Beyond Structured Settlements

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

S2KM Reviews Jeremy Babener's QSF Paper - 2

While researching his paper "Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History" (QSF paper), Jeremy Babener interviewed many structured settlement industry leaders including Patrick Hindert, Managing Director of S2KM Limited.

This S2KM blog post features Jeremy Babener's research interview with Patrick Hindert - with emphasis (bold type) added subsequently by Patrick Hindert for this publication.

Prior S2KM blog posts about Babener's QSF paper:

• Single Claimant 468B QSF Update
• Jeremy Babener's QSF Paper
• S2KM Reviews Jeremy Babener's QSF Paper - 1

Secondary market

• Babener: How frequently do structured settlement consultants discuss the secondary market with injury victims?
• Hindert:
  
  • While some settlement planners may discuss the secondary market with their clients, most primary market structured settlement advisers do not.
  • Most structured settlement annuity providers and their agents are not qualified to advise anyone about "structured settlement transfers" (aka "factoring").

Anti-assignment clauses

• Babener: Do courts enforce anti-assignment clauses in structured settlement documents?
• Hindert:
  
  • Structured settlement anti-assignment clauses are generally enforceable but not self-executing.
  • A party to the related documents (eg. annuity provider) must act to enforce the clause.
  • Since IRC 5891 was enacted, relatively few annuity providers attempt to enforce structured settlement anti-assignment clauses except in unusual circumstances.

Annuity commissions

• Babener: What is the typical commission for structured settlement annuities?
• Hindert:
  
  • The "standard" structured settlement annuity commission is four (4%) percent of premium which is paid by the product provider to its agents (aka "consultants" or "brokers") .
  • Frequently, multiple agents share the four percent commission.
  • Such "commission sharing" creates conflicts of interests which are rarely disclosed to the structured settlement recipient or his/her attorneys.

Taxing structured settlement recipients

• Babener: Many structured settlement consultants believe the majority of structured settlement recipients pay taxes - or would otherwise pay taxes but for the structured settlement tax subsidy.
• Hindert: Where is the objective proof? Many structured settlement industry "beliefs" don't square with the facts or the law. Your dissipation and QSF papers help to prove this thesis.

Do defendants save money using structured settlements?

• Babener: Have defendants and their liability insurers historically saved money using structured settlements by negotiating based on nominal rather than present values?
• Hindert:
  • Many structured settlement agents and intermediaries proclaim defendants save money using structured settlements.
  • Where is the independent, objective proof?
  • If true, what are the reasons:
    
    • Misrepresentation?
    • Failure to disclose?
    • Unauthorized practice of law?
  • Most structured settlements are negotiated using lump sums which are subsequently transitioned into structured settlements.
  • Why would any informed plaintiff attorney ever knowingly accept a lower fee from his client for a structured settlement settlement costing defendants less than an alternative cash settlement?
  • Under current CMS rules for workers compensation Medicare set-aside agreements (WCMSA), annuities are valued more cost advantageously for defendants than lump sums because of the CMS required "set-off" method for calculating present value.
  • This CMS valuation method also means that annuities underfund WCMSAs because the annuities do not include any inflation provisions.

Defendant savings - 2

• Babener: How frequently would you estimate that defendants save money using structured settlements?
• Hindert:
  • If and when defendants save money today using structured settlements, the primary reasons are misrepresentations, failure to disclose, unauthorized practice of law and/or undue sales pressure to fund using affiliated companies and agents.
  • Plaintiff attorneys should be, and probably will become, more aggressive in discovery to elicit information from defendants about structured settlement compensation, conflicts of interest, and company policies as well as more accurate cost and present value calculations.
  • When calculating any cost savings from structured settlements, defendants should anticipate and factor in costs from potential lawsuits for bad business behavior resulting from their current structured settlement programs.

Defendant savings -3

• Babener: What is your estimate of the amount of money defendants save using structured settlements?
• Hindert:
  • I have never seen an independent study demonstrating or explaining whether, or more importantly why, defendants save money using structured settlements.
  • Any cost savings result primarily from:
    
    • Misrepresentations;
    • Failure to disclose; or
    • Negotiation pressure to direct annuity sales to affiliated companies.
  • One of the results of high pressure structured settlement sales in a claim management context is to increase the likelihood the recipient will subsequently attempt to sell their payment rights.
  • If you ignore profits from product sales and assume full disclosure of compensation and costs with no misrepresentations and no unauthorized practice of law (agents providing legal services to save defendants legal costs), how do defendants save money using structured settlements?

