Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and John Darer Reviews

Avoid NY Mediation Mistakes | Do Mediation Documents Violate NY Structured Settlement Law/ Federal Tax Law?

by John Darer® CLU ChFC MSSC RSP CLTC

If a successful New York mediation involves a structured settlement, care must be taken by all parties when documenting the settlement, to properly reflect the consideration and the intentions of the parties to the structured settlement, to not to run afoul of New York State General Obligations Law and Federal tax law.

§ 5-1702
Initial Disclosure of Structured Settlement Terms

In negotiating a structured settlement of claims brought by or on behalf of a claimant who is domiciled in this state, the defendant or defendant’s legal representative shall disclose in writing to the claimant or the claimant’s legal representative all of the following information that is not otherwise specified in the structured settlement agreement:

(a) the amounts and due dates of the periodic payments to be made under the structured settlement agreement. In the case of payments that will be subject to periodic percentage increases, the amounts of future payments may be disclosed by identifying the base payment amount, the amount and timing of scheduled increases, and the manner in which increases will be compounded;

(b) the amount of the premium payable to the annuity issuer;

(c) the nature and amount of any cost that may be deducted from any of the periodic payments;

(d) where applicable, that any transfer of the periodic payments is prohibited by the terms of the structured settlement and may otherwise be prohibited or restricted under applicable law; and

(e) a statement that the claimant is advised to obtain independent professional advice relating to the legal, tax and financial implications of the settlement, including any adverse consequences and that the defendant or defendant’s legal representative may not refer any advisor, attorney or firm for such purpose.

Commentary

The above is a section of the New York General Obligations Law. A number of settlement consultants are attempting to protect their turf at mediation by attempting to get their names placed into mediation agreements as "structured settlement broker of record". But does having the defense representative named in the "settlement agreement"  signed at mediation comply with the NY G.O.L. 5-1702(e)?

This author recently came across a mediation document labeled  "settlement agreement" in which the Defendant's representative was named as "structured settlement broker of record". A written 5-1702 disclosure was not provided to the plaintiffs at the time of the mediation. As it was the plaintiff lawyer contacted his own settlement consultant and there are consultants representing both sides of the case.

In an era when separate brokers or settlement consultants representing the adverse parties is customary and commonplace, why is it necessary for a defense or plaintiff representative to put their moniker on the mediation settlement agreement? 

The agreement in question called for the consideration of  "defendant paying and the plaintiff accepting the sum of ($XXX,XXX) for cash or periodic payments using XYZ Company as structured settlement broker of record at the above cost to the defendant's insurers at plaintiffs' option".

Don't know about you,  but in my opinion, settlement consultants could be providing better assistance to their clients by paying more attention to how the consideration is articulated in a mediation agreement than making sure their name is inserted as part of it. 

Furthermore, mediators should consider having a structured settlement friendly mediation agreement on hand.

Fortunately for the plaintiffs in the case described above. minors were involved and therefore the settlement was subject to approval of the trial court.

 Related Reading

Constructive Receipt Doctrine and Structured Settlements  December 3, 2009

Structured Settlement Broker Relations "Dog Pound"

This morning I received a phone call from a structured settlement broker concerning a case with an approach so boorish it need not be be fully described here. The broker, who was not even insurance licensed in the state where the case was being adjudicated, knows who they are and so does the President of their firm. The broker' deserves thanks for inspiring this blog post, which makes suggestions in response to some some of the behavioral oddities I have observed over the years from different cases involving different people.

• When you call your counterpart, be prepared! Have a clear purpose for calling and state it succinctly. The word "babbling" is a descriptive best associated with a patch of running water known as a brook**.

• Just because your client didn't call you until after the fact is not my fault. I encourage my clients to bring me in early and most of the time they do!

• If by chance you arrive at the dance late, try to do what you can to help get the deal done instead of disturbing the feng shui in a weak attempt to justify your existence. If there is something substantive fair enough, but if not, just makes the industry look bad.

• If you don't hold a valid insurance license in the state where the case is being adjudicated you should not even be at the dance. There is no pro hac vice in insurance! If you get caught, expect me to point that out (or have pointed out) (1) to my client, (2) to your client. (3) to the lawyers involved, (4) the mediator;  and (5) if a minor is involved, to the judge or magistrate overseeing the case. Note that there are documented cases where several members of our industry have been fined thousands of dollars for operating in a state without a license. Don't let that be you!

