Beyond Structured Settlements

Single Claimant 468B QSF Update

S2KM supports and promotes the application of IRC section 468B qualified settlement funds (QSFs) for single claimants in appropriate cases as a superior settlement planning model benefiting all structured settlement stakeholders.

S2KM has previously reported and reviewed professional commentary addressing single claimant QSFs by industry knowledge leaders including Robert Wood, Richard Risk and John Campbell.

See, for example:

• Single Claimant 468B Funds
• IRC 468B Funds Revisited
• Robert Wood and 468B Funds
• IRC 468B and 5891

Jeremy Babener, a third year law student at New York University, has written a valuable and timely addition to the public QSF discussion with his new legal paper titled "Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History" (QSF paper).

Babener's QSF paper will be published in the NYU Journal of Legislation & Public Policy in March 2010. Babener has made available online an abstract of his QSF paper which S2KM will review and discuss in a new series of blog posts.

In a prior blog series titled "Dissipation Studies," S2KM reviewed Babener's first structured settlement paper titled "Justifying the Structured Settlement Tax Subsidy: The Use of Lump Sum Settlements," (dissipation paper) which includes extensive Appendices with detailed analysis of 12 dissipation studies relevant to U.S structured settlements.

Babener's dissipation paper, which will be published in the NYU Journal of Law & Business in November 2009, debunks one of the fundamental myths of the traditional structured settlement credo - the false and misleading claim that "nine out of 10 lump sum recipients of personal injury settlements dissipate their entire recovery within five years."

Because Babener's two papers address important public policy issues, S2KM will also feature Babener's papers on S2KM's structured settlement public policy wiki.

S2KM invites and encourages industry knowledge leaders and professional associations to review and discuss Babener's two structured settlement papers.

Additional S2KM posts in this series:

• Jeremy Babener's QSF Paper;
• S2KM Reviews Jeremy Babener's QSF Paper-1;
• S2KM Reviews Jeremy Babener's QSF Paper-2;
• Jeremy Babener Interview-2.

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".

Special Needs Trusts X

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

MSA Update - 3C: Structured Settlement Annuities

This S2KM blog post is the sixth in a series of S2KM blog posts in 2008 updating Medicare set-aside (MSA) developments that impact the growth of structured settlements.

S2KM's previous posts about MSAs include:

• Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA)
• MSA Update - 1: Historical Background and Recent Developments
• MSA Update - 2: CMS Rules for Structured Settlements
• MSA Update - 3A: Interview with Thomas Spratt A
• MSA Update - 3B: Interview with Thomas Spratt B

John Campbell and other NAMSAP members have thoughtfully pointed out to S2KM that CMS has distributed a new policy memo dated August 20, 2008 that appears to conflict with its earlier May 20, 2008 policy memo related to life expectancy. As of today's date, CMS has not yet posted online the August 20, 2008 policy memo with its earlier WCMSA policy memos which are available for download on this CMS website.

The May 20, 2008 CMS policy memo is addressed to "Consortium Administrator for Financial Management and Fee-for-Service Operations". It states, in part:

"Effective with WCMSA submissions received by CMS' Coordination of Benefits Contract on or after July 1, 2008, CMS will only accept life expectancies obtained from the CDC [Centers for Disease Control] Table 1, Life table for the total population. The CMS will only use the CDC Table 1 in its WCMSA review process."

The May 20, 2008 CMS policy memo does not mention annuities or structured settlements or rated ages.

The August 20, 2008 CMS policy memo is addressed to the same "Consortium Administrator". It states, in part:

"To protect the Medicare Trust Fund, a set-aside relationship should be funded based upon the life expectancy of the individual unless the State law specifically limits the length of time that WC covers work-related conditions. Unless a submitter furnishes acceptable proof of a Rated Age for a claimant, CMS will estimate the claimant's remaining life expectancy using Actual Age. Acceptable proof of Rated Ages includes independent rated ages on the letterhead of an insurance carrier or settlement broker and a statement from the submitter that all rated ages obtained on the claimant have been included."

Industry issues:

• How will CMS regional offices and contractors interpret these two recent policy memos?
• How do these two policy memos impact the growth of structured settlements?
• How do the developing CMS rules for structured settlements impact industry growth?

Learning resources:

• Release 44 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) features an update for MSAs and the Medicare Secondary Payer (MSP) rules.
• MSA Update-2 summarizes existing CMS rules for structured settlements and WCMSAs.
• Thomas Spratt's Interview B highlights challenges and advantages for the structured settlement industry specific to MSAs and rated ages.
• NAMSAP will host its 2008 Annual Meeting October 2 in Washington, D.C.