Approved lists

• Babener: Have defendants and their liability insurers historically saved money on structured settlement costs by insisting on purchasing annuities from affiliates and particular life insurance companies?
• Hindert:
  • For the best evidence of defendant savings from affiliated programs, and the best explanation for such savings, review the allegations of misrepresentation and non-disclosure in the Spencer v. Hartford case.
  • When calculating "defense savings", it is important to differentiate:
    • claim savings - if any;
    • profits from structured settlement annuity sales; and
    • future liabilities resulting from structured settlement annuity sales.

Qualified Settlement Funds

• Babener: Assuming there are no defendant savings, do you think that structuring a settlement with a QSF is superior to structuring directly with a defendant?
• Hindert:
  • Yes, I believe structuring a settlement with a QSF is inherently superior to structuring with a defendant in a claim management model.
  • The objectives, processes and knowledge resources are completely different in these two settings.
  • Both the plaintiff and defendant receive judicial protection and a trustee/administrator whose role is to develop settlement solutions for all QSF beneficiaries.
  • QSFs permit and require allocation among claimant beneficiaries and lien holders - including Medicare and Medicaid.
  • Claimants and their advisers can objectively consider needs, resources and best interests.
  • The primary (only) negative of QSFs for plaintiffs is the cost.
  • Key questions about QSFs are the costs - and how to substantial decrease those costs as well as the time necessary for QSF disbursements and termination.

NAMSAP 2008 Annual Meeting

The National Alliance of Medicare Set-Aside Professionals (NAMSAP) hosted its 2008 Annual Meeting October 2 in Washington, D.C. One hundred and thirty-six members attended including attorneys, insurers, life care planners, MSA administrators and structured settlement professionals.

Founded in 2005, NAMSAP is a non-profit organization devoted to improving Medicare set-aside arrangements (MSAs) and to facilitating compliance with Medicare conditional payment recovery. NAMSAP has over 600 members who are responsible for the vast majority of MSA submissions to the Center for Medicare and Medicaid Services (CMS). CMS is the Federal agency within the U.S. Department of Health and Human Services responsible for enforcing the Medicare Secondary Payer (MSP) rules.

Historical Summary

Although the MSP rules were enacted by Congress in 1980, CMS did not begin to enforce the MSP statute until 2001. Beginning July 2001, CMS has enforced the MSP statute by recommending MSAs for certain categories of workers compensation (WC) commutation settlements. Since 2001, CMS has issued a series of policy memoranda for WCMSAs, several of which address structured settlement issues. These CMS WCMSA policy memos are available for download on this CMS website.

On December 29, 2007, President George W. Bush signed into law the "Medicare, Medicaid and SCHIP Extension Act of 2007" (MMSEA). Beginning July 1, 2009, Section 111 of MMSEA requires liability insurers (including self-insurers, no-fault insurers and workers compensation insurers) to:

• Determine Medicare status for all claimants; and
• Report all claims involving a Medicare beneficiary to CMS when those claims are resolved.

If the reporting for any claimant is not done in a timely manner, MMSEA authorizes CMS to enforce a civil penalty of $1000 per day per claimant. These information requirements and penalty provisions provide the basis for expanded enforcement by CMS of the MSP statute.

CMS stated recently that it currently receives, on average, 1550 WCMSA submissions per month - and this number appears to be increasing. According to NAMSAP leaders, the vast majority of WCMSAs are self-administered and a high percentage of WCMSAs are funded with structured settlement annuities. Because of the "set-off" method CMS requires for determining present value, structured settlement annuities currently have a cost advantage over lump sum alternatives.

CMS also accepts rated ages from annuity providers to determine the funding period for WCMSAs unless state law specifically limits the length of time that workers compensation (WC) covers work-related conditions. CMS most recently addressed age rated annuity rules in its August 20, 2008 policy memorandum. The August 20, 2008 CMS policy memo states in part:

"Unless a submitter furnishes acceptable proof of a Rated Age for a claimant, CMS will estimate the claimant's remaining life expectancy using Actual Age. Acceptable proof of Rated Ages includes independent rated ages on the letterhead of an insurance carrier or settlement broker and a statement from the submitter that all rated ages obtained on the claimant have been included."

