Beyond Structured Settlements

Risk Settlement Planning Practicum

Sheltered from the violent storms that unleashed dozens of tornadoes across Oklahoma and the plains states on April 13-14, 2012, the University of Tulsa College of Law hosted the Richard B. Risk Jr. Settlement Planning Practicum which organizers believe was the first time any law school has sponsored a settlement planning educational conference.

Risk, a national authority on structured settlement law and one of the founders of the Society of Settlement Planners (SSP), endowed the settlement planning practicum which is expected to become an annual event for attorneys and law students. Risk invited and introduced the practicum presenters in the following speaking order: Joseph Tombs, Patrick Hindert, Mark Popolizio, Jeremy Babener, Jack Meligan and Professor Carl Pierce.

Joseph Tombs

Tombs, a lawyer, certified financial planner and former SSP President who, working with Risk, helped organize the Registered Settlement Planner (RSP) certification program, addressed "Common Issues Attorneys Face When Settling Cases". As part of his presentation, Tombs contrasted settlement planning and financial planning. One primary difference, according to Tombs, is the relative importance in settlement planning of "dissipation risk". Other differentiating factors identified by Tombs include the importance of: government benefits, medical forecasting and special needs legal issues. Tombs discussed structured settlements as a core settlement planning tool that combines relatively low investment and dissipation risks.

Tombs emphasized the multi-professional skill sets settlement planning requires and described settlement planning as an evolving profession stating: "The more we study and practice settlement planning, the more we realize its complexity and understand its challenges." He offered the following definition for settlement planning: "a profession helping recipients of settlement proceeds use those proceeds to achieve post-loss goals and transition successfully to post-settlement financial life."

Patrick Hindert

In his presentation titled "The History of Structured Settlements", Hindert (co-author of "Structured Settlements and Periodic Payment Judgments" and author of S2KM's blog) provided a visual analysis featuring schematic diagrams to explain how structured settlement has evolved from a claim management tool into a core component of the larger and more complex settlement planning profession - and how competing business models have restricted the growth of the structured settlement annuity market.

Hindert stated key structured settlement stakeholders have succumbed to "path dependence" by failing to strategically study and analyze continuing industry changes. Structured settlement business models and practices that once made sense and represented "industry standards", according to Hindert, have survived despite the eclipse of their justification, benefit and/or better alternatives.

Hindert described settlement planning as an "emergent system" and quoted John McWhorter, a linguist at Columbia University, to help explain the significance for structured settlements:

"Emergent systems [settlement planning] are ones in which many different elements interact. The pattern of interaction then produces a new element [settlement planning] that is greater than the sum of the parts, which then exercises a top-down influence on the constituent elements [including structured settlements]."

To improve and grow the structured settlement market, Hindert recommended more detailed and comprehensive study of alternative structured settlement payment models and life cycles within the broader context of settlement planning as an important and necessary first step.

Mark Popolizio

A nationally recognized legal authority in Medicare Secondary Payer (MSP) compliance and a current board member of the National Alliance of Medicare Set-Aside Professionals (NAMSAP), Popolizio addressed how Medicare impacts settlement planning. Starting with an introductory Medicare road map, he next discussed CMS' reimbursement rights for conditional Medicare payments - who is at risk; what is Medicare's recovery amount; how to challenge conditional payments; how to obtain information; CMS' most recently announced policies and payment options; and recent case law developments.

Popolizio also discussed Medicare set-aside arrangements (MSAs), in the context of both workers compensation and liability cases, as CMS' recommended method for protecting Medicare's future interests under the MSP Act. For liability cases, he began by emphasizing why the key issue is not: "Are liability MSAs required?" Instead, Popolizio reviewed two recent CMS memoranda providing informal information about how CMS looks at liability MSAs. Finally, Popolizio offered his own recommendations (a three-step process) for approaching the liability MSA issue and also reviewed recent related case law.

Jeremy Babener

Babener, a rising star among structured settlement legal and tax experts, offered a comprehensive overview of "Taxation in Personal Injury Cases". He began by outlining sources for tax authority, the variables for tax liability and the character of income. Next, he discussed the exclusion for personal injury damages and explained the language of IRC 104(a)(2) before addressing other damages in personal injury cases - past and future medical expenses; punitive damages; and pre and post-judgment interest.