• How is it that XYZ insurance Company "insists" on using THEIR documents but in my experience with 4 different brokers on the approved panel of XYZ Insurance Company there are 4 different documents in 3 different fonts?

• Does XYZ insurance company insist that you do ALL your documents in courier font?

• Please don't send documents in Adobe .pdf format for review , UNLESS it is accompanied by a version in MS Word. It takes much longer review them and is not time efficient for anyone. Encourage your clients to use MS Word. Word has a great track changes function where everyone can instantly see every change and edit and who made them.  Use it or learn how to use it. It makes for much easier collaboration for all concerned and increases the level of satisfaction with the process. If your client doesn't know it, teach them!

• At some point you have to realize that a cookie cutter belongs in the kitchen.

The structured settlement watchdog's favorite cookie cutter

• Don't call me out in the hallway to negotiate a commission split in front of the client. While sitting in a cramped waiting room next to my client during a mediation, this dude actually swiveled his "fresh from an transcontinental flight " keister into my client's face in one such attempt.

And most of all...Have a frickin' sense of humor!

**August 9, 2010 postscript.  I am astonished at times about the lack of sophistication in the industry. Thus this message to the clueless who don't get " the picture", I was not referring to a friend and fellow Syracuse alum who coincidentally belongs to the same firm as one of the brokers who inspired this post. The broker in question and the head of the firm and my firm know who they are. I'm surprised nobody has tried to figure out which of our industry brethren's "fresh from a transcontinental flight" keister I referred to.   Send in your suggestions. If you correctly guess the "butt" of this joke  you will win a bottle of Malbec courtesy of this author. Contest ends November 10, 2010. Only one entry permitted per person. Neither offender and any brokers or attorneys, or mediator involved in the case, nor any of their employees are eligible. Ties will be settled by a monkey throwing at a dart board. You supply the simian. And before I forget, reread the final point!

How Constructive Receipt Doctrine Affects Structured Settlements

by John Darer® CLU ChFC CSSC RSP CLTC

 

If you would like to read more on the subject...

Constructive Receipt is Game Over for Structured Settlements (4structures.com) January 11, 2024

Structured Settlements and the Big Mediation MIstake  September 29, 2009

Structured Attorney Fees 101 and Constructive Receipt  October 17, 2009

Structured Settlement Tips For Lawyers

Constructive Receipt in Wikipedia

John Darer Reviews Structured Settlements and A Big Mediation Mistake

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

After a long exhaustive day of mediation ends up with a settlement and everyone of tired mind is scrambling to cobble together a mediation agreement or perhaps the mediator has his/her own version...

WARNING! Don't kill your client's ability to do a structured settlement! Avoid torching all your hard work after a long day of settlement negotiations at mediation by blowing it on flawed "cookie cutter" settlement documentation!

If a structured settlement is to be part of the resolution of a claim or suit, then the consideration for the structured settlement is the stream of periodic payments.

While I know it's important to know the cost, the cost is NEVER the consideration in a structured settlement. Documentation, including a mediation agreement that is binding, must reflect the correct language.

Here's how easy it is to blow if you're not paying attention:

Assuming no court approval is needed, if parties sign a mediation statement that states the parties agree to settle for the sum  of $2,000,000 and that the receipt of said sum will release all claims and mediation agreement is a binding agreement AND all parties are represented by counsel and they all sign it, is there anything else standing in the way of the plaintiff receiving the money?

Plaintiff attorneys

Retain your own structured settlement consultant early in the process or encourage your client to do so. If your client expects to receive tax-free periodic payments as a result of a negotiated settlement, or you are structuring your attorney fees, be sure the mediation agreement does not include language that will cause constructive receipt of the money that will fund the future payments. On a large case with lifetime payments, the cost of constructive receipt could be in the millions in lost tax-free interest (tax-deferred in the case of attorney fees structures or employment settlements).

Defendants and Claims Representatives

Constructive Receipt means that there can be "no structure". If the structured settlement has somehow managed to slip through the processing, that means you are potentially exposed to an unwind of the qualified assignment and your company owning an asset where interest will now be adversely taxed . If properly structured, the qualified assignee has an income tax exclusion for owning the "qualified funding asset". If you, or who you represent, is not a tax-exempt entity you will be left holding the bag with an asset that may no longer be qualified.

Constructive receipt is the doctrine that taxes income before the income is actually received. It is contained in Treasury Regulations § 1.451-2(a) as follows:

"Income although not actually reduced to a taxpayer’s possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given".  Thus, to have “constructive receipt,” the plaintiff must have both the right to the income and the power to compel payment.