NAMSAP Meeting Highlights

NAMSAP Accomplishments - NAMSAP President Rob Lewis summarized NAMSAP's 2008 accomplishments:

• Increasing membership
• Increasing revenues
• Funded participation on the MARC coalition steering committee
• NAMSAP position paper for CMS
• Active listserve and committees
• NAMSAP ethics statement
• MSA educational resources including:
  • Annual meeting
  • Webinar series
  • Updated certification program
  • National training program for structured settlement consultants

Medicare Action Recovery Coalition (MARC) - Roy Franco, Director of Safeway's Risk Management Strategies and Acting Chairman of MARC spoke about "Medicare and Liability Claims - Turmoil in the Trenches".

• In discussing the MMSEA requirements for liability cases, Franco said "the issue is not just about reporting". He asked "what will the government do with the data" and predicted a "claim freeze" as liability insurers and self-insureds wait for resolution and approval before they pay claims.
• Franco characterized the MMSEA MSP rules as an attack on traditional best practices for liability claim management. He predicted legal challenges and criticized MMSEA rules for:
  • Required consent;
  • Immediate reporting;
  • No safe harbor for liability insurers;
  • Lack of time limits, due process, or reimbursement mechanism;
  • Disregard for state tort laws;
  • Disenfranchisement of senior citizens;
  • Legal impossibility to report all settlements and awards
• Franco outlined MARC's Action Plan priorities for MMSEA including:
  • Change the law - or, alternatively, obtain an injunction to stop its July 1, 2009 implementation;
  • Raise public and legislative awareness;
  • An October 8, 2008 Steering Committee meeting;
  • Increased MARC membership.

H.R. 2549 and WCMSA Reform - Douglas Holmes, President of UWC, spoke about WCMSA reform focusing on pending U.S. House of Representatives bill H.R. 2549.

• Holmes summarized H.R. 2549's goals including:
  • No CMS review where the MSA cost is less than the MSA benefit;
  • Streamline CMS approval process;
  • Establish an MSA appeal process;
  • Consistent and efficient MSA procedures;
  • State WC laws define the primary obligation;
  • Medicare shares the cost of protecting its own interests;
  • Creating clear legal authority for MSAs.
• Holmes stated CMS is not cooperating with Congress. He cited CMS' failures to respond to:
  • Congressional requests for data to determine whether H.R. 2549 is revenue neutral;
  • Supplemental Congressional letters and requests for meetings.

Ethics and Multi-Disciplinary Approach - A panel discussion of NAMSAP members addressed ethical issues that arise when attorneys, nurses and structured settlement consultants collaborate on MSA cases. Participants included: Aaron Frederickson; Robert Brown; Karen Cofield; and Christine Phillips. Although this discussion was important and valuable, the topic deserves and requires more time and would benefit from a comparative analysis of existing standards of professional conduct as well as hypothetical case studies.

NAMSAP Committee Reports - NAMSAP currently has four committees whose chairpersons provided summary reports:

• Membership - Ann Major
• Government Affairs - Henry Kohnlein
• Education - Leslie Schumacher
• Ethics and Standards - Tom Spratt

Additional Presentations - The following presentations completed the NAMSAP educational program:

• Pharmacy Trends - Robert Esgro
• Coding - Jason Beans
• CAT Claims - Jon Gice
• Mandatory Insurer Reporting - Mark Popolizio and John Williams

Congratulations to NAMSAP, especially President Rob Lewis and Education Chairperson Leslie Schumacher, for a valuable and well-organized educational program. Lewis closed the meeting by announcing the election of Robert Brown and David Korch as new NAMSAP Directors.

For additional information about:

• MSP Rules and MSAs - see this S2KM blog post;
• NAMSAP - see this S2KM blog post.

Release 44 of "Structured Settlements and Periodic Payment Judgments" (S2P2J) will include an update on Medicare set-aside arrangements.

