Beyond Structured Settlements

S2P2J Release 54

Publisher Law Journal Press anticipates an October 2013 distribution date for hardcopy supplements for Release 54 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) with online S2P2J subscribers receiving their update simultaneously at no additional charge.

Online S2P2J includes a search feature and download capability as well as link features to access individual book sections, appendices, footnotes, cases and statutes.

First published in 1986 and updated semi-annually, S2P2J is co-authored by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) have utilized S2P2J as an educational resource for their certification programs. 

Release 54 Highlights - Release 54 will feature new, updated and/or expanded sections addressing the following structured settlement topics:

• Negotiating structured settlements vs. cashing out
• Defendant disclosure issues
• Business practices of consultants
• Insurance company insolvencies
• Medicare set-aside arrangements
• Re-cycled structured settlement payment rights
• Securitization of structured settlement payment rights
• Australia structured settlement update

Negotiating Structured Settlements vs. Cashing Out - Why and when should defendants agree to structured settlements as opposed to lump sum settlements? Do defendants save money using structured settlements and, if yes, why and how? Do structured settlements result in additional costs and risks for defendants and, if yes, how do defendants reduce these costs and risks? Release 54 examines these questions in the context of existing state statutes and case law and offers recommendations for defendants when they review their traditional structured settlement policies and business practices. The recommendations include new sample structured settlement Mission and Disclosure Statements for liability insurers.

Defendant Disclosure Issues - Release 54 substantially expands and re-organizes S2P2J's existing coverage of defendant structured settlement disclosure issues. Topics addressed:

• State structured settlement protection act requirements
• Product disclosures and representations
  • Cost or Value
  • NAIC Annuity Disclosure Model Regulation
  • NAIC Suitability in Annuity Transactions Model Regulation
  • Compensation disclosure
  • "Guaranteed" payments
  • Dissipation studies
  • Public assistance
  • Annuity ownership and rights
  • Taxation
  • Financial condition of funding entities
• Conflicts of interest
• Medicaid/Medicare disclosures
• Securities issues
• Class action lawsuits vs. defendants
• Meeting professional responsibilities

Structured Settlement Consultants - Release 54 expands and updates S2P2J's coverage of structured settlement consultants to address: consultant selection criteria; structured settlement product suitability; and consultant business practice issues including laws and regulations, industry standards, commission disputes, privacy rules, and disclosure and representation requirements.

Insurance Company Insolvencies - Release 54 expands and updates S2P2J's already extensive coverage of insurance company insolvencies including state insurance guaranty associations and the most recent developments impacting Executive Life of New York [ELNY] and Reliance Insurance Company. Following ELNY's 22 years of New York State supervised "rehabilitation", S2P2J's Release 54 identifies lessons that potential structured settlement recipients and their attorneys and advisers can and should learn from the ELNY debacle.

Medicare Set-Aside Arrangements - Release 54 re-organizes and promotes S2P2J's coverage of Medicare set-aside arrangements (MSAs) with updated materials for both workers compensation (WC) MSAs and liability MSAs. These updates include an extensive summary and analysis of the structured settlement provisions in the new CMS WCMSA Reference Guide as well as conclusions and recommendations for utilizing MSAs in personal injury liability cases.

Re-cycled Structured Settlement Payment Rights - As low interest rates continue to negatively impact the primary structured settlement market, new products featuring re-cycled structured settlement payment rights have begun to proliferate as funding alternatives for personal injury periodic payment settlements. Release 54 features a new section with detailed diagrams and charts (designed by Timothy Morbach) to explain the several variations of these products. In addition, this new section compares the features of these products with traditional structured settlements and summarizes recent investor warnings about these products issued by the SEC and FINRA.

Securitization of Structured Settlement Payment Rights - S2P2J already includes a detailed Chapter 16 titled "Transfers of Structured Settlement Payment Rights" which provides comprehensive coverage of most structured settlement secondary market issues. This coverage includes: the history of the secondary market; summary and analysis of IRC section 5891 and the state structured settlement protection acts; and how judges review (or should review) transfer applications. Release 54 adds a new section, with detailed diagrams and charts (designed by Timothy Morbach), explaining how securitization of structured settlement payment rights works.

Australia Structured Settlement Update - S2P2J continues to track structured settlement developments in countries outside the United States including Canada, the United Kingdom, Continental Europe, Australia and New Zealand. Release 54 highlights a recent legislative development in Australia called “The Lifetime Care and Support Scheme” which provides treatment, rehabilitation and attendant care services to people severely injured in automobile accidents. At least one Australian structured settlement expert believes this legislative development could prevent an annuity-funded structured settlement market from developing in Australia anytime soon.

"Structured Settlements and Periodic Payment Judgments" is a complete reference work for attorneys, settlement planners, structured settlement consultants, risk managers, liability insurers, annuity providers and secondary market participants. It is available in both hardcopy and online versions which are updated semi-annually. For highlights from previous S2P2J updates, see the structured settlement wiki.

