Beyond Structured Settlements

Structured Settlement 2009 Strategic Analysis

S2KM has begun a mid-year 2009 strategic analysis of the structured settlement industry. This analysis includes attending and reporting about 2009 structured settlement professional stakeholder meetings plus continuing conversations with structured settlement industry leaders.

To organize and publish S2KM's findings and analysis, S2KM is developing, and plans to publish and update, a related public wiki titled "Structured Settlements 2009". Here is a preview of this S2KM public wiki home page.

Purposes of S2KM's Structured Settlements 2009 wiki

• Provide S2KM with a dedicated online resource to identify, capture, organize and publish 2009 structured settlement strategic analysis.
• Demonstrate how blogs and wikis can interact to improve strategic analysis and learning.
• Encourage structured settlement knowledge leaders and professional associations to endorse, encourage and participate in strategic industry analysis.
• Help all structured settlement stakeholders to better understand, improve and grow structured settlements.

Table of Contents - includes references to related 2009 conference presentations; subject to continuing wiki updates:

• S2KM primary analytic resources - S2KM blog reporting for:
  • 2009 structured settlement stakeholder meetings - the Table of Contents incorporates and features educational discussions from the following conferences:
    
    • NSSTA 2009 Winter Meeting
    • ASNP 2009 Annual Meeting
    • SSP 2009 Annual Meeting
    • NSSTA 2009 Annual Meeting
  • Structured settlement professional stakeholder association prior year meetings
  • Related topics and knowledge leaders:
    
    • Settlement consulting;
    • Tim Nay Interview.
• S2KM's transitional perspective - structured settlements are undergoing two primary transitions:
  • From claim management to settlement consulting:
    • NSSTA: Settlement Consulting - Joseph DiGangi
    • SSP: Settlement Planning Industry Update - Patrick Hindert.
    • SSP - State of the Art Settlement Planning - Joseph Tombs
    • NSSTA: Looking Forward - Chris Diamantis and Dan Durbin.
  • From historic communication, learning and work processing to Internet-based models:
    • NSSTA:Web 2.0 - Patrick Hindert.
• Public policy - no 2009 stakeholder association discussions.
• Legislation and regulations
  • Existing
    • Federal
      • SSP: Tax Panel - Richard Risk; Sylvius von Saucken; Peter Wayne.
    • State
      • SSP: Judicial Approval of Minors Settlements - Phillip McCrury.
      • NSSTA: Exemptions for Structured Settlement Payments - Craig Ulman.
  • Proposed - no 2009 stakeholder association discussions.
    • Federal
    • State
  • Political strategy
    • NSSTA: Federal Entitlement Programs - Andrew Imparato.
    • NSSTA: Washington Reports - Eric Vaughn.
    • SSP: AAJ Strategy - John Bowman.
    • NSSTA: Federal and State Issues - Len Blonder.
    • NSSTA political speakers:
      • Senator Richard Durbin (D) from Illinois;
      • Senator Charles Grassley (R) from Iowa;
      • Congressman Charles Rangle (D) from New York;
      • Congressman Kendrick Meek (D) from Florida;
      • Congressman James Langevin (D) from Rhode Island;
      • Congressman Joseph Crowley (D) from New York;
      • Congressman Dave Camp (R) from Michigan;
      • Congressman Brian Higgins (D) from New York;
      • Congresswoman Allyson Schwartz (D) from Pennsylvania;
      • Congressman Joseph Courtney (D) from Connecticut;
      • Plus the Chiefs of Staff for four congressmen.
• Case law
  • SSP: Litigation and Legislative Update - Anthony Alfieri.
  • NSSTA: Spencer v. Hartford - Michael Miller.
  • NSSTA: Fresno County Factoring Cases - Illana Hanau.
• Primary and secondary markets
  • NSSTA: Secondary Market Update - Michael Miller and Illana Hanau.
• Government benefits
  • NSSTA: Federal Entitlement Programs - Andrew Imparato.
  • ASNP: Medicare Secondary Payer Compliance - Mark Popolizio.
  • ASNP:Lien Resolution Strategies - William Browning; Mark Popolizio; Sylvius von Saucken.
  • SSP: MMSEA Section 111 - Mark Popolizio.
  • NSSTA: Medicare Panel - Roy Franco; Mark Popolizio; David Korch; Rafael Gonzoles.
  • NSSTA: Medicaid Panel - John McCulloch; Timothy O'Driscoll; Dennis McAndrews
• Structured settlement economics
  • ASNP: Structured Settlement Annuities - Jack Meligan and Michele Whitmore.
  • SSP: Life Insurance Insolvencies - Eric Nordman.
  • NSSTA: Financial Strength Ratings - William Pargeans.
• Structured settlement funding products
  • NSSTA: 468B QSFs - Henry Strong, William Winslow, James Klapps.
  • ASNP: Structured Settlement Annuities - Jack Meligan and Michele Whitmore.
  • ASNP: 468B QSFs - Richard Risk and Jason Lazurus.
  • SSP: Settlement Trusts - Christi Fried.
  • SSP: Settlement Trust Software - David Eichenbaum.
• Transactional analysis
  • ASNP: Anatomy of a SNSP Case - Frank Johns, Kevin Urbatsch, Patrick Hindert.
• Stakeholder associations
  • NSSTA (2), SSP and ASNP 2009 meetings.
• Ethics
  • NSSTA: Business Ethics - Father Oliver Williams.
  • NSSTA: Business Ethics - Mike Jones.
• Standards
  • SSP: Registered Settlement Planner - Joseph Tombs.
• Business models
  • Claim management
    • NSSTA: Plaintiff and Defense Brokers - Ronald Sullivan, James Early, Roger Bernstein, Bruce DeBacher, Michael Goodman.
    • SSP:Structured Settlement Insolvencies - Randy Dyer.
    • SSP: Growing Structured Settlements - Randy Dyer.
    • SSP: In-House Structured Settlement Programs - Kevin Mack.
    • NSSTA: Minnesota Bridge Collapse - Jerry Lothrop.
  • Settlement consulting
    • NSSTA: Settlement Consulting - Joseph DiGangi.
    • ASNP: Integrating SNSP with an Elder law Practice - Tim Nay and Sandy Conley.
    • ASNP: Marketing to the Trial Bar - Frank Johns, Jason Lazurus, Kevin Urbatsch.
    • SSP: State of the Art Settlement Planning - Joseph Tombs.