Babener explained the importance of documentation, including the complaint and the settlement agreement, to maximize the exclusion for personal injury damages. He highlighted specific facts that frequently create problems with the IRS and conversely how to encourage the IRS to respect the documents so as to obtain the preferred tax result. Babener concluded by addressing these additional settlement tax considerations: legal expenses; structured settlements; qualified settlement funds; and transfers of structured settlement payment rights.

Jack Meligan

Meligan, a founder and current President of the SSP, discussed "Pitfalls in Settlement Planning and How to Avoid Malpractice"; offered reasons why personal injury claimants and their attorneys need settlement planning advice from a qualified professional or team of professionals; and reviewed an example of a settlement plan. In addition, Meligan:

• Summarized three cases (Grillo; Lyons; and Spencer) to demonstrate why structured settlements need to be considered and risks associated with certain business behavior;
• Cited statistics from American Bar Association studies to underscore the frequency and risk of malpractice cases against personal injury attorneys;
• Spotlighted danger areas for plaintiff attorneys: MSP compliance; deductability of attorney fees; and documentation of confidentiality clauses; and
• Cautioned plaintiff attorneys against failing to retain an independent settlement advisor; or to advise their clients about all settlement options (including the pros and cons of structured settlements); or to completely document their files as proof of their best practices.

Professor Carl Pierce

Professor Pierce is the W. Allen Separk Distinguished Professor of Law and Director of the Howard Baker, Jr. Center for Public Policy at the University of Tennessee. Among his professional activities, Professor Pierce has served as Reporter for the Tennessee Bar Association Standing Committee on Ethics and Professionalism and as Associate Reporter for the American Bar Association Special Commission on Evaluation of the Rules of Professional Conduct. During 2007-2008, Professor Pierce served as Consultant to the Society of Settlement Planners (SSP) and helped review and draft the SSP's Standards of Professional Conduct for Settlement Planners (SSP Standards).

Professor Pierce provided a summary comparative analysis of both the National Structured Settlement Trade Association (NSSTA) Statement of Ethics and Professional Responsibility (NSSTA Code of Ethics) and the SSP Standards. Despite substantial experience working with litigators, Professor Pierce acknowledged surprise by the degree of hostility between some plaintiff and defense structured settlement consultants. Professor Pierce:

• Observed that all law school graduates need some exposure to structured settlements and settlement planning;
• Suggested that the business collaboration models among insurance companies, plaintiff attorneys and settlement planners could look very different in the future; and
• Recommended that representatives of NSSTA and SSP meet to discuss and compare their respective statements of ethics and standards.

Congratulations to Richard Risk, the University of Tulsa College of Law and the guest speakers who participated in the Settlement Planning Practicum. S2KM understands that Tulsa College of Law will publish a video compilation of the practicum speaker presentations on YouTube.

Structured Settlements and Settlement Planning

The purpose of this blog post is to compare structured settlements and personal injury settlement planning. As noted in an earlier S2KM blog post, the transition from structured settlements to settlement planning is one of three fundamental transitions reshaping the structured settlement industry. The other two fundamental transitions:

• From a singular, illiquid, and non-assignable product to multiple products with greater flexibility to address changing needs and circumstances of injury victims;
• From traditional (pre-Internet) to web-based business models, processes and skill sets.

Among statutory definitions, "structured settlement" is defined in IRC 5891 (c)(1) and Section 2(m) of the Model State Structured Settlement Protection Act. Wikipedia offers an additional definition for "structured settlement". Financing diagrams provide a visual perspective for understanding traditional structured settlement financing alternatives and methodologies.

As summarized in this history diagram, structured settlements and the structured settlement industry have experienced significant changes since structured settlements were first utilized in the United States during the late 1970s including:

• The secondary market;
• 468B qualified settlement funds;
• Integration with Medicare and Medicaid; and
• Integration with settlement trusts.

This transaction diagram demonstrates how, as an integrated product, structured settlements have become increasingly complex legally and financially with multiple stakeholders and documents.

One result of this increased integration and complexity has been the evolution of structured settlements from a stand alone product into a core product for a more comprehensive profession called "settlement planning" - which some participants refer to alternatively as "settlement consulting" or "special needs settlement planning".