A Response to the SEC Bulletin

Two structured settlement industry leaders have taken issue with a recent Securities and Exchange Commission (SEC) Investor Bulletin providing advice for individuals who are contemplating selling or purchasing (as investors) structured settlement payment rights and/or future pension payments.

Matthew Bracy, a former President of the National Association of Settlement Purchasers (NASP) and Jason Lazarus, a former President of the Society of Settlement Planners (SSP), have published an article titled "A Response to the SEC Bulletin: The Truth about Factored Structured Settlements as an Investment Vehicle." which characterizes the SEC Bulletin as "misleading and in some cases inaccurate concerning the sale of structured settlement payment streams and factored structured settlements as an investment vehicle." 

More specifically, Bracy and Lazarus argue the SEC Bulletin "muddles":

• "two distinctly different businesses, pension purchasing and structured settlement factoring"; and
• "distinctions between the process of purchasing payment from the structured settlement recipient and selling purchased payment streams to investors."
  

In response, Bracy and Lazarus discuss the following features of structured settlement factoring they believe the SEC Bulletin should have clarified:

• "Always court ordered"
• "No negative tax consequences to the seller"
• "Investors' rights"

SEC Rule 10b-5

Bracy and Lazarus premise their criticism of the SEC Bulletin in the context of SEC Rule 10b-5 which they characterize as "the bedrock of securities laws". SEC Rule 10b-5 "Employment of Manipulative and Deceptive Practices" reads as follows:

"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security." (S2KM emphasis).

S2KM Critique

S2KM agrees with Bracy and Lazarus that the SEC Bulletin has serious shortcomings. As S2KM pointed out in an earlier blog post:

"The SEC Investor Bulletin provides a generic definition for a structured settlement plus an indirect reference to state structured settlement protection statutes. It does not, however, specifically reference or discuss the definitions, requirements and protections for structured settlement transfers provided in:

• Internal Revenue Code section 5891; and
• The state structured settlement protection statutes."

Most Fundamental Issue

More importantly, however, neither the SEC Bulletin nor the article by Bracy and Lazarus directly addresses the most fundamental related issue: whether, and when does, a specific sale and purchase of structured settlement payment rights constitute a "security" for purposes of U.S. securities laws?

The SEC Bulletin references this issue obliquely stating: "structured settlement income-stream products may or may not be securities and likely are not registered with the SEC. As such, reliable information about these products may be difficult to find and resolving disputes should an investment go sour may also be difficult."

Bracy and Lazarus recognize that factoring companies sometimes "bundle the payment streams together in securitized transactions for institutional investors". Presumably such "securitized transactions":

• Do qualify, and are registered, as investment "securities";
• Are subject to SEC regulatory authority; and
• Must meet the requirements of SEC Rule 10b-5.

What about individual transactions - i.e. the purchase and sale of structured settlement payment rights by factoring companies (and/or the re-purchase and re-sale of previously transferred structured settlement payment rights by brokers) to individual investors including sales to personal injury claimants?

Shouldn't the SEC specifically highlight these transactions and address the question: Do these transactions qualify as investment "securities"?

If the answer is "no", what is the legal authority? In this case, the securities laws presumably do not apply and the SEC presumably has no authority to regulate such transactions. Alternatively, who does regulate such transactions and what laws apply?

If the answer is "yes", what is the legal authority? In this case, how many of these transactions (do/do not) meet applicable securities law requirements including registration, licensing, disclosure and other sales practices?

Definition of a "Security"

The Securities Act of 1933 establishes the following definition of a "security" and courts have held the definition in the Securities Exchange act of 1934 to be identical:

“The term ‘security’ means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, any interest or instrument commonly known as a ‘security’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.” 

After reviewing various tests applied by courts when determining whether this definition applies to various investment contracts, the authors of "Structured Settlements and Periodic Payment Judgments" (S2P2J) conclude in Section 4.05[2] ("Securities Law Issues"): "If a settlement involves fixed periodic payments for a claimant’s lifetime, which [are] funded through the purchase of a fixed annuity, it is highly doubtful that the promise to make such payments will be viewed as a “security” subject to the federal securities laws."

This conclusion, however, applies to the primary market and does not address the purchase and sale of structured settlement payment rights in factoring transactions. 

S2P2J Release 54, to be published later this summer, will address the issue of whether the purchase and sale of re-cycled structured settlement payment rights constitutes an investment "security". With Daniel Hindert and Joseph Dehner, S2KM author Patrick Hindert is an S2P2J co-author.

S2P2J Release 53

Publisher Law Journal Press is currently distributing hardcopy supplements for Release 53 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Online S2P2J, which includes a searchable index, download capability and one-click access to cases and statutes, has already been updated to include Release 53 materials.

