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

USDOJ Calendar List of Annuity Brokers | Brokers May Have to Prove Qualifications on Assignments

by John Darer CLU ChFC MSSC CeFT RSP CLTC

The United States Department of Justice Civil Division published its 2019 Calendar Year List of Annuity Brokers in a Memorandum to All United States Attorneys.

United States Attorneys assign cases on behalf of the United States government

United States Attorneys assign cases for structured settlement annuity brokerage on behalf of the United States government for Federal Tort Claims Act  (FTCA) cases.

Despite the fact that 28 C.F.R. § 50.24 requires each broker to declare, among other things, under penalty of perjury that the broker has substantial experience in each of the past three years in providing structured settlement brokerage services to or on behalf of defendants or their counsel, there are brokers on the list whose websites and marketing to trial lawyers suggest that they perform no defense assigned work.  

With this in mind it's poignant that the nature of the list and the ramifications concerning the declarations are stated in more explicit detail than ever before in the current publication.

"(1) The inclusion of an annuity broker on the list signifies only that the individual declared under penalty of perjury that he or she meets the minimum qualifications required by the Attorney General for providing annuity  The appearance of an annuity broker's name on the list does not signify that the annuity broker actually meets the minimum qualifications or is otherwise competent to provide structured settlement brokerage services to the United States. Title 28 C.F.R. § 50.24 provides the following disclaimers: brokerage services in connection with structured settlements entered into by the United States. Because the decision to include an individual annuity broker on the list is based solely and exclusively on the Declaration submitted by the annuity broker, the appearance of an annuity broker's name on the list does not signify that the annuity broker actually meets those minimum qualifications or is otherwise competent to provide structured settlement brokerage services to the United States. No preferential consideration will be given to an annuity broker appearing on the list except to the extent that United States Attorneys utilize the list pursuant to section 11015(b) of Public Law 107-273.

(2) By submitting a Declaration to the Department of Justice, the individual annuity broker agrees that the Declaration and the list each may be made public in its entirety, and the annuity broker expressly consents to such release and disclosure of the Declaration and list.

Accordingly, any broker being considered for selection should be required to verify at the time of selection that he or she meets the minimum qualifications set forth in 28 C.F.R. § 50.24(a) and is otherwise competent to provide structured settlement brokerage services to the United States". (Emphasis added)

 

 

Is A Commutation Rider the Fries To The Structured Settlement Burger?

by John Darer CLU ChFC MSSC RSP CLTC  

Is a commutation rider the fries to the structured settlement burger? 

Do Structured Settlement Commutation Riders Taste Better With Ketchup or Mayonnaise?

In the catchpenny "Secrets Structured Settlement Brokers Wish You Didn’t Know" one settlement planner opines that plaintiffs "should almost ALWAYS consider a commutation rider with their structured settlement".  Like fries to a burger.

A commutation rider provides liquidity to the contingent payee(s) of a structured settlement in the event of death of the measuring life.  An irrevocable election to commute and the percentage to be commuted must be made at the time of the structured settlement is established in order for the commutation to be income tax free.

The Original Purpose of Structured Settlement Commutation Riders

Commutation riders triggered by the death of the measuring life were originally established  in 1995. to provide liquidity for structured settlement beneficiaries to pay estate taxes on large settlements at a time when estate tax filing thresholds were much lower than they are in 2017.

While properly designed life insurance was a potential solution to providing estate liquidity, the insurability of the annuitant comes into play. Not all annuitants are insurable for life insurance.

Between 1987 and 1997, the filing threshold in effect for IRS Form 706 was only $600,000 The tax applied to qualifying estates is based on the  decedent’s  gross estate  less  allowable  deductions.  For tax purposes, gross estate includes “all property in which the decedent had an interest at the time of his or her death and certain property transferred during the lifetime of the decedent without adequate consideration; certain property held jointly by the decedent with others; property over which the

A unified credit is allowed, and, between 1987 and 1997, the credit was $192,800, the credit equivalent of $600,000 in total taxable transfers.  The unified tax rate schedule on taxable estate and gift transfers is graduated from the initial rate of 18 percent to the top tax rate of 55 percent on transfers of $3 million or more. 