Under the constructive receipt doctrine, an individual who has an existing right to receive income payable immediately cannot defer taxation of that income by refusing or delaying receipt. Critical to the constructive receipt analysis is whether the individual has an unrestricted right to the funds and turns his or her back on them.

Mediators

We know you like to keep it simple.  So do we! Consider having one form for settlements that have a structured settlement component, or contemplate a structured settlement as part of the resolution, and another for cash settlement.

Last updated April 28, 2024

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

After a long exhaustive day of mediation ends up with a settlement and everyone of tired mind is scrambling to cobble together a mediation agreement or perhaps the mediator has his/her own version...

WARNING! Don't kill your client's ability to do a structured settlement! Avoid torching all your hard work after a long day of settlement negotiations at mediation by blowing it on flawed "cookie cutter" settlement documentation!

If a structured settlement is to be part of the resolution of a claim or suit, then the consideration for the structured settlement is the stream of periodic payments.

While I know it's important to know the cost, the cost is NEVER the consideration in a structured settlement. Documentation, including a mediation agreement that is binding, must reflect the correct language.

Here's how easy it is to blow if you're not paying attention:

Assuming no court approval is needed, if parties sign a mediation statement that states the parties agree to settle for the sum  of $2,000,000 and that the receipt of said sum will release all claims and mediation agreement is a binding agreement AND all parties are represented by counsel and they all sign it, is there anything else standing in the way of the plaintiff receiving the money?

Plaintiff attorneys

Retain your own structured settlement consultant early in the process or encourage your client to do so. If your client expects to receive tax-free periodic payments as a result of a negotiated settlement, or you are structuring your attorney fees, be sure the mediation agreement does not include language that will cause constructive receipt of the money that will fund the future payments. On a large case with lifetime payments, the cost of constructive receipt could be in the millions in lost tax-free interest (tax-deferred in the case of attorney fees structures or employment settlements).

Defendants and Claims Representatives

Constructive Receipt means that there can be "no structure". If the structured settlement has somehow managed to slip through the processing, that means you are potentially exposed to an unwind of the qualified assignment and your company owning an asset where interest will now be adversely taxed . If properly structured, the qualified assignee has an income tax exclusion for owning the "qualified funding asset". If you, or who you represent, is not a tax-exempt entity you will be left holding the bag with an asset that may no longer be qualified.

Constructive receipt is the doctrine that taxes income before the income is actually received. It is contained in Treasury Regulations § 1.451-2(a) as follows:

"Income although not actually reduced to a taxpayer’s possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given".  Thus, to have “constructive receipt,” the plaintiff must have both the right to the income and the power to compel payment.

Under the constructive receipt doctrine, an individual who has an existing right to receive income payable immediately cannot defer taxation of that income by refusing or delaying receipt. Critical to the constructive receipt analysis is whether the individual has an unrestricted right to the funds and turns his or her back on them.

Mediators

We know you like to keep it simple.  So do we! Consider having one form for settlements that have a structured settlement component, or contemplate a structured settlement as part of the resolution, and another for cash settlement.

Last updated April 28, 2024

Mediation Etiquette 101...Don't Call The Opposing Expert Out to the Hall In Front Of Their Client!

by John Darer® CLU ChFC MSSC RSP CLTC

Some settlement professionals show an amazing lack of protocol during a mediation.

The placement of a structured settlement today commonly involves structured settlement brokers, settlement planners or consultants from one or more interested parties who split the fees much in the same way as brokers to a real estate sale. For the most part it works well, is fair for all parties and is disclosed. Yet for some,  "side lipped" horse trading lives on.

Here are some thoughts inspired by a few recent personal experiences:

• When you're a settlement professional invited to a mediation, you are a participant in an adversarial process. You are also representing our industry. It is absolutely not appropriate to approach your adversary who is sitting next to his client, turn your back (and your "fresh" from a "red-eye" posterior) in his client's face and then, with a poorly disguised nod and a wink, suggest that the two of you "go out into the hallway" when the intent is simply to discuss how commissions are to be whacked up. If you don't think there is any perception problem there then perhaps you need to get new bifocals!
• You should not be discussing aspects of the case with your counterpart at the mediation, or providing any signals like "thumbs up" unless authorized by your client.
• You should come prepared for the mediation and be knowledgeable of the laws of the jurisdiction.
• Do not prepare a structured settlement quote from a company that is not licensed in the state of jurisdiction if you expect to be credible.