S2KM will continue to report MSA developments that impact the growth of structured settlements in S2KM's blog and structured settlement wiki.

IRC 468B Funds Revisited - 3

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

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

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

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

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

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

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

S2KM conclusions - Campbell's article highlights:

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

IRC Section 468B Funds Revisited

S2KM previously has published online commentary about Internal Revenue Code Section 468B Funds:

• S2KM Blog Posts
  • Definitions of Designated Settlement Funds (DSF) and Qualified Settlement Funds (QSF);
  • Single Claimant 468B Funds
  • Robert Wood Podcast
  • SSP Annual Meetings featuring 468B discussions:
    • 2008 SSP Annual Meeting
    • 2006 SSP Annual Meeting
• S2KM Wikis
  • Structured Settlement Wiki
  • Structured Settlement Public Policy Wiki

In addition, hardcopy legal textbook "Structured Settlements and Periodic Payment Judgments" (Table of Contents), co-authored by Daniel Hindert, Joseph Dehner and Patrick Hindert, S2KM's blog author, features Section 3.08B titled "Section 468B Settlement Funds".

Because of the strategic importance of IRC 468B for the structured settlement and settlement planning industries, S2KM will revisit 468B Funds during 2008. As a preliminary focus, John J. Campbell, a leading elder law and special needs attorney, has published a new article titled "The Use of Qualified Settlement Funds, Qualified Assignments and Special Needs Trusts in Physical Injury Settlements" in the most recent issue of the NAELA Journal .

The NAELA Journal is one of many valuable educational resources offered by the National Academy of Elder Law Attorneys (NAELA). Published twice a year, the NAELA Journal features scholarly legal articles many of which address topics of interest for settlement planners and structured settlement professionals. As an association policy, however, NAELA currently limits distribution of the NAELA Journal to NAELA members and law schools.  For additional S2KM blog posts about NAELA, see 2008 NAELA Symposium.

In addition to Campbell's 468B article, the current NAELA Journal (Volume 4; 2008; Number 1) includes articles addressing:

• Monitoring guardianships
• Long-term care admissions contracts
• Transfer-on-death deeds
• Medicaid fair hearing decisions
• Psychology of mediation

Campbell is a frequent contributor to the NAELA Journal including earlier articles titled "Basic Strategies for SSI Planning" and "Preserving Public Benefits in Physical Injury Settlements: Special-Needs Trusts and Beyond". In 2007, Campbell was a featured presenter at the First Annual ASNP Conference. He spoke about the growing interaction between Medicaid and Medicare in personal injury settlements - creating the potential for what Campbell termed "Medicare Set-aside Special Needs Trusts".

Campbell's most recent NAELA Journal article highlights the complex interaction of IRC section 468B, IRC section 130 and 42 U.S.C.A section 1396p(d)(4)(A).

To better understand IRC 468B and evaluate Campbell article, S2KM recommends that settlement planners and structured settlement professionals also review online 468B legal analysis and commentary by Richard B. Risk, Jr and Robert W. Wood.

Risk's Most Recent 468B article:

• Is titled "A Case for the Urgent Need to Clarify Tax Treatment for a Qualified Settlement Fund Created for a Single Claimant";
• Was first published in the Virginia Tax Review and now appears on Risk's website;
• Asserts Congress did not intend for the judicial doctrine of economic benefit to apply to a DSF (Designated Settlement Fund) or a QSF (Qualified Settlement Fund) created for the benefit of a single claimant;
• Supports a June 19, 2003 letter written by partners at Skadden, Arps, Slate, Meagher & Flom to the Department of Treasury and Internal Revenue Service on behalf of the Society of Settlement Planners (SSP);
• Urges the Department of Treasury to issue favorable 468B guidance.
• Note:  Risk also moderates the tax panels at SSP's Annual Meetings (see links above) which feature and address 468B Funds.

Wood is the pre-eminent structured settlement and settlement planning tax attorney in the United States - as well as a prolific tax writer and commentator. Wood's most recent 468B article titled "Electing Code Section 468B Trust Treatment for Lawyers Trust Accounts After Receiving Settlement Proceeds" appeared in the February-March 2008 issue of the Journal of Tax Practice and Procedure. Wood's online commentary about 468B Funds is accessible at:

• Wood and Porter website
• This S2KM blog post
• S2KM's structured settlement public policy wiki
• The Settlement Channel

Future S2KM blog posts will summarize and analyze John Campbell's NAELA article about the interaction of 468B funds, qualified assignments and special needs trusts.