To put things in even more perspective, the Economic Recovery Tax Act (ERTA) of1981 (Public Law 97-34) significantly altered Federal estate tax law. The Act gradually increased the unified credit from $47,000 to $192,800 over a 6-year period. This effectively raised the exemption and, thus, the filing requirement, from $175,000 to $600,000. Such a low estate tax exemption potentially affected a large number of claims.  By contrast, In 2017 the lifetime exclusion amount against the estate tax for 2017 is $5.49 million, up $40,000 from 2016. That is the maximum size of taxable estate that can escape tax for those who die in 2017.  So from a purely federal estate tax standpoint, in 2017 a commutation rider only benefits a very small population of plaintiffs**. Note that state inheritance taxes may apply with lower exempt amounts.

"Liquefies the remaining value of the annuity"

The settlement planner opines in a memo circulated to trial lawyers, that "the benefit to using this rider is that it liquefies the remaining value in the annuity so that the estate can be probated and distributed without waiting perhaps years for all the remaining guaranteed payments to trickle in". 

Fact: All structured settlement commutation riders pay a percentage  (generally between 90-95%) of the present value. Hence the statement " liquefies the remaining value" is false and misleading.

Fact: Naming a beneficiary, means that payments bypass probate at the death of the measuring life, with or without a commutation rider.

Does Structured Settlement Commutation Rider Have Anti-Factoring Sex Appeal?

• Showcased in a way that would make Peachtree Settlement Funding proud, the settlement planner sells the benefit "Without waiting perhaps years for all the remaining guaranteed payments to trickle in" 

The settlement planner then reasons that "the discount available from the annuity company should be a whole lot less than the double digit discounts that most factoring companies offer".  Such a blanket statement is misleading as most discount rates have come way down.

Furthermore the unresolved conflict facing "plaintiff loyal" settlement planners who push structured settlement derivatives (as is highlighted in a prior post), holding themselves out as "fiduciaries",  in resolving to get the best rate for an investor client, knowing that the same class of annuitant that the settlement planner often deals with, is being screwed (or has already been screwed) on the other side of the deal. The settlement planner has recommended that personal injury clients as investors purchase of structured settlement payment rights from the very same class of annuitants that he claims to protect.

• Another dubious selling point from the settlement planner "commutation rider don’t require a court hearing like factoring does". 

The need for a qualified order is a requirement of the Internal Revenue Code Section 5891 and Structured Settlement Protection Acts in effect in the majority of states.  Given what I and others have documented, the court approval process is not a panacea.  But in many cases it works well.   Setting aside the high stink factor and the need for improvements to regulation, factoring of structured settlements is, in its purest sense, a response to real time changing needs.  A structured settlement commutation rider is an irrevocable election made at the time of settlement whose operation may not come into play for many years, or not at all. 

Relevant Reading

Structured Settlement Commutation Riders FAQ | What You Need to Know About Commutations

Why Name a Beneficiary on a Large Structured Settlement For a Minor?

Federal Estate Tax Returns 1995-1997 an IRS publication by by Barry W. Johnson and Jacob M. Miko

**one example would be where the marital deduction does not apply when the spouse who inherits isn’t a U.S. citizen, even if the spouse is a permanent U.S. resident. The federal government doesn’t want someone who isn’t a citizen to inherit a large amount of money, pay no estate tax, and then leave the country to return to his or her native land.

Still, keep in mind you can leave assets worth up to the exempt amount ($5.49 million in 2017) to anyone, including your non-citizen spouse, without owing any federal estate tax. And if the non-citizen spouse dies first, assets left to the spouse who is a U.S. citizen do qualify for the unlimited marital deduction.

Image: © Ariwasabi | Dreamstime.com

 

 

 

Structured Attorney Fees Best Practices to Avoid Unexpected Timing of Income

by John Darer® CLU ChFC MSSC RSP CLTC

When structuring attorney fees or taxable damages in the second half of the year, it is common to push the first payment out until January of the following year so that it is not received in the same tax year as the settlement.  An attorney who is already having a great income year can use this strategy to delay receipt (and thereby some of the taxes) on the fee. In some cases this may result in a lower tax bracket.