First published in 1986, S2P2J is co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) utilize S2P2J as an educational resource for their certification programs.

Release 53 Highlights

Release 53 continues S2P2J's comprehensive reporting of the Executive Life insolvencies with updates for both Executive Life of California (ELIC) and Executive Life of New York (ELNY). The ongoing ELNY liquidation threatens severe court-approved reductions for more than 1400 structured settlement recipients across the United States.

Certain prospective ELNY shortfall payees are appealing the ELNY liquidation and restructuring order. Their attorneys are appealing a related contempt order. The outcome of this courtroom drama will significantly impact not only the ELNY shortfall payees but also the structured settlement industry and state life insurance guarantee associations.

Other Release 53 topics:

• American Taxpayer Act of 2012 - updating when and how personal injury damage awards are taxed to a decedent's estate. 
• Non-qualified assignments - expanded analysis of this growing market.
• 2013 HIPAA omnibus final rule - how it impacts settlement planners and structured settlement professionals.
• The Smart Act - which sets new procedures for Medicare Secondary Payer (MSP) repayment and reporting.

As the structured settlement and settlement planning markets continue to experience unprecedented changes, S2P2J provides a comprehensive and up-to-date knowledge resource for industry experts and stakeholders.

If you do not already subscribe to S2P2J, or your subscription is out-of-date, review some of the recent S2P2J highlights to see what you are missing.

Need for Reform?

In a companion article to the National Underwriter's recent comprehensive analysis of the Executive Life of New York (ELNY) Liquidation ("The Complete ELNY Saga"), writer Warren Hersch asks: "is the structured settlement process in need of reform"?

The Hersch article highlights a "potpourri" of structured settlement issues:

• Business practices - including disclosure and suitability issues
• Structured settlement regulation - or lack thereof
• Industry lobbying
• Industry education
• Broker compensation
• Structured settlement transfers
• IRC 468B qualified settlement funds
• Declining annuity sales
• Increasing case complexity - including annuity/trust blended products
• An evolving settlement planning profession
• Responsibilities of plaintiff attorneys
• Financial strength of annuity providers

In addition to industry criticism, the article features diverse individual perspectives demonstrating a foundation for industry consensus:

• Len Blonder
  • “No other option today can match the structure’s mix of tax-free income and guaranteed security.”
  • "A casualty company should ... be allowed to vet their own representatives of choice.”
  • "Plaintiffs are free to hire any financial professional from among the tens of thousands that are available to them."
• Joseph Dehner
  • "A personal injury attorney for claimants who isn’t even considering a structured settlement in high damage cases is bordering on malpractice."
  • “Structured settlements have become both more flexible and complicated because of the advanced planning that now accompanies these transactions.”
  • "Continuing low interest rates on the fixed annuities used to satisfy settlement claims [is] the key factor" in explaining the recent declines in structured settlement annuity sales.
• Jeremy Babener
  • “The qualified settlement fund (QSF) allows for a significant increase in the amount of time that payees have to make necessary determinations.”
  • "But for the single plaintiff, use of the vehicle comes with uncertainty. That’s because it is unclear whether a single plaintiff is treated for tax purposes as receiving funds deposited into a QSF."
• Timothy Morbach: “More should be done to recognize that the field of settlement planning is highly specialized and that [claimants] should make efforts to retain separate and qualified financial and legal counsel with respect to the strategies they wish to implement.”
• Charles Schell: “If the plaintiff's attorney engages a settlement planner, then .... , more likely than not, the product or plan recommended will be suitable.”
• Peter Gallanis: "The rate of insolvencies among life and health insurers, now at an all-time low, are but a fraction of the hundreds of failures within the commercial and investment banking and thrift sectors during the financial crisis."
• Eric Vaughn: "IRC Section 5891 has effectively prevented many abuses ... that commonly occurred in prior decades."

Perhaps this National Underwriter article will help motivate the structured settlement industry to undertake its own strategic analysis about whether and how to reform the structured settlement process. Immediate existential challenges certainly exist. In addition to the ELNY liquidation, these challenges include:

• Declining primary market annuity premium
• Historically low interest rates
• Potential reforms to the tax code and the tort system
• Implementation and impact of Dodd-Frank and the Affordable Care Act
• Transitioning business skills, relationships and processes to the Internet.

Assuming Charles Darwin was correct: It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.

The primary strategic issues for the structured settlement industry are whether, when, how and to what degree it will become "responsive to change"?

