Here's something about structured settlements quoted from the web site of a New York City law firm that should set this lawyer's high school English teacher and law school professors tongues wagging (or eyes rolling).
"Of course, in a depressed interest market, even with inflation guard protection, the tax free return achieved may be less than that attainable when interest rates increase and return to ''normal''. One respected specialist claims to have created an investment ''structured settlement'' within the meaning of new product, which allegedly qualifies as a New York State law, but which, although not exempt from income taxes under Section 130 of the Internal Revenue Code, provides the flexibility to adjust to rising interest rates and inflation. This is purportedly accomplished by a permitted and qualified assignment of a portion of the settlement fund to a trust with major bank, as trustee, which then manages the portfolio pursuant to the order of the court." Quote from NY City lawyer website section on structured settlements
What's wrong with this? Let me count the ways.
1. What is a "normal rate"? What a silly statement. Just for kicks I looked at the site MeasuringWorth.com. I calculated the average annual return from the date I was born, July 2, 1961 until last Friday, August 17, 2007. The Dow Jones Industrials Average Rate of Return during that time period was 6.40%. The S&P 500 average rate of return during that same time period was 6.74%. According to the research on the same web site, the average rate of inflation from 1961-2006 was 4.33%. BUT, from 1987-2006 it was only 3.06%. You can also find out what the short and long term interest rate was at any point in time back to 1798
Sources: Samuel H. Williamson, "Annualized Growth Rate of the DJIA, S&P500, NASDAQ in the United States Between Any Two Dates," MeasuringWorth.Com, 2007 AND Lawrence H. Officer and Samuel H. Williamson "Annual Inflation Rates in the United States, 1774 - 2006, and United Kingdom, 1265 - 2006," MeasuringWorth.Com, 2007. Lawrence H. Officer, "What Was the Interest Rate Then?" MeasuringWorth.com, 2007.
2. "Within the meaning of a new product"? Let's just say the "apple" is 100 yards away "from the tree" on this one.
3. "Which allegedly qualifies as a New York State Law," The apple keeps rolling...I didn't know products qualified as laws, but then again... I DIDN'T GO TO LAW SCHOOL!
4. "But which, although not exempt from income taxes under Section 130 of the Internal Revenue Code..." That sentence has "the runs" so bad, it needed Pepto Bismol! Products are not exempt from income taxes. Income is what is taxed, or exempt from tax, as the case may be.
5. In critiquing the alternative "product" the lawyer states "This is purportedly accomplished by a permitted and qualified assignment of a portion of the settlement fund to a trust with major bank". If the the assignment is permitted and its a qualified assignment, then the income to the assignee would be exempt from income taxes under IRC Section 130. IRC Section 130 only affects the tax status of the assignee's income. The "qualified funding asset" may be a structured settlement annuity or an obligation of the United States government, Treasury Inflation Protection Securities (TIPS) for example.
6. An adult plaintiff, under the scenario described, could use the alternative product in question without an order of the Court.
7. While one company no longer issuing structured settlements obtained a Private Letter Ruling (PLR) that led to the short-lived introduction of a CPI linked, there is no such thing as "inflation guard protection" in the United States. Use of such sales jargon is misleading. Annuity issuers have fixed increase annuities where the option exists to have the modal payment increase by an agreed to fixed percentage each year, compounded annually. Such option must be incorporated at the time the structured settlement is created.For the benefit of my UK readers, periodical payments in the UK may actually be indexed to the RPI.
If you're going to put something out there then at least make sure it's right! This was a case of "better to keep your cake hole shut and let other people think... "
The other thing that is somewhat disconcerting is the meta tags for this lawyer's website, which state that this lawyer is "specializing in structured settlement transfers". At one industry meeting I saw him sidled up to a major firm in the structured settlement industry. Are these indicia that the same lawyer is representing injured parties in car accidents as advertised, creating structured settlements AND handling structured settlement transfers?