by John Darer CLU ChFC CSSC RSP
This post continues our ongoing commentary concerning the recent reporting of National Underwriter about structured settlements. The National Underwriter posting reveals that while quite a lot of research was done, some of it is downright shambolic. Figuratively speaking, there seems to have been an over judicious imbibing of Patrick Hindert's "Kool Aid".
Here is an example of something the writer Warren Hersch failed to reconcile.
HINDERT THEN
"His (San Francisco tax attorney Robert Wood*) article helps to explain why most annuity providers have not offered factoring or commutation products and services". by Patrick Hindert December 31, 2006, in a blog post explaining the impact of Wood's writing which, in general, questioned whether structured settlement commutations posed any negative tax effect on the IRC 130 tax exemption for qualified assignment companies. To wit, Hindert also wrote in that blog post "But a commutation (see analysis below) "appears to accelerate payments" - in violation of IRC section 130's prohibition against acceleration".
*comment in parentheses added by us
HINDERT NOW
"But Hindert notes that many structured settlement annuity providers are staying out of the secondary market. 'That’s either because they view the secondary market as contrary to a principal aim of the structured settlement—protecting claimants against dissipation—or because of resistance from other industry players,' he adds. 'Among them are traditional industry stakeholders who, owing to unenlightened self-interest, have pressured annuity providers to not offer a commutation rider.' cite of Patrick Hindert by Warren Hersch from November 9, 2012 National Underwiter article" Is The Structured Settlement Process In In (Sic) Need Of Reform"
The typo in the title "Is the Structured Settlement Process In In (sic) Need of Reform?", together with other typos pointed out in a previous blog post , the typo label of the image at the begining of the article stating "Image courtesy of [image creator name] / FreeDigitalPhotos.net" are a real hoot, and the Hindert "finger prints" add an unecessary bias that detracts from the article, in my opinion. It is notable that comments by NSSTA Executive director Eric Vaughn are stuck on the 4th page that only the most tenacious of readers are likely to get to.
While the article speaks of the secondary market, it speaks nothing of certain offensive secondary market processes and marketing which drive the opinion of the primary market and many trial lawyers and judges around the country or several pending lawsuits between secondary market competitors over the business practices of certain players in that market. Those lawsuits contain some very serious allegations.
Single claimant qualified settlement fund, another staple of Hindert commentary, is presented while neglecting to mention that a planner doing so may be committing professional malpractice since only one life insurer's assignment company openly admits it will take qualified assignments from such a legal instrument. Thus a plaintiff's structured settlement diversification objectives might not be able to be achieved and the one carrier may or may not be competitive at a given time.
The issue of broker commissions is presented but the article fails to balance in neglecting to mention that those who represent an injured party make a commission too. The alternative presented is an ongoing assets under management fee where fees over the lifetime of the account, might far exceed the commission. Moreover, such fees are applied even if the account loses money.
As this isn't enough of an example, this "minor" technical detail highlights just how poorly presented the article is. Warren Hersch writes "Since passage of the Tax Equity and Fiscal Responsibility Act of 1982, structured settlement annuities have also been exempt from federal and state income tax, taxes on interest and dividends, capital gains tax and the alternative minimum tax (AMT) under Internal Revenue Code Section 130. Contrast this with lump sum distributions, the principal of which is tax-free, but not growth on the principal, unless invested in tax-free bonds"
The Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA" P.L. 97-248) was introduced on November 13, 1981 and signed into law by the late President Ronald Reagan on September 3, 1982. The act which actually created IRC 130, The Periodic Payment of Settlement Act of 1982 (H.R. 5470, later P.L.97-473) was proposed by Rep. Andrew Jacobs Jr. of Indiana on February 2, 1982. It passed the House on December 21, 1982, submitted to the Joint Committee on Taxation after passing both Houses on December 22, 1982 and was signed into law by President Ronald Reagan on January 14, 1983.
It is also worth emphasizing that the structured annuity is merely a funding asset. The tax exemption is related to the character of the damages being funded by the structured settlement annuities. For example, payments are tax exempt if they represent damages paid on account of personal physical injury, physical sickness or for a claim of workers compensation {see IRC 104(a)(1) and 104(a)(2)]. Structured settlement annuities are also used in taxable damage cases and in other non litigation related periodic payment applications { non qualified assignments or non qualified structured settlements].
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