Can industry leaders:

• Be honest ? - Acknowledge the problems. Study the changes. Abandon political correctness. Question traditional assumptions, business models and business practices.
• Be inclusive ? - David Ringler, NSSTA's first president, re-stated NSSTA's original vision during NSSTA's 2011 annual conference: "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. ... If we can continue this tradition, there is no problem we cannot overcome."
• Be open ? - The late James Corman insisted promoters of structured settlements were "on the side of the angels". Does that statement remain true today? To regain public trust, empower stakeholders and expand the customer base, structured settlement strategic planning needs to re-emerge from behind closed doors. Important industry issues need to be articulated and discussed openly.
• Listen to customers ? - The profiles of ELNY structured settlement victims featured in "The Complete ELNY Saga" provide a valuable introduction. Prior market surveys should be re-visited, updated and expanded. The traditional "one and done" structured settlement customer model needs to be re-evaluated.
• Engage critics ? - and challenge/encourage critics to be part of an industry solution by incorporating their relevant issues and best ideas into a strategic thinking process? These critics include legal and financial professionals who view the structured settlement product and market as core components of a larger and more complex settlement planning industry.

For related S2KM reporting and analysis, see the structured settlement wiki:

• Re-thinking Structured Settlements
• Growing the Market
• Business Standards and Practices
• Settlement Planning
• Structured Settlements and Knowledge Management

S2P2J Release 52

Publisher Law Journal Press anticipates a late October 2012 distribution date for hardcopy supplements for Release 52 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Online S2P2J will also be updated late October 2012 to include Release 52 materials. First published in 1986, S2P2J is co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) utilize S2P2J as an educational resource for their certification programs.

Release 52 Highlights

Documenting a structured settlement is generally more complicated than the paper work involved with a lump sum settlement. Structured settlement documentation can be further complicated depending upon the number of claimants and annuities, whether plaintiff attorneys defer their fees, the need to allocate damages, the degree of government benefit planning and the growing integration of annuities and trusts into blended products.

Increasingly, therefore, the parties to a structured settlement agreement must endeavor to implement complex settlement plans, using multiple funding devices, designed to address both the intent of the parties and compliance and accountability requirements from the public sector.

To assist structured settlement participants in achieving these objectives, S2P2J Release 52 features new sample structured settlement forms with suggested alternate clauses for use as circumstances change. The new sample forms include a model Structured Settlement Agreement, with a Supplemental Schedule to more conveniently address funding details, plus an optional Advisory Disclosure document specifying the involvement, services and commission sharing (if any) of structured settlement consultants used by the claimant, defendant and liability insurer(s).

The Supplemental Schedule provides a useful, alternative format for specifying the funding details of the settlement, including:

• The amount of up-front payments and their recipients.
• The cost to purchase funding for the periodic payments.
• A provision if the claimant’s attorney will receive periodic payments.
• Allocations by the parties between tax-free and taxable payments.
• Amount of monthly payments and whether they will extend for the claimant’s lifetime or for the greater of claimant’s lifetime or a set period of time.
• Any deferred lump sums to be paid.
• Contingent payee provisions in case payments remain due after claimant’s death.
• Provisions needed for minor’s or protected person’s settlements.
• Specific payee designations, including post office addresses or account information for electronic deposits.
• Designation of attorneys to be paid and at what address or to what account number.
• Language used to permit or disallow later transfers of periodic payment rights.

To help explain these new structured settlement forms, the authors have added extensive related commentary discussing how to create enforceable structured settlement agreements that minimize the risk of post-closing issues.

Release 52 also features a comprehensive update of the Executive Life of New York (ELNY) liquidation plus new and/or expanded analyses for the following structured settlement industry issues and case developments:

• International use of structured settlements.
• Whether defendants save money, historically and currently, using structured settlements.
• New Treasury regulations for IRC section 104(a)(2).
• Allocating settlement proceeds between taxable and tax-exempt elements.
• How special needs trusts can prevent private health care organizations from obtaining subrogation reimbursements from SNT beneficiaries.
• New case law addressing structured settlements for minors issues.
• Bankruptcy court decisions analyzing whether and when a bankruptcy trustee can access structured settlement benefits.
• New cases addressing differences between state periodic payment of judgment statutes that do and do not include termination provisions.
• The State of Washington's new Claims Resolution Structured Settlement Agreement for workers compensation cases.
• The new CMS Medicare Secondary Payer Recovery Portal offering authorized users access and the ability to update pending case information.
• Secondary market case update including:
  • Approval and denial of transfers based upon the "best interest" and "fair and reasonable"  tests.
  • Whether a structured attorney fee is subject to the state structured settlement protection statutes.

For highlights of prior "Structured Settlements and Periodic Payment Judgments" updates, see the structured settlement wiki.

QSF Symposium 2012 - 2

Will Qualified Settlement Funds (QSFs) eventually replace structured settlements as the standard business model for resolving complex personal injury claims?

QSFs already represent the standard resolution technique for class action lawsuits - and provide advantages for both defendants and plaintiffs:

• Defendants not only obtain an immediate tax deduction and release, they also can reduce their settlement planning costs and risks.
• Plaintiffs can conduct their settlement planning with a sum certain, using their own advisers, free from the pressures of litigation, with unlimited time to analyze and address tax, investment and government benefit issues.
• QSFs can also be utilized to purchase tax-free structured settlements without any direct involvement by defendants.

