distinguishable and have well-documented, long term effects, as opposed to being short lived or transitory emotional/mental distress damages. As there was no Congressional intent to tax these two types of claims in the 1996, it followed that they should be excluded. Attempting to define what “is” physical on a broad basis is too difficult; taking specific types of injuries and making them per se physical resolves the difficulty in trying to make a broad, one-size fits all standard. Further, because these are two very small groups of claimants, the revenue loss would be negligible.

S2KM: From a structured settlement industry perspective, was this hearing a success? What could or should the different groups in the industry have done better?

McCulloch: It’s too early to tell what the results will be, whether it was successful or not. I was pleased the Service and Treasury were receptive to my comments, asked a lot of questions and encouraged me to seek further support from the Hill.

Dick Risk, Attorney, Risk Law Firm
Risk offered two comments after the hearing. First, what he, as commissioner of the IRS, would say to staff.

The proposed revision is deficient, as pointed out in the written public comments and in the testimony at the hearing, as it fails to “prescribe all needful rules and regulations for the enforcement” of Code section 104, as the law requires. The clarification of the single-claimant issue can be resolved with a single paragraph, consistent with congressional history, court decisions and the agency’s previous rulings, without creating new policy. The definition of “personal physical injury or physical sickness,” as Congress has prescribed, which other commentators have recommended, also merits inclusion in this regulation. Fix it and publish it again as a revised proposal. I do not concur that the revision should be made final in its current state. Your duty is to serve the people, not operate for the convenience of the staff. Further, it is abusive to the people you are here to serve to have suggested during the hearing that they start the process over again by requesting that the single-claimant issue be placed on the Priority Guidance Plan, without giving any assurance that the result would be any different than when the request was first made, in June 2003, accepted as a project in April 2004, and finally abandoned in late 2009.

Second, his overall take of the hearing.

I am extremely disappointed at the staff’s position in favor of pushing through a shoddy and deficient product for its own convenience that fails to address legitimate issues brought to its attention by comments from the public, rather than doing the job right.

S2KM Footnote: S2KM readers can find the various hearing-related writings of structured settlement commentators here .