Although no statutory or standard definitions exist for settlement planning, leading practitioners and advocates, including Jack Meligan and Joseph DiGangi, have offered their own definitions and explanations. In addition, the Society of Settlement Planners (SSP) has adopted the "Standards of Professional Conduct for Settlement Planners" and offers a Registered Settlement Planner  (RSP) certification program.

Here is how Meligan, SSP's President, explains settlement planning:

• "Settlement Planning is the modern day [holistic] approach to assisting personal injury (and other types of) claimants with the personal, and highly unique, financial planning decisions surrounding the settlement of their claim.
• "Settlement Planning starts from the premise that structured settlements are not the answer to everything that everyone needs or wants to do with their settlement dollars.
• "Using that as a starting point, the first in a long line of questions for any personal injury claimant to answer is: 'What do you want this settlement to accomplish for you? What is the most important thing? Then, what is the, second most important, third most important, etc'.
• "Only after you, as the claimant, answer the question above should you really begin to craft a plan to help you reach those goals."

DiGangi spoke about "settlement consulting" at the 2009 Winter Meeting of the National Structured Settlement Trade Association (NSSTA).

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

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

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

Characteristics of DiGangi's settlement consulting model:

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

During his 2009 NSSTA presentation, DiGangi also highlighted several transitional issues: licensing; conflicts of interest; collaboration models; and work process infrastructure.

S2KM will summarize and evaluate how SSP and NSSTA addressed "settlement planning" during their 2011 Annual Meeting educational conferences in a subsequent and related blog post.

Timothy Morbach of The Settlement Services Group (TSSG) developed the linked diagrams in this blog post. TSSG is an affiliate and strategic partner of S2KM Limited. Viewers can enlarge the diagrams to improve their visibility.

NSSTA and NASP 2010 Educational Conferences - 3

"Protect and Preserve" or "Improve and Grow".

These polar-opposite imperatives for the structured settlement industry represent S2KM's two strategic lenses for reporting and analyzing simultaneous educational programs this week in Las Vegas sponsored by the National Structured Settlement Trade Association (NSSTA) and the National Association of Settlement Purchasers (NASP).

S2KM's Managing Director, Patrick Hindert, will attend portions of the NSSTA conference (as a NSSTA member and former NSSTA President) and participate in NASP's Friday morning "Industry Analysis" program (as a moderator and speaker). S2KM's continued reporting and commentary about the NSSTA and NASP conferences will appear on this S2KM blog ("Beyond Structured Settlements") as well as S2KM's structured settlement wiki.

NSSTA's strategic mandate is to "protect and preserve".

Question: what exactly does NSSTA want to "protect and preserve"?

The simple answer: Internal Revenue Code sections 104(a) and 130.

More strategically, what NSSTA wants to "protect and preserve" (to the extent possible) are business models and business practices ("good old days") that existed prior to:

• 1986 - Jim Lokey completed the first structured settlement transfer;
• 1991 - Executive Life insolvency;
• 1993 - Congress enacted IRC 468B and introduced qualified settlement funds;
• 1994 - Weil lawsuit settlement permitting structured settlement agents to work directly with claimants and plaintiff attorneys;
• 2001 - Congress adopted IRC 5891 and defined "structured settlement" as well as rules for structured settlement transfers;
• 2010 - Hartford settled the Spencer class action lawsuit (and departed the structured settlement business) following allegations of civil RICO and state fraud violations by Hartford, its agents, brokers and attorneys.

One result of NSSTA's "protect and preserve" mandate has been a "dumbing down" of NSSTA's educational programs - at least from a strategic perspective. Some of NSSTA's technical discussions are excellent. For example, NSSTA's legal committee has re-emerged as a leading structured settlement educational resource. And NSSTA's CSSC certification program continues to receive positive reviews despite low attendance and the lack of a continuing education (CLE) requirement.

NSSTA's primary educational problem is the application of its narrow and political strategic framework ("protect and preserve" as opposed to "improve and grow") for its educational programs. For example, NSSTA never invites knowledge leaders from NASP or SSP (or anyone critical of NSSTA political objectives) to participate in NSSTA's educational programs. For another related example, NSSTA educational programs never provide strategic discussions ("Industry Analysis") with alternative perspectives.