ASNP 2009 Annual Meeting

The Academy of Special Needs Planners (ASNP) hosted its Third Annual Meeting March 6-7, 2009 at the Rancho Bernardo Inn in San Diego, California. Titled "Special Needs Planning in an Era of Change", the program devoted one day of educational discussions to "special needs settlement planning" (SNSP) which ASNP characterized as a "new opportunity" for special needs attorneys.

The ASNP speakers included leading special needs attorneys and plaintiff structured settlement consultants who provided detailed analyses of the following SNSP topics:

• Anatomy of a SNSP Case - Frank Johns, Kevin Urbatsch and Patrick Hindert;
• Structured Settlement Annuities in SNSP Practice - Jack Meligan and Michele Whitmore;
• IRC 468B Qualified Settlement Funds (QSFs) - Jason Lazarus and Richard Risk;
• Integrating SNSP with an Elder Law Practice - Tim Nay and Sandy Conley;
• Medicare Secondary Payer Compliance - Mark Popolizio;
• Lien Resolution Strategies - William Browning, Mark Popolizio and Sylvius von Saucken;
• Marketing to the Trial Bar - Frank Johns, Jason Lazarus, and Kevin Urbatsch.

The SNSP program highlighted three basic issues:

• What is SNSP?
  
• What changes are impacting SNSP?
• What new opportunities does SNSP create for special needs attorneys?

What is SNSP?

Surprisingly, none of the speakers attempted to specifically define SNSP. Hindert recommended web 2.0 knowledge maps, wikis and folksonomies as a strategy for defining and growing SNSP.