The only opponents of QSFs, for becoming the settlement planning standard for all complex personal injury cases, appear to be advocates for the traditional claim management structured settlement business model. These advocates include liability insurers who attempt to direct claim dollars to their affiliate life companies and defense brokers who fear the loss or reduction of their annuity commissions.

Together, with political support from the National Structured Settlement Trade Association (NSSTA), these QSF opponents have spent hundreds of thousands of dollars attempting to limit both the scope of QSFs and the expanded utilization of QSFs. Maintaining that structured settlements are best created when both plaintiffs and defendants actively participate, the QSF opponents argue that broad approval of single-claimant 468B funds would undermine and diminish the use of structured settlements.

To sustain their argument, QSF opponents have organized and promoted a marketing and lobbying strategy that:

• Ignores the IRC section 468B regulations that allow a QSF to be “established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability". (emphasis added)
• Expands their own definition of single claimant to encompass multiple single event claims by family members, their attorneys and lien holders including Medicare and Medicaid.
• Promises defendants questionable structured settlement advantages (e.g. cost savings in a low-interest rate environment) without fully informing defendants of their potential costs and risks using traditional structured settlement business practices.

Fortunately for defendants and plaintiffs, utilization of QSFs (including single claimant QSFs) appears to be expanding as more settlement planning stakeholders learn about the advantages of QSFs and the professional QSF community of practice continues to grow.

That conclusion was S2KM's most important take away from the first QSF Symposium sponsored by Evolve Bank and Trust in Memphis, Tennessee on September 27-28, 2012.

Organized to stimulate dialogue among QSF industry leaders and experts and to help shape industry thinking on QSF issues, the first QSF Symposium was restricted the 20 participants and included the following speakers and topics:

• Sylvius von Saucken - "Establishing the QSF: Account, Fund or Trust / Drafting Considerations"
• Kevin Urbatsch - "Petitioning the Court for Approval"
• Andy Cook - "Investment Policy and Fiduciary Investment Options"
• Peter Wayne - "QSFs and Government Benefits Preservation"
• Will Shapiro - "Lien Holdbacks and Claimant Distributions"
• Jeremy Babener - "QSF Taxation: Filing, Payments, Withholding and Reporting"
• Chris Lordan - "Accounting and Reporting Best Practices"
• Patrick Hindert - "How Structured Settlement Transfers Impact QSF Planning"
• Roundtable Discussion - moderated by Pi-Yi Mayo and Bryn Poland.

The first QSF Symposium provided several benefits in addition to the presentations:

• Networking with QSF experts and hearing multiple QSF professional perspectives.
• Detailed discussions focused on a single (QSF-only) settlement planning topic.
• Open dialogue that encouraged entrepreneurial and collaborative "out-of-the box" thinking.
• Meeting Evolve's officers, shareholders and technology providers.
• Learning how a bank views settlement planning, settlement trusts and QSFs.

For additional information about QSFs, see:

• Robert Wood, "Qualified Settlement Funds and Section 468B"
• Hindert, Dehner and Hindert, "Structured Settlements and Periodic Payment Judgments" - Section 3.08B
• Jeremy Babener, "Structured Settlements and Single Claimant Qualified Settlement Funds"

For additional S2KM analysis of the structured settlement and settlement planning markets, see the structured settlement wiki.

QSF Symposium 2012 - 1

Evolve Bank and Trust will host the first Annual Qualified Settlement Fund Symposium September 27-28, 2012 in Memphis, Tennessee.  Dedicated exclusively to the advancement of qualified settlement fund (QSF) professionals, the purposes of the Symposium are to stimulate dialogue among QSF industry leaders and experts and to help shape industry thinking on QSF issues.

QSF Symposium Speakers and Topics

• Sylvius von Saucken - "Establishing the QSF: Account, Fund or Trust / Drafting Considerations"
• Kevin Urbatsch - "Petitioning the Court for Approval"
• Andy Cook - "Investment Policy and Fiduciary Investment Options"
• Peter Wayne - "QSFs and Government Benefits Preservation"
• Will Shapiro - "Lien Holdbacks and Claimant Distributions"
• Jeremy Babener - "QSF Taxation: Filing, Payments, Withholding and Reporting"
• Chris Lordan - "Accounting and Reporting Best Practices"
• Patrick Hindert - "How Structured Settlement Transfers Impact QSF Planning"
• Roundtable Discussion - moderated by Pi-Yi Mayo and Bryn Poland

Defined in Treasury Regulation 1.468B-1(c),  QSFs represent an important settlement planning tool and provide benefits for both defendants and plaintiffs. Defendants can use QSFs to resolve complex claims in exchange for a release and immediate tax deduction. Plaintiffs and their advisers can use QSFs to marshall assets, determine which plaintiffs and counsel receive which amounts, satisfy government benefits and other lien obligations and engage in thoughtful settlement planning without the pressures that accompany negotiations, mediations and litigation.