Bottom line: NSSTA's educational programs have fallen behind NASP and SSP who now represent the benchmarks for structured settlement educational excellence. For further S2KM reporting about NSSTA's educational demise, see: S2KM's analysis of NSSTA's 2009 educational program. Unfortunately, NSSTA's announced 2010 educational program looks like "the same old, same old" - at least from S2KM's strategic perspective.

By comparison with NSSTA, NASP will devote three hours of its 2010 educational program this week in Las Vegas specifically to "Structured Settlement Industry Analysis". This portion of the NASP program is subtitled: "How to Improve and Grow the Structured Settlement Industry".

Announced participants for this strategic discussion include industry knowledge experts who are members of NASP, SSP and NSSTA plus Jeremy Babener as an independent writer and analyst. Other participants include: Robin Shapiro, Earl Nesbitt, Matt Bracy, Andrew Savysky, Peter Vodola, Richard Risk, John Darer and Patrick Hindert - and continues prior NASP strategic discussions that featured: Stephen Harris, Jack Meligan and Michael Upchurch among others.

Spencer v. Hartford - 8

If YOU are a defendant (or insure or represent defendants), how do YOU save money using structured settlements - post Spencer v. Hartford?

What are your structured settlement risks - if you don't fully disclose your structured settlement business practices?

What are your NEW structured settlement best business options and practices following Spencer v. Hartford?

To begin re-thinking structured settlements (post Spencer v. Hartford), S2KM recommends a recent article written by Jeremy Babener titled "Structured Settlements and Single Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History".

See especially Section IV titled: "Helping the Wrong Party" for background research and analysis about defendants attempting to save money using structured settlements - published prior to the announced proposed settlement of the Spencer v. Hartford class action lawsuit.

Spencer v. Hartford - 7

What are the critical questions for defendants (and your insurers and your re-insurers and your attorneys) resulting from the proposed settlement of the Spencer v. Hartford class action lawsuit - assuming YOU, as a defendant, participate in funding structured settlements?

Question number 1: What are your risks for non-disclosure and/or lack of full disclosure?

Question number 2: What information do you need to disclose - and to whom and when?

Question number 3: Assuming you fully disclose, how do you save money using structured settlements?

For a valuable (pre - Spencer v. Hartford settlement) analysis about how defendants save money using structured settlements, see Section IV "Helping the Wrong Party" in Jeremy Babener's article titled: "Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History".

Spencer v. Hartford - 6

Why and when should defendants, and/or their insurance companies and/or their reinsurance companies, ever agree to fund a structured settlement using either a "buy and hold" strategy or an "IRC section 130 qualified assignment" - as opposed to paying cash or using an IRC section 468B Qualified Settlement Fund?

The traditional answer from the traditional structured settlement industry:

• YOU, the defendant, save money using structured settlements - and;
• YOU face no future risk (or almost no future risk) so long as:
• YOU use IRC section 130 qualified assignments.

How does this traditional answer square with the recent Spencer v. Hartford class action lawsuit and proposed class action lawsuit settlement?

What are the most important lessons for defendants, and their insurers and reinsurers, and their attorneys, from the proposed Spencer v. Hartford settlement?

For prior S2KM reporting about Spencer v. Hartford, see S2KM's blog post Spencer v. Hartford - 5.

SSP and NSSTA 2010 Annual Meetings - 8

NSSTA scheduled something totally unexpected and outrageous for its 2010 Annual Meeting. NSSTA invited Dan Clark to discuss NSSTA, the structured settlement industry and ethics.

When has NSSTA and/or the structured settlement industry ever engaged a better or more timely critic?

Clark was introduced by Joseph O'Reilly and presented himself as a former disabled person who advises professional athletes and teams (among others) on achieving high performance.

Clark's discussion about ethics and structured settlements was the antipodal response to the Rev. Oliver William's ethics discussion during the NSSTA 2009 Winter Meeting. Rev. Williams asked his NSSTA audience to identify structured settlement business conduct that caused "shocked disbelief" among NSSTA members. The only answer from NSSTA in 2009 was "structured settlement factoring".

Clark's primary message for NSSTA: "what the F... is the matter with YOU?"  Clark started his discussion by answering his own question and then educated and challenged his 2010 NSSTA audience using stories and analogies. Clark's examples, highlighting current industry conduct and performance, were simple and accurate.

Clark compared NSSTA and the structured settlement industry with the "1976 Tampa Bay Buccaneers". The "professionals" who play the game for commissions but never win championships. "Professionals" who create problems rather than solve problems.