Timing is everything when it comes to structured attorney fees and structuring taxable damages

 Care should be taken to avoid the tax planning strategy backfiring by not using a January 1 payment start date for structured attorney fee payments.  Many structured settlement annuity issuers automatically send out payments by check in advance, to assure they arrive on time. One company is known to send out payments as much as 10 days in advance! 

Even if you have direct deposit, you're not completely out of the woods with a January 1 payment date.  The annuity issuer has a contractual obligation to make payments on time.  This applies not just to your January 1 payments, but to likely to tens of thousands of other annuitants and policyholders with the same payment due date.  In 2016, January 1st was on a Friday and the next business day was Monday January 4, 2016.  If the insurer waited to pay the next business day,  payments for thousands of people would have been 3 days late.  Therein lies their dilemma.  So a number of insurers set their computerized payment systems to release direct deposit payments early so that they would be in good faith and timely.

It is possible that you will also receive a 1099 for that payment, in the year of settlement.  What a way to mess up your tax planning if you're not careful.

The same issue goes when using a structured settlement for taxable damages.
 
How to Avoid Getting Hit With Unexpected Income in the Wrong Tax Year  When Structuring Attorney Fees

• Select a first payment date no earlier than January 10th, if getting paid by check
• Select a first payment date a few business days into January, if being paid by direct deposit.

Good Faith Use of Structured Settlements in Bad Faith Claims

by John Darer® CLU ChFC MSSC RSP CLTC

Insurance bad faith  describes a tort claim that an insured person may have against his/her/its  insurance company for its intentional bad acts. Under the law of most jurisdictions in the USA, insurance companies owe a duty of good faith and fair dealing to the persons they insure. This duty is often referred to as the "implied covenant of good faith and fair dealing" which automatically exists by operation of law in every insurance contract.  [ Source : Wikipedia]

In Good Faith Use of Structured Settlements in Bad Faith Claims,  published in the Connecticut Law Tribune on March 14, 2016 , I explore how structured settlements can make a difference in bad faith cases on either side of the damages tax spectrum.  Download Good_Faith_Use_of_Structured_Settlements_in_Bad_Faith_Cases_3-2016 .

I am a frequent contributor to "The Trib". The Good Faith/Bad Faith article, is my 6th published in the Connecticut Law Tribune in the last 12 months.

For further information on structured settlements and bad faith claims and practical illustrations, please contact the structured settlement experts at 888-325-8640

Rated Ages Boost Yield on Lifetime Structured Settlements, Reduce Cost of NY Structured Judgments

by John Darer® CLU ChFC MSSC RSP CLTC

A rated age will be issued if the structured settlement annuity issuer believes the plaintiff has an impaired life expectancy.  The rated age is simply the age used to price the structured settlement annuity, or New York structured judgement annuity, as opposed to the actual age

Rated Age Structured Settlements Can Boost Your Potential Lifetime Annuity Payout

• From the plaintiff's perspective,  rated age will serve to boost the yield per settlement dollar allocated to a structured settlement.
• From a defendant or insurer's perspective,  a rated age will serve to reduce the cost of settlement offers for paying life contingent future damages.

How Does a Rated Age Help Reduce the Cost of A New York Structured Judgment?

A rated age could reduce the cost of a structured judgment in New York for a Defendant.  Certain aspects of a structured judgment, pursuant to CPLR 50A or CPLR 50B are life contingent, future medical expenses and future pain & suffering.  A rated age would most likely impact future medicals, which stretch many years into the future,  Under New York law, future pain & suffering is compressed into 8 years for Article 50-A and 10 years for Article 50-B structured judgments,  so it would need an exceptionally high rated age to have any impact.

High rated age structured settlements may hold an advantage over other vehicles and even a modest amount allocated from a large settlement, can effectively be used as an  "investment backstop" to assure a certain level of future income, even if everything else is lost.

Moreover payments from structured settlements are income tax-free pursuant to Sections 104(a)1 or Section 104(a)(2) and 130(c) of the Internal Revenue Code. A structured settlement offers contractual certainty as opposed to hypothetical investment possibility. A structured settlement blended with a settlement trust,such as a Settlement Preservation Trust or Special Needs Trust (Supplemental Needs Trust in New York state),in tandem, may offer a plaintiff a measure of liquidity, contractual guarantees, upside potential along with downside protection.