Revenue Procedure 93-34

One QSF advantage is the unlimited time QSFs allow for claimants to consider multiple investment options - including structured settlements provided the QSF satisfies rules set forth in Revenue Procedure 93-34 to qualify as a "party to a suit or agreement":

1. Claimants must agree in writing to the assumption by a IRC 130 qualified assignee of the QSF's obligation to make periodic payments.
2. Each qualified assignment must relate to a claim “on account of personal injury or sickness (in a case involving physical injury or sickness)”.
3. Each qualified funding asset purchased by each qualified assignee must relate to a liability to make periodic payments for damages to a single claimant.
4. No qualified assignee can be “related” to the QSF.
5. No qualified assignee can be controlled by nor control, directly or indirectly, the QSF.
6. Each transaction must meet all other section 130 requirements.

Single Claimant QSF Controversy

Whether a QSF can be established for a single claimant remains controversial - especially among structured settlement and settlement planning stakeholders.

The arguments in favor of allowing single claimant QSFs include the language in IRC section 468B and, more specifically, in the 468B regulations. These regulations, which also define a QSF (see above), allow a QSF to be “established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability". (emphasis added)

The Society of Settlement Planners (SSP) requested a ruling from the U.S. Department of Treasury on this single claimant issue in 2004. To date, however, the Treasury has not provided definitive tax authority for the single claimant QSF issue.

The National Structured Settlement Trade Association (NSSTA) historically opposes the issuance of guidance by the Treasury Department or the Internal Revenue Service on the single claimant QSF issue. NSSTA’s position appears to be that broad approval of single-claimant 468B funds would undermine and diminish the use of structured settlements. NSSTA maintains structured settlements are best created when both plaintiffs and defendants actively participate.

For more detailed information about QSFs, see:

• Robert Wood, "Qualified Settlement Funds and Section 468B"
• Hindert, Dehner and Hindert, "Structured Settlements and Periodic Payment Judgments" - Section 3.08B
• Jeremy Babener, "Structured Settlements and Single Claimant Qualified Settlement Funds"

S2P2J Release 51

Publisher Law Journal Press anticipates an April 2012 distribution date for hardcopy supplements for Release 51 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Online S2P2J will also be updated April 2012 to include Release 51 materials. First published in 1986, S2P2J is co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) utilize S2P2J as an educational resource for their certification programs.

Release 51 Highlights

Release 51 for "Structured Settlements and Periodic Payment Judgments" features a comprehensive Executive Life update including expanded and updated coverage for the Executive Life of New York (ELNY) liquidation proceedings now in progress. In related reporting, Release 51 also:

• Expands and updates prior reporting for life insurance insolvency procedures and state guaranty association laws;
• Offers advice to plaintiff attorneys about how to address the risk of non-payment by annuity providers; and
• Summarizes recent case developments impacting Aurora, the successor company to Executive Life Insurance Company of California (ELIC),

Release 51 also updates Medicare Secondary Payer (MSP) developments and conditional Medicare payment requirements. Contributing author Peter H. Wayne IV provides current analysis and advice about Medicare Set-Aside (MSA) arrangements in liability cases discussing new and related case law, new CMS pronouncements and new CMS field office guidance with practice tips for structured settlement and settlement planning consultants, attorneys and claim supervisors.

Release 51 expands existing coverage of structured settlement business standards and practices including analysis of the following legislation impacting settlement planners:

• The NAIC Suitability in Annuity Transactions Model Regulation;
• The NAIC Annuity Disclosure Model Regulation;
• Dodd-Frank's impact on fiduciary and suitability standards; and
• The Uniform Prudent Investor Act.

Other topics addressed in Release 51:

• Structured settlement metrics for defendants and liability insurers.
• The Treasury's final regulations for IRC section 104(a)(2) incorporating amendments resulting from the Small Business Job Protection Act of 1996.
• The new IRS Lawsuits, Awards and Settlements Audit Techniques Guide.

"Structured Settlements and Periodic Payment Judgments" is now available in both hardcopy and online versions. For summaries of prior Release Highlights, see the structured settlement wiki.

S2P2J Release 50

Publisher Law Journal Press is currently distributing hardcopy supplements for Release 50 of "Structured Settlements and Periodic Payment Judgments" (S2P2J). Online S2P2J was also updated as of October 21, 2011 to include Release 50 materials.

First published in 1986, S2P2J is co-authored and updated semi-annually by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert. Both the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP) utilize S2P2J as an educational resource for their certification programs.