Meligan and Whitmore described the related topic of "settlement planning" as both a profession and a process. According to Meligan and Whitmore: "Settlement planning is a profession that helps recipients of settlement proceeds use their proceeds to achieve their post-loss goals and transition successfully into their post-settlement financial lives". Meligan and Whitmore recommended utilizing settlement planning professionals with: credentials; loyalty to plaintiffs; planning approach; and experience. Meligan and Whitmore also described "settlement planning" as part of a three-part process preceded by litigation and followed by financial planning.

von Saucken also described "settlement planning" as a process or "continuum" subject to changing rules that require adjustments in settlement planning prototypes. von Saucken presented a settlement planning timeline:

• Agreement on settlement amount;
• Lien reimbursement;
• Medicare/Medicaid preservation trust;
• Structured settlement paperwork;
• Disbursement.

By comparison, during his recent presentation at the NSSTA 2009 Winter Meeting, Joseph DiGangi defined "settlement consulting" as a four-stage process:

• Analysis
• Planning
• Implementation
• Monitoring

Most of the ASNP presenters identified and addressed "structured settlements" as an essential component of SNSP. As part of his 468B QSF comments, Risk reviewed several structured settlement definitions including the tax definition in IRC section 5891(c)(1). To S2KM's knowledge, Risk thereby becomes the first structured settlement primary market participant to review the IRC section 5891 tax definition for "structured settlement" during a national conference. By comparison, not a single NSSTA or SSP conference speaker has reviewed the IRC Section 5891 definition for "structured settlement" since IRC 5891 was enacted in 2001. Risk also becomes, to S2KM's knowledge, the first conference speaker to link IRC 468B and 5891 which S2KM views as a strategic SNSP construct.

Several ASNP speakers addressed various types of settlement trusts in the context of SNSP. Browning highlighted settlement trust "due diligence" as an increasingly important SNSP issue. Three settlement trust providers, but not one structured settlement annuity provider, exhibited at the SNSP conference.

What changes are impacting SNSP?

ASNP speakers identified and highlighted the following changes impacting SNSP:

• Deficit Reduction Act of 2005 (DRA);
• The Ahlborn Case;
• 468B qualified settlement funds (QSFs);
• Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA);
• Recent MSA rules promulgated by CMS;
• The structured settlement secondary market;
• State structured settlement protection statutes;
• Transition of knowledge and knowledge work to the Internet.

Additional changes referenced by ASNP speakers which deserve more detailed analysis in future SNSP discussions:

• Transitional SNSP business models:
  • How the claim management SNSP model differs from the 468B QSF SNSP model; and
  • How to develop multi-professional SNSP teams and knowledge networks.
• How the current financial crisis impacts SNSP;
• Proposed and/or needed SNSP legislative and regulatory changes.

What new opportunities does SNSP create for special needs attorneys?

Traditional special needs legal practice and education have focused on special needs trusts, estate planning, government benefits and probate. As the ASNP conference demonstrated, SNSP encompasses traditional special needs expertise, but also new fields of related legal practice.

Four leading SNSP legal treatises (listed alphabetically by title) define these new fields of SNSP legal practice:

• "Negotiating and Settling Tort Cases" - by Matt Garretson and Guy O. Kornblum;
• "Qualified Settlement Funds and Section 468B" - by Robert W. Wood;
• "Structured Settlements and Periodic Payment Judgments" - by Daniel W. Hindert, Joseph J. Dehner and Patrick J. Hindert;
• "Taxation of Damage Awards and Settlement Payments" - by Robert W. Wood.

The ASNP presentation by speakers Johns, Lazarus and Urbatsch titled "Marketing to the Trial Bar" offered valuable advice for special needs attorneys as well as other SNSP stakeholders. S2KM's structured settlement transaction diagram, developed in 2005 with graphic artist Keith Burtoft, may help special needs attorneys identify other potential SNSP clients and roles. In addition, as S2KM's blog post "Structured Settlement Surveys" demonstrates, further market research would be useful to define and grow the SNSP market.

Congratulations to ASAP and SNSP program Chairperson Tim Nay for the timely and educational SNSP program. Prior S2KM blog posts about ASNP:

• 2008 ASNP Conference;
• 2007 ASNP Conference.

For additional information about settlement consulting, see S2KM's four-part blog series "Settlement Consulting".