Structured Settlements in 2007

Happy holidays from S2KM Limited. Thank you for reading S2KM's blog during 2007. This final 2007 S2KM blog post highlights some of this year's important structured settlement developments and issues.  For additional background information, see:

• S2KM Mid-2007 Structured Settlement Report
• Structured Settlements in 2006

Industry Growth and Development

• Industry insiders are predicting final 2007 structured settlement annuity sales (qualified and non-qualified) will match or slightly exceed total 2006 production of $6.1 billion.
• Membership growth in 2007 for the National Structured Settlement Trade Association (NSSTA) and the Society of Settlement Planners (SSP), the primary structured settlement trade associations, also appears flat. Neither of these associations has articulated a strategy for growing the structured settlement industry.
• NSSTA replaced long-time Executive Director Randy Dyer in 2007 with association management company Smith Bucklin. NSSTA has announced it will continue a business relationship with Dyer. However, NSSTA has not yet announced Dyer's new role or responsibilities.
• Annuity provider Mass Mutual exited the structured settlement industry in 2007 joining other recent industry departures such as Genworth, Travelers and Aegon. No new annuity providers entered the structured settlement market in 2007.
• The secondary life and annuity markets continued to be controversial within the structured settlement industry in 2007. Semetra resigned from NSSTA in 2007 based in part on their disagreement with NSSTA's Bylaw Amendments related to structured settlement factoring. Neither NSSTA nor SSP allows factoring companies to join their associations.
• Although the secondary structured settlement market continues to grow in 2007, the overall pace of its growth appears to have leveled off for many, but not all, participants.
• Preliminary strategic recognition and some consolidation continued during 2007 within these overlapping markets:
  
  • Structured settlements;
  • Personal injury settlement planning;
  • Litigation funding;
  • Special needs planning;
  • Secondary insurance and annuity markets.

Legislation and Regulations    

• New York Governor Eliot Spitzer announced a $750 million "agreement in principle" for Executive Life of New York in 2007. The agreement is designed to continue paying all ELNY annuitants 100% of their benefits. The announcement represents a public relations victory for the structured settlement industry. Many questions about the agreement, however, remain unanswered. For example: the amount of contributions from indemnity (casualty) insurers who own or have assigned structured settlement annuities.
• State Medicaid Agencies are continuing to adopt annuity provisions from the Deficit Reduction Act into their state Medicaid Plans. Interpretations and applications of these new annuity rules remain inconsistent creating process bottlenecks and denials. The impact of the secondary annuity markets on Medicaid qualification remains unclear in 2007. The Social Security Administration (SSA) announced in 2007 that it will draft POMS for annuities in 2008. For additional information about the Deficit Reduction Act, see:
  • Release 41 of "Structured Settlements and Periodic Payment Judgments";
  • Inconvenient Questions; and
  • NAELA Annuity Policy White Paper.
• 48 states have enacted structured settlement protection statutes. Overall, these statutes appear to be accomplishing their purposes and functioning with increasing certainty and efficiency. Pennsylvania's judiciary adopted Pennsyvania Rule 229.2 in 2007 tightening some rules and processes within that state's protection statute.
• The U.S. Treasury has not ruled on single claimant 468B funds in 2007.

Case Law - some of the significant 2007 cases:    

• DOJ Sovereign Immunity Defense - see "Drinker Biddle's Structured Settlement Update" for analysis of two DOJ sovereign immunity cases: Transamerica v. Settlement Capital and Continental Casualty v. United States.
• Primary Market Disclosure Case - "Pullman & Comley's Structured Settlement Insights" provided the first Internet analysis of Joseph v. The City of New York which Pullman & Comley characterizes as ""the first court opinion to analyze the requirements in structured settlement protection acts that disclosures be made when negotiating a structured settlement."
• Rapid Settlements cases challenging secondary market laws and business practices including:
  
  • Rapid v. Symetra; and
  • CNA v. Rapid Settlements

• Murphy v. IRS - Eleven months after ruling that taxing damage awards for nonphysical compensatory damages violated the United States Constitution, the United States Court of Appeals for the District of Columbia Circuit has reversed itself in Murphy v. IRS by holding that the United States can tax awards for emotional distress and injury to reputation.
• Macomber v. Travelers - the parties agreed to a confidential settlement in 2007.  It is unclear what legal precedents, if any, the earlier Connecticut State Supreme Court rulings in this case will hold for current or future structured settlement litigation.
  