Clark challenged NSSTA to change from within: "To improve industry performance, you must discuss both sides of every issue and do what is right."

Strategic questions:

• Will Dan Clark's message wake-up the structured settlement industry?
• Who among the NSSTA leaders: 1) attended Dan Clark's presentation? and, more importantly, 2) understood Dan Clark's message?
• If Karen Meyers, quoting the late James Corman, is correct - that structured settlement professionals are "on the side of the angels":
  • Why is NSSTA so secretive?
  • Why the closed-door meetings?
  • Why the lack of disclosure and transparency for NSSTA's own members?

Strategic follow-up: among the NSSTA presentations S2KM attended in Washington, D.C., only Joseph DiGangi acknowledged and appeared to understand Dan Clark's message. In less than 30 minutes, DiGangi repeated and improved his one hour discourse from the NSSTA 2009 Winter Meeting about settlement consulting.

For S2KM's complete reporting and analysis of DiGangi's 2009 NSSTA presentation about settlement consulting plus S2KM's continuing coverage about structured settlement associations, see S2KM's structured settlement wiki.

SSP and NSSTA 2010 Annual Meetings

This blog post begins S2KM's reporting about the 2010 Annual Meetings of the Society of Settlement Planners (SSP - May 2-4) and the National Structured Settlement Trade Association (NSSTA - May 4-6).

Patrick Hindert, S2KM's Managing Director and primary blog and wiki author, is a former Executive Director of SSP and former President of NSSTA. Hindert will attend both the SSP meeting and NSSTA meeting. Hindert will lead a discussion at the SSP 2010 annual meeting titled "Structured Settlement Public Policy". S2KM's prior reporting about SSP and NSSTA is available on S2KM's structured settlement wiki. S2KM also publishes the structured settlement public policy wiki.

SSP and NSSTA have each published their advanced educational program summaries:

SSP (May 2 - May 4) - at the Washington D.C. Marriott at Metro Center

• MSP and SCHIP Compliance - Doug Brand
• Marketing Foundations - Frank Maguire
• The Anatomy of a Life Care Plan - Paul Deutsch
• Working with Life Care Plans: an Economist's perspective - Frederick Raffa
• The AAJ Legislative View - John Bowman
• Justifying and Expanding the Structured Settlement Tax Subsidy - Jeremy Babener
• The Structured Settlement Tax Panel - Richard Risk; Michael Montemurro; Jeremy Babener; Daniel Hindert; Gregg Polsky; Brant Hellwig.
• Structured Settlement Public Policy - Patrick Hindert
• Settlement Planning for Minors - Joseph Tombs
• Growing Your Settlement Planning Practice - Mark Newton
• Litigation Update - Anthony Alfieri
• Medicare Set-Aside Panel - Doug Shaw, Jason Lazarus; Mark Popolizio
• Medicare Secondary Payer Compliance Panel - Erica Cooper; Katie Fox; Jason Lazarus; Mark Popolizio
• Medical Underwriting for Structured Settlements - Rosemary Brindamour.

NSSTA (May 4 - May 6) - at the Washington D.C. Grand Hyatt

• Opening Remarks - Dan Durbin
• Washington Legislative Update - Eric Vaughn
• Congressional Keynote - John Lewis
• NSSTA Legal Committee Update - Peter Vodola; Ilana Hanau; Craig Ulman.
• Congressional Chiefs of Staff - Debbie Curtis; Kristin Nicholson; Derek Harley; Kate Winkler; Jim Brandell;
• Congressional Luncheon - Joe Crowley;
• The Truth about Scott Rothstein - Peter Arnold
• Capital Hill Briefing - Eric Vaughn
• Capital Hill Meetings and Reception - Steny Hoyer; Bob Ethridge.
• Medical Underwriting - Rosemary Brindamour; Hilary Topalian.
• Congressional Keynote - Dave Camp
• Congressional Keynote - Pete Stark
• Ethics - Dan Clark
• The Future of NSSTA - Michael Kelly; Eric Vaughn; Joe Bornstein.
• Congressional luncheon - Peter Roskam.
• Settlement Planning - Karen Meyers; Joseph DiGangi.
• Structured Settlement Tax Issues - Rafael Gonzalez; Doug Shaw; Jessica Smythe.