Settlement Trusts Revisited

Introduction

S2KM previously published blog posts in 2004 about:

• Settlement trusts
• Selecting a settlement trustee

The Spring 2008 issue of "The Brief", a publication of the Tort, Trial and Litigation section of the American Bar Association (ABA), features an article written by Henry L. Strong and David M. Cordell, titled "Fiduciary Focus - The Prudent Integration of Structured Settlements and Post-Settlement Trusts".

Strong, the immediate past-president of the National Structured Settlement Trade Association (NSSTA), and Cordell, Director of Finance Programs at the University of Texas in Dallas, would appear to be well-qualified to analyze the relationship of annuities and trusts in personal injury settlement planning.

Summary of Article

The authors identify the following objectives for their article:

• Outline key distinctions between "structured settlements" and "post-settlement trusts";
• Articulate how these differences affect returns on a risk-adjusted basis;
• Demonstrate how a thoughtful integration can deliver "vastly superior results" compared with results of either alternative alone;
• Clear up the confusion over how to allocate settlement proceeds thereby assisting attorneys, judges and injured claimants;
• Offer practice tips to avoid problems.

Their article sets forth many premises and assertions including:

• Because attorneys and judges are not trained in "modern finance", they risk liability for failing to:
  • Meet "prudent standards" of care, skill and caution; or
  • Determine the risk and return of a settlement plan.
• Although "settlement fiduciaries" may analyze proposed settlements from a legal perspective, they rarely pay attention to "economic sufficiency" - which the authors define as "the prudent process by which recovery assets are actually conveyed to the injured party and then invested and managed over time".
• The core dynamic in the structured settlement vs. post-settlement trust debate parallels modern portfolio theory;
• Beyond risk and return, the most important investment decision-making considerations "by far" for personal injury settlements are diversification, taxation, fees and liquidity. According to Strong and Cordell, "all other considerations pale in comparison".

Following a one paragraph summary of "modern portfolio theory", Strong and Cordell propose a definition for "modern settlement theory": "the discovery that blending dissimilar distribution methods not only reduces risk but also increases returns for injured claimants".

The authors compare the relative merits of structured settlement annuities and post-settlement trusts in the context of the following "allocation strategy considerations":

• Taxability
• Conditionality of payments
• Liquidity
• Trust/custodial fees
• Investment options
• Longevity risk hedge
• Medical underwriting

The authors conclude their article by addressing:

• Liability exposure
• Destructive receipt
• Informed consent
• Involvement of qualified experts.

Analysis of Article

The interaction of structured settlement annuities and settlement trusts represents an important, timely and complex subject. Instead of offering settlement solutions, the structured settlement industry historically has sold a single product (annuities) and viewed settlement trusts and trustees as competitors. From that perspective, the article by Strong and Cordell is a positive step forward. Their proposed "modern settlement theory" should serve as a catalyst for additional industry analysis and discussion.

Unfortunately, the article by Strong and Cordell contains serious omissions and flaws which call into question some of their assertions and conclusions. Here are some of the problems with their article:

• Definitions - The authors fail to define some of the most basic and important terms they are discussing. Examples:
  • "Post-settlement trusts" - What are "post-settlement trusts"? What types of settlement trusts are the authors discussing (and not discussing) in their article?  They never say.  Are they including or excluding settlement trusts which are established concurrently with (not following) a personal injury settlement? Most settlement trusts are part of the settlement. These include:
    • Settlement preservation trusts
      