S2P2J Release 50 Highlights

Release 50 for Structured Settlements and Periodic Payment Judgments reviews the history of the receivership of Executive Life of New York ("ELNY"), tracks the status of its receivership and impending liquidation, updates discussion of the operation and role of U.S. life and health guaranty associations (“GAs”), and provides a comprehensive new chart summarizing coverage limits under the enabling statutes for all GAs in each of the U.S. states and territories.

This Release also expands and updates the discussions of several topics, including:

• Understanding the scope and meaning of “physical” as that crucial term is used in IRC § 104(a)(2) for claimants who receive damages on account of personal injuries that are not “physical” per se, such as wrongful incarceration and PTSD.
• Negotiating the important issue whether and pursuant to what terms a settlement payor will issue an IRS 1099-MISC form in cases where the tax treatment of agreed damages appears to be neither fully excludable under IRC § 104(a)(2) nor fully includable as income to the claimant.
• Determining choice of forum for establishing a 468B fund when one or more claimants against the 468B fund is a protected person.

In addition, Release 50 includes an extensive discussion of the IRS’s Structured Settlement Factoring Audit Technique Guide used to assist its examiners in determining taxability of structured settlement factoring transactions. The Guide describes the interplay between state law requirements and federal tax sanctions and presents a simplified conceptual framework to be used for determining taxability.

Joseph Dehner Interview

Joseph Dehner is a partner in the Frost Brown Todd law firm and co-author of "Structured Settlements and Periodic Payment Judgments" (S2P2J). He has been studying and writing about structured settlements since 1977 and agreed to be interviewed for this S2KM blog post.

S2KM: Your Frost Brown Todd biography highlights your expertise in multinational securities and business disputes. How do structured settlements fit into your legal practice?

Dehner: Through some of my clients, I was part of the birth of the structured settlement industry many years ago. It is great to see the structured settlement industry evolve into a robust part of the U.S. economy. I continue to advise attorneys and firms on structured settlement and periodic payment judgment issues. One example was the honor of serving as the U.S. Government’s expert witness in the criminal trial of James Gibson, who besmirched the good names of structured settlements and US Government bond trusts, and is now serving a long prison term.

S2KM: William T. Robinson lll, your Frost Brown Todd partner and President-Elect of the American Bar Association (ABA), was be a featured speaker at the NSSTA 2011 Annual Meeting. In addition to Robinson and yourself, does Frost Brown Todd have other attorneys with structured settlement expertise?

Dehner: We have a large litigation department, but I am the primary person specializing in structured settlement matters within our firm.

S2KM: You and your co-authors have been writing and updating S2P2J since 1986. Who is your target audience and how to you track new developments?

Dehner: Our target audience includes attorneys, as well as structured settlement consultants, judges and funding providers. We review on a monthly basis all reported cases and news reports about structured settlements and periodic payment judgments, and follow information as it flows about case and other developments.

S2KM: Having recently completed S2P2J Release 49, what important legal issues and developments do you see emerging?

Dehner: There is a growing experience of post-settlement issues emerging from a variety of directions – including fights among beneficiaries of holders of structured settlement rights, factoring company fights and disputes arising from Protection Act hearings, tax rulings (e.g., wrongly incarcerated persons can receive tax-free payments, despite prior uncertainty whether they suffered a “physical” injury), rights in bankruptcy, whether structured settlement rights are marital property, and many other issues that are being resolved over time by individual case rulings. The growing use of structured settlements outside the “tax-free” arena represents recognition that settlement is a time to put into place good financial planning.

S2KM: How do structured settlements in the United States differ from structured settlements in other countries?

Dehner: Many countries have more of a safety net philosophy and less of a litigation-driven means of addressing the needs of injured persons. But for common law countries, many have moved well ahead of the USA in insisting that compensation meet needs – meaning that payments should correspond over time to the actual needs of injured persons. So, in the UK, Ireland and elsewhere, we are seeing a conversion from the ancient lump-sum one-time system to what we in the USA would find normal in the workers compensation context. This is a real sea shift in thinking.

S2KM: Are there any lessons or ideas the United States structured settlement industry can gain from other countries?

Dehner: Sure – read Chapter 1 of our book about other country experiences and approaches.

S2KM: How do you view the secondary market? Are structured settlement transfers good or bad for the industry generally - and more specifically for structured settlement recipients?

Dehner: It’s not a question of bad or good. It’s a question of how individuals react in the real world. People who hold structured settlement rights chose to take money over time at one point, and then decide for various reasons to get cash now in exchange for giving up future rights that have greater value overall. But that’s their choice. The reality is that high-pressure tactics, coupled with what would have been viewed as usury and heresy in the Middle Ages, robbed those individuals of a truly fair and efficient secondary market when the factoring industry arose. Protection Acts now exist in 47 states. When you review the reported decisions about transfers of structured settlement rights, virtually every case where a judge wrote an opinion rejects the transfer and recites in pointed language why discount rates and other factors compel denial of a transfer application. Most transfers go through anyway because of no real contest and no real focus by the court on the underlying issues. I would hope that the impact of factoring over time does not dissuade Congress from maintaining favorable government support for structured settlements through a continuation of 104(a)(2) treatment.