Jeremy Babener Interview - 2

Since first meeting Jeremy Babener at the SSP 2009 Annual Meeting, S2KM has reviewed, analyzed and featured his writing about structured settlements. For prior S2KM blog posts about Jeremy Babener and his structured settlement writing, see S2KM's structured settlement public policy wiki.

S2KM published an advanced summary ("Babener Proposes Expanded S2 Tax Subsidy") of Babener's most recent structured settlement article (titled "Expanding the Structured Settlement Tax Exclusion") which is featured in this week's edition of Tax Notes. The article also appears on Babener's website TaxStructuring.com. Babener has granted S2KM the following exclusive interview about his most recent article.

S2KM: Greetings Jeremy. Our first and only prior S2KM interview (Jeremy Babener Interview) was published June 23, 2009 and highlighted your research about dissipation studies. What structured settlement articles have you written since your dissipation paper?

Jeremy Babener: I have written several articles since. The first provided context when the Treasury removed the single-claimant qualified settlement fund issue from their Priority Guidance Plan. The second discussed a Treasury hearing on Section 104(a)(2) regulations focused on the different tax treatment for physical and non-physical damages, as well as a recent proposal to eliminate the distinction by the National Taxpayer Advocate. The third, a longer law journal article, provides the history of the structured settlement and factoring industries, and makes the public policy argument in favor of Treasury regulations for single-claimant qualified settlement funds. This most recent piece introduces the possibility of converting the structured settlement tax exclusion into a tax credit.

S2KM: What reactions have you received to your structured settlement writing?

Jeremy Babener: I have enjoyed receiving feedback from industry practitioners. Many have contacted me with questions, which I am happy to discuss. In terms of recommendations that I have and am making, while I have received a lot of positive responses, the question is whether those with decision-making powers will consider them.

S2KM: Let's talk about your most recent article. What is the title and where and when was it published?

Jeremy Babener: It is titled, "Expanding the Structured Settlement Tax Exclusion," and was published on April 19th in Tax Notes.

S2KM: Who is your target audience and why should they read your most recent article?

Jeremy Babener: The article is aimed at legislators and those interested in affecting structured settlement policy. It is meant to restructure the 1982 legislation that established the current tax exclusion to better accomplish the purpose of the 1982 Congress. Of course, those in the structured settlement industry are the more practical audience. They would economically benefit from the proposal and are therefore the likeliest group to be interested.

S2KM: What is your core message?

Jeremy Babener: My article focuses on who benefits from the structured settlement exclusion. Like all exclusions, it is of little use to those who, even without the exclusion, would incur no taxable income. The article suggests that a uniform refundable tax credit for structured settlements, or a financial supplement to structured settlement recipients with less income, might better accomplish Congress’ purpose of discouraging premature and inappropriate dissipation.

S2KM: What is the difference between an exclusion and a credit?

Jeremy Babener: Let's say that my taxable income is $100,000, and that I have a 50% tax rate. That means that I pay $50,000 in taxes. A $1,000 exclusion reduces my taxable income to $99,000, and thus I pay $49,500 in taxes. As you can see, the $1,000 exclusion was only worth $500 to me. Tax credits, quite differently, are generally "dollar for dollar." This means that a $1,000 tax credit actually reduces my taxes, not my taxable income, by $1,000. Thus, I would pay $49,000 after the tax credit, rather than $49,500 after the tax exclusion. Of course, someone with a lower tax rate, such as 10% will get even less out of a tax exclusion. For them an exclusion would be worth $100, as opposed to $500 for someone with a rate of 50%.

A refundable tax credit provides the value of the tax credit to someone whether or not they have any tax liability. Thus, $100 of tax credit to someone with no tax liability results in a $100 check from the government. A uniform refundable tax credit provides the same value to all, regardless of tax brackets. Thus, everyone might subtract the same $100 tax credit from their tax liability. A person who owes $50,000 in taxes would subsequently owe $49,900. A person who owes nothing in taxes receives a $100 check from the government ($100 in "negative taxes").

S2KM: Who gets the most out of the structured settlement exclusion, and who gets the least?

Jeremy Babener: Those who generate sufficient income after a settlement to place them in the highest tax-bracket get the most out of the exclusion. As illustrated above, the higher one's tax rate is, the more one gets out of an exclusion. Those who have no tax liability do not benefit at all from the exclusion.