    • Blended trusts
    • Medical reversionary trusts
    • IRC section 468B trusts
    • Special needs trusts
    • Medicare set-aside trusts
    • IRC section 130 government obligation trusts
  • "Settlement fiduciary" - Who exactly is a "settlement fiduciary"? The authors never define this term.  They assert ,without offering authority, that judges and plaintiff attorneys owe a financial fiduciary responsibility to injured claimants. Compared with recent discussions and papers by attorneys Frank Johns and William Browning at the 2008 ASNP Annual Meeting , Strong and Cordell's discussion of fiduciary responsibilities, the Uniform Prudent Investor Act and ethical considerations under the ABA's Model Rules of Professional Conduct is incomplete. Strong and Cordell never specifically address the fiduciary responsibilities of settlement trustees, their attorneys, settlement planners or structured settlement consultants. They fail to reference either NAELA's Aspirational Standards or the SSP's Standards of Professional Conduct.
  • "Structured settlement" - Strong and Cordell never define "structured settlement". They fail to adequately explain or compare annuities and U.S. government obligations as alternative Qualified Funding Assets under IRC section 130. By ignoring the IRC section 5891(c)(1) definition of structured settlement, Strong and Cordell help to perpetuate an outdated industry perspective about structured settlement and settlement planning. Consistent with this outdated perspective, Strong and Cordell state: "structured settlements are not liquid because the recipient cannot exercise control over the funding assets". A related footnote references "certain finance companies" that "have begun" to offer "cash now" in exchange for a claimant's rights to receive future payments. Structured settlement transfers began in 1987 (21 years ago) and were legally sanctioned by IRC 5891 in 2002 (6 years ago). 46 states have enacted structured settlement protection statutes. Strong and Cordell fail to address how the secondary market impacts structured settlement liquidity and/or the interaction of structured settlement annuities, settlement trusts and settlement planning.
• Government benefits - With the exception of two minor references (one a footnote), Strong and Cordell ignore the impact of government benefits in settlement planning "distribution decisions". They never explain this omission. The importance of government benefit rules as "investment decision-making considerations" contradicts several of Strong and Cordell's assertions. These assertions include their priority of diversification, taxation, fees and liquidity as "by far" the most important considerations. To the contrary, government benefit issues frequently represent the single most important consideration in personal injury distribution decisions.  As David Lillesand highlighted at the 2008 Annual Meetings of both the Society of Settlement Planners and the Academy of Special Needs Planners, qualification for Medicaid is a "life or death" issue for many personal injury victims. Analysis of structured settlement annuities and settlement trusts should consider their interaction with Medicaid, Medicare, Veterans benefits, Section 8 Housing rules, special needs trusts, Medicare set-aside trusts, the Deficit Reduction Act of 2005 and the Medicare, Medicaid and SCHIP Extension Act of 2007.  So why do Strong and Cordell ignore government benefits? Perhaps, incorrectly, they consider government benefits to be merely a legal consideration and not an investment consideration. Alternatively, they may actually believe NSSTA's historic and continuing message to Congress: "structured settlements enable injured victims to live ...free of reliance on government assistance".
• Settlement planning and special needs planning - The authors never reference or acknowledge settlement planning or special needs planning as existing and growing professional specialties. Both of these overlapping professions address the legal and financial interaction of annuities and trusts in personal injury settlements. The following professional associations and conferences feature experts and offer educational programs about issues that are fundamental to Strong and Cordell's ABA article and analysis:
  • The Society of Settlement Planners
  • National Academy of Elder Law Attorneys
  • Academy of Special Needs Planners
  • Special Needs Alliance
  • National Alliance of Medicare Set-aside Professional
  • Stetson Law School Special Needs Trust Seminars
  • National Alliance of Medicare-Set Aside Professionals

Conclusions: Strong and Cordell's ABA article highlights:

• An important topic that requires more and better analysis - the interaction of annuities (including the secondary market) and trusts in personal injury settlement planning;
• The knowledge gaps that currently exist between the structured settlement industry (and most personal financial planners) with:
  • Personal injury settlement planning;
  • Special needs planning;
  • Settlement trusts;
  • Government benefits;
  • Secondary life and annuity markets.
• The need for
  • Strategic thinking - The structured settlement industry, as a "transitional industry", needs to engage a new generation of leaders in strategic thinking that encompasses settlement trusts, government benefits and the secondary markets. For additional and related S2KM analysis, see 2008 NSSTA Annual Meeting-2.
  • Professionalism - The structured settlement industry needs to upgrade its professionalism  to understand and solve settlement problems instead of simply selling annuities. To achieve these objectives, SSP's educational programs, professional certification, and Standards for Professional Conduct currently offer the best industry resources and roadmap.
  • New trade association - Settlement trust companies should consider forming their own trade association to provide education, standards and lobbying complementary to NSSTA and SSP.