S2KM: What factors, in your opinion, have contributed to the recent decline in growth of the structured settlement annuity premium?

Dehner: It’s pretty simple really. Interest rates are so low for so long that structured settlements have not stood out as bargains compared to receiving a lump sum and investing it for potentially greater returns (though the performance of the US equity markets should cause a reasonable observer to think twice).

S2KM: Do you have any thoughts or ideas about how to improve and/or grow the structured settlement industry?

Dehner: Greater focus on its basic point is where to start. Regardless of tax treatment, putting into place a compensation plan that actually aims to match needs with resources makes sense. Although there is no solid statistical evidence to support the concept that recipients of windfalls have nothing left after five years, we all know the realities that confront anyone who obtains a large sum as a first time experience with wealth. Charities, friends and relatives want a piece. It’s easy to spend money sitting in the bank. And then at some point there is nothing left to deal with what in some cases is a lifetime of needs. My favorite structured settlement example was an elderly fellow I represented who was pushed over in a grocery store, broke his hip and ended up in a nursing home that at the time cost about $1100/month. He would have run out of money from his savings in about two years. Instead of getting a small lump sum settlement for what happened, the insurer provided a structured settlement that paid $1400/month for the rest of his life. The cost was minimal, given his age and the magic of actuarial science. He died 15 years later, but never had to worry about his nursing home bills. Keep the focus on this example and what it represents, and the structured settlement industry merits a bright and expanding future.

S2KM: What lessons, if any, do the Spencer v. Hartford and Macomber v. Travelers class action settlements provide for the structured settlement industry?

Dehner: Transparency. As long as underlying economic realities are known and disclosed to those involved, I don’t see an issue. One can argue about Spence and Macomber should ultimately have been decided, but there is an easy solution to the issues that underlay both cases – being up front and clear in documentation and negotiation as to what was going on. When we wrote "Structured Settlements and Periodic Payment Judgments" in 1986 (since updated 49 times), our negotiation chapter talked about how a good structured settlement negotiation should be about how much a claimant would receive when over time. It was not about negotiating an amount first, and then finding out what it would buy. Focusing on what payments will be received when (and the reliability of the financing mechanism) and disclosure of who does what and receives what are consistent with best practices, and should not be subject to later court challenges about what participants earned how much in the process.

S2KM: What impact, if any, would the expanded use of 468B funds in single event tort cases have on structured settlements?

Dehner: It would simplify matters for a defendant, of course, but would require clear IRS or statutory guidance that is missing now. It would give greater leverage to the claimant than exists now, so the defense side understandably is reluctant to embrace the tool generally, and absent clear guidance on the efficacy of single-claimant 468B funds, there is no point in the rhetorical debate that rages about this issue.

S2KM: Assuming federal malpractice reform legislation is enacted, should periodic payment of judgments be included?

Dehner: Of course. Read the recent paper of the Irish judiciary, or the UK Government’s papers that led to widespread use of periodic payment judgments there as a matter of course. Or just think about what the law really accomplishes at its best – matching compensation with actual need. This is not about favoring the defense or plaintiff side of the bar. And it is not about who wins and loses. This is about trying to make sure as well as possible that injured persons receive compensation that meets their needs. If it lowers cost, fine. If it increases cost, fine. I would argue that this is unknowable, but it is obvious to a rational individual that trying to match compensation against need is better than the equivalent of a lottery, where some people lose completely, others win it big, and many get a lump sum that does not last enough to get them through their lifetimes.

S2KM: Are there any opportunities for the structured settlement industry to benefit from proposed changes (including budget decreases) for Medicare, Medicaid and/or Social Security?

Dehner: Yes, and one can expect both further pressures for Medicare and Medicaid reimbursement at settlement time, as well as increasingly sophisticated settlement planning. Our book tries to keep abreast of these rapidly changing areas and how attorneys and other participants in the structured settlement industry can do a good job for their clients (and not make serious mistakes in the process).

S2KM: From an historic legal perspective, what impact have structured settlements and periodic payment judgments had on the U.S. tort system?

Dehner: The rule thought to be enunciated first in England in Fetter v. Beale that an injury should be compensated with a single one-time payment – the lump-sum system – has been met with deviation when it matters most – in workers compensation systems, in vaccine cases, in other applications. And even in England, the lump sum award system is slowly disappearing based on statutory changes. Structured settlements in the US have continued to chip away at lump sum thinking in America. History should show that structured settlements and periodic payment judgments will prove to be a far better alternative to the jackpot theory of litigation. Do we really want injured people to go to courthouse casinos for justice?