S2KM: Recent estimates state that 47 percent of potentially eligible U.S. taxpayers pay no federal income tax. Is that statistic accurate and, if so, how does that statistic impact your proposal?

Jeremy Babener: Yes. The Tax Policy Center found this to be the case. We do not know how many personal injury victims pay no federal income tax, but since injury often makes work difficult, I would guess that the percentage would be even higher. That means that the current tax exclusion may fail to incentivize half or more of those who could choose to structure, providing them with no economic benefit for doing so.

S2KM: Why does it matter that some structured settlement recipients get more out of the exclusion than others?

Jeremy Babener: The purpose of the exclusion is to prevent premature and inappropriate dissipation of lump sum settlements. Unless Congress believes that such dissipation is more likely among plaintiffs earning higher incomes after their settlements, which seems unlikely, the exclusion’s design is not economically efficient.

S2KM: Should we be particularly concerned that potential structured settlement recipients expecting lower incomes have a weaker incentive to structure?

Jeremy Babener: Probably. We do not have proven data on this, but it seems likely that those with lower income are those more likely to dissipate. A low income after settlement might result from a debilitating injury and high injury-related expenses. It would seem that persons in such a situation are more likely to need every last cent of their settlement compensation because they may not be able to make up for dissipation by working more. Thus, they may be the most likely people to end up requiring government assistance as a result of dissipating.

S2KM: How could the exclusion be modified to incentivise potential structured settlement recipients expecting lower incomes?

Jeremy Babener: If Congress wishes to incentivise all potential structured settlement recipients equally, the exclusion could be turned into a uniform refundable tax credit. Such a credit would provide the same amount of value, whether by reducing tax liability or providing a tax refund, to all structured settlement recipients.

S2KM: If those earning a lower income are more likely to dissipate, why should we not just direct the structured settlement subsidy to them?

Jeremy Babener: Congress could do just that. But, there are reasons not to at this time. First of all, we do not have proven evidence on the matter. Economic literature posits that when we lack such evidence, it is most economically efficient to incentivise all equally. Secondly, not everyone knows what they will be making after a settlement. Since the exclusion is meant to encourage a particular decision at the time of settlement, it may be best to guarantee the benefit to all potential structured settlement recipients.

S2KM: Who would win and who would lose if Congress goes with a uniform tax credit?

Jeremy Babener: Clearly, those who could take advantage of the structured settlement exclusion, who could not before, would benefit. The “loser,” if there is one, depends on the structure of the credit. The tax credit would cost the government, just as the current exclusion does. Since the benefit would go to more people under this proposal, Congress would have to decide whether to allow an increase in lost revenue, or decrease the benefit to potential structured settlement recipients. Of course, allowing an increase in lost revenue may save the government from future increases in government assistance payments due to dissipation.

S2KM: What are you hoping to accomplish by writing this article?

Jeremy Babener: The article is not a sophisticated and ready-to-go proposal for Congress. It introduces an idea that I hope the structured settlement industry will take on and make its own. An expansion of the exclusion could benefit plaintiffs (by increasing their settlement value), defendants (by decreasing their settlement cost), brokers (who will earn more commissions), and insurance companies (who will increase annuity sales). I encourage the National Structured Settlements Trade Association (NSSTA) and the Society of Settlement Planners (SSP) to consider the proposal in the future. In fact, even the National Association of Settlement Purchasers (NASP) might weigh in, as the secondary market would be impacted by such a policy change. When the entire structured settlement industry stands to gain, these three associations should work together to further their mutual interests.

S2KM: Given your previous finding that no empirical data has proven that 90% of lump sum plaintiffs dissipate their money in five years, why would you recommend an expansion of a tax exclusion meant to prevent dissipation?

Jeremy Babener: In my research I found that the many citations to statistical findings of dissipation are not substantiated. However, I have also spoken with many in the industry. The anecdotal evidence certainly exists. It is the responsibility and prerogative of Congress to decide how much evidence is needed to legislate, and this was certainly not the first or last time that anecdotal evidence was relied upon for that purpose. My recommendation for a uniform refundable tax credit is meant to better accomplish Congress' goal.