How Was Pacific Life Indexed Structured Settlement Affected by Market Crash?

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

How does a stock market swoon affect someone who is receiving payments from an indexed linked structured settlement offered by Pacific Life Insurance Company or Pacific Life and Annuity Company, in New York, through its licensed agents?

As I wrote earlier this month, those that took an indexed linked structured settlement payment from Pacific Life when it was introduced in April 2014, enjoyed a 5% increase in payments when the first contract anniversary rolled around.  If the S&P 500 declines and ends up down for the year, the good news is that those receiving payments from Pacific Life index linked structured settlements WILL NOT see any reduction in their payments. They keep increases already received.

Pacific Life clearly states in its brochure for the Index-Linked Annuity Payment Adjustment Rider  "Increases Settlement Payments if the Market Rises. No Losses if the Market Declines"

Download Index Linked Annuity Payment Adjustment Rider to Structured Settlement Annuity PL brochure

Index measurement periods are not calendar years.  They are defined according to when your annuity payments begin. Increases in the index are measured by the percentage difference between the index on the first and last day of each measurement period. Payment increase take effect on the anniversary of when payments started.

If you are receiving indexed linked structured settlement annuity payments from Pacific Life, here are the possibilities

Market up between measuring points    Upward adjustment in payments with 5% cap
No change between points                     Payments stay the same until next year
Market decline between points              Payments stay the same until next year

Last updated August 28, 2023

 

 

Minimum Size Structured Settlement For Minor's Personal Injury Settlements

by John Darer CLU ChFC MSSC CeFT RSP CLTC

What is the minimum size for a structured settlement?  At least two of the primary companies writing structured settlement annuities will accept a minimum of $5,000. But does it make sense to structure $5,000?

Says one industry colleague in a bar publication, "Is your client a minor? For example, $5,000 awarded to a 5-year-old child could be placed in a Blocked Account with minimal interest rates. However, a structured settlement could easily double, if not triple",

The investment and is both state and federal tax-free. Additionally, the parents have the opportunity to direct the distribution past the minor’s 18th birthday". (emphasis ours)

Comments

1. The "minimal interest rates" offered on a 5 Year CDs today range from 2.39% to $2.6% at the time of posting.  Source: BankRate.com
2. There is a Kiddie Tax exemption on the first $2,100.00 the child earns as investment or interest income  (updated 2018)
   
3. Now do the math, assuming $5,000. What's the net return?
4. Consider that in some cases today one can get a zero (or even a negative) return for a structured settlement cash flow of 5 years or less.
5. Consider that one of the life insurance companies offering structured settlements for $5,000 charges a $750 qualified assignment fee AND a small case policy fee  of $300.00 on a case of $5,000 premium meaning that 21% of the premium is eaten up in fees.
6. Consider that another life insurance company offering structured settlements for $5,000 has a qualified assignment fee of $500.00 and a small case policy fee of $400.00 , meaning that on a case with $5,000 in premium 18% of the premium is eaten up in fees
7. Note that a small case fee does not apply over certain amounts, which vary by the life insurance company that issues the structured settlement annuity contact as qualified funding asset.
8. Because of such fees, a structure for $5,000 premium or other small premiums, should only be considered for very young children, where there is a significant time for deferral or the very rare case where need for spendthrift protection beyond majority age overrides return. 
9. The article states that Orange County Superior Court requires the purchase of an annuity where the net amount distributable exceeds $25,000 and the child is under 15 years of age. Given the information presented above this author, who is also California licensed, suggests that Orange County judges even more carefully scrutinize the proposed cash flows to be sure that the structured settlement is indeed in the best interest of the minor.
10. In addition to the CDs, over certain durations and for amounts in multiples greater than $5,000, carefully selected structured settlement payment rights purchased on behalf of the minor in the secondary market, as an asset class,  might make sense since such cash flows yield more than even CD rates do.  Whether or not the Court would approve such purchases by a trust on behalf of a minor is another story.

In conclusion, I am not downplaying the benefits of structured settlements for minors. I'm saying let's get real with the application of structured settlements for minors.

 

 

 

Qualified Assignments and Tax Rules Concerning Structured Settlements

by John Darer® CLU ChFC MSSC RSP CLTC