Educational Programs and Resources

• Both NSSTA and SSP offered certification programs in 2007.    
• S2KM attended educational programs for the following trade associations in 2007 and wrote blog posts (see links) evaluating their structured settlement educational programs:          
  
  • National Structured Settlement Trade Association (NSSTA).          
  • Society of Settlement Planners (SSP)          
  • American Association for Justice (AAJ)          
  • National Academy of Elder Law Attorneys (NAELA)          
  • Academy of Special Needs Planners (ASNP)          
  • National Association of Settlement Purchasers (NASP)    
• The structured settlement industry continued to offer various additional educational resources in 2007:          
  
  • Blogs, podcasts, wikis and concept maps;          
    
  • Digital and hardcopy newsletters;          
    
  • Hardcopy legal textbooks.

Business Standards and Practices

• 2007 developments
  
  • Broker Relations Initiative - status report provided in this S2KM blog post.
  • SSP Ethics Project - status report provided in this S2KM blog post.
• 2007 issues:
  
  • Structured settlement public policy
  • Claim management vs. settlement planning
  • Consumer and investor protection including:
    
    • Compensation disclosure;
    • Informed consent;
    • Single claimant 468B funds;
    • Unfair claim practice legislation;
    • Fiduciary responsibilities for professional advisors.

• Additional compensation issues:
  • Rebating
  • Affinity programs
  • Secondary market transactions
• Unauthorized practice of law.

Unauthorized Practice of Law - 1

Mark Wahlstrom has written a blog post titled "Structured settlement brokers drafting settlement documents. Are you guys nuts?" that highlights an important and controversial industry issue.

Mark's question: does a routine structured settlement business practice (life insurance agents drafting personal injury settlement documents) represent the unauthorized practice of law?

Mark, a life insurance agent and structured settlement commentator, answers yes: 

• Current structured settlement business practices promote the unauthorized practice of law including non-lawyers drafting structured settlement legal documents. 

• Some structured settlement intermediaries (aka "brokers" or "agents") regularly provide such legal services without appropriate licenses or qualifications for:
  • Plaintiff attorneys;
  • Liability insurers;
  • Defense attorneys.

Mark's blog post:

• Describes how some liability insurer claim managers pressure structured settlement brokers to provide unauthorized legal services;
• Does not address this corollary question: do these same structured settlement legal practices also represent malpractice by plaintiff and defense attorneys?

For additional information about structured settlements and the unauthorized practice of law, see:

• Related S2KM blog posts:
  • NSSTA - NSSTA's 2007 Fall Meeting featured an educational program for NSSTA members about structured settlement documentation (subtitled: "an analysis of the legal and practical issues and problems") without any discussion concerning the unauthorized practice of law by life insurance agents and their employees.
  • AAJ - This author believes the American Association for Justice (plaintiff attorneys) has been negligent for not providing its members with updated education about:
    • Structured settlement laws and legal issues;
    • Related professional responsibilities and potential liabilities.
• ASNP - This author also believes structured settlement recipients will benefit if and when special needs attorneys expand their professional knowledge to address structured settlement legal issues including the proper drafting of personal injury settlement documents.
• Related S2KM wikis:
  • Structured Settlement Law - part of S2KM's coverage of the Academy of Special Needs Planners (ASNP) 2007 Annual Meeting;
  • Structured Settlement Resources - part of S2KM's 2007 presentation to the National Association of Settlement Purchasers (NASP).
• Related hardcopy resources - "Structured Settlements and Periodic Payment Judgments" including separate chapters for plaintiff and defense attorneys as well as updated information about structured settlements and:
  • The secondary annuity market - including IRC section 5891 and the state structured settlement protection statutes;
  • Government benefits and structured settlements - including the Medicare Secondary Payor statute; special needs trusts; and the Deficit Reduction Act of 2005.
• John Darer's defense and explanation of traditional structured settlement business practices related to the unauthorized practice of law titled: "Nuts, Protein, Cholesterol, Fiber and your Settlement Documents." 

Postscript - October 30, 2007

This post was originally published Sunday evening October 28, 2007.  Additional edits were added Monday morning October 29, 2007. The original post appeared unedited for approximately eight hours Sunday night. S2KM's edits included changing S2KM’s interpretation of John Darer’s October 27, 2007 blog post titled “Nuts..Protein, Cholesterol, Fiber and Your Settlement Documents”.  S2KM’s original post characterized John’s post as promoting and condoning current structured settlement business practices.   S2KM’s edited post (above) substitutes the words “defense and explanation”.  Both the original and final versions include links to John Darer’s blog post and recommend that readers of S2KM's blog review Mark Wahlstrom's original post as well as John Darer's post.