S2KM: As a participant in the upcoming SSP tax panel (May 3 - Washington, D.C.), what tax issues interest you the most about structured settlements and personal injury settlement consulting?

Jeremy Babener: Clearly, I am interested in reactions to this proposal. Among other issues, I am also very interested to discuss the National Taxpayer Advocate's proposal to eliminate the difference in tax treatment between physical and non-physical injury. Currently, the proposal does not take the purpose of the structured settlement exclusion into account. The Advocate's proposal seeks to repeal the 1996 amendment to Section 104(a)(2) limiting the favorable tax treatment of damages to those received on account of "personal physical injury or physical sickness," rather than simply "personal injury or sickness." Unfortunately, the proposal does not seek to repeal the amendment to Section 130 in the Tax Reform Act of 1986 limiting the favorable tax treatment for structured settlement assignment companies to cases "involving physical injury or physical sickness." Thus, while the purpose of the Advocate's proposal is consistent with bringing non-physical damages back into the structured settlement tax-favored fold, it does not.

For prior S2KM blog posts directly or indirectly related to Jeremy Babener, see:

• Babener Proposes Expanded S2 Tax Subsidy
• Legislation to Expand the Structured Settlement Industry
• Jeremy Babener Interview
• SSP 2009 Annual Meeting
• NSSTA 2009 Fall Educational Conference

25 Questions to Evaluate Pooled Trusts

Health care reform (Patient Protection and Affordable Care Act), enacted on March 23, 2010, has re-defined the structured settlement and personal injury settlement consulting marketplace: whether current participants realize it - or (more probably) do not.

Among the 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.

Without focusing specifically on health care reform (not then enacted), the ASNP 2010 Annual Meeting included valuable presentations and handout resources indirectly related to health care reform, structured settlements and settlement planning/consulting.

Among those valuable presentations was Evan J. Krame's analysis titled "Not Very Special Trusts: Fixing Trusts to be Special and Using Pooled Trusts". As part of his ASNP trust analysis, Krame introduced a document he wrote titled "25 Questions to Evaluate Pooled Trusts".

In addition to his legal practice and teaching activities, Krame serves as President of Shared Horizons, Inc. Shared Horizons is trustee of the Wesley Vinner Memorial Trust (a pooled trust) serving people with disabilities in the District of Columbia and Maryland.

Krame has granted permission for S2KM to re-publish his list of 25 Questions here in S2KM blog format.

Trust Structures

• Check the Trust Agreement and Joinder Agreement? What do the documents say? For example, what powers does the trustee have?
• Is the trust approved and monitored by any state agencies?
• Who/what is really serving as the trustee? Is it the non-profit organization that created the trust or is it a third party hired to administer the trust?

Is this Trust Right for You?

• What are the costs of participation? Is there an initiation fee, an annual fee or a termination fee?
• How are the disbursements approved? What is the ease and method of disbursements? Who signs disbursement checks?
• What is the availability of advocacy on behalf of the beneficiary?
• How do they manage public benefit issues?
• How do they monitor the beneficiaries?
• Will the trust own illiquid or uncommon assets such as cars or homes?

Trust Management

• What is the reputation of the non-profit and/or trust management organizations?
• What is the organizational structure? Check on staff, space and activities.
• Who are the officers of the non-profit? What are their skills and background?
• What is the function of the board of the non-profit trustee?
• How long has the trust been in existence? Is there any reason to believe it could fail? How appropriately is the pooled trust compensated?
• How are the trust assets invested? Is there an investment policy in force that is followed? Is there an independent investment adviser? Is there an investment review committee? Is there an allocation model?
• How do they maintain separate shares? Do they uphold the duty to segregate?
• Is there liability and casualty insurance in place?
• How do they meet their duty to inform? Are statements provided to beneficiaries and state agencies (as required)?
• How do they meet their duty to account?
• How do they maintain their records? Are they precise, complete and accurate?
• How do they meet their duty of confidentiality?
• Do they have and/or employ legal counsel?
• Are there termination procedures in place?
• What is the policy as to funds at the death of a beneficiary?
• How do they handle income tax reporting?

Additional S2KM resources about settlement trusts:

• Settlement trusts re-visited
• Settlement trusts
• Single claimant 468B funds
• Selecting a settlement trustee
• Settlement trust due diligence
• Special Needs Trusts X
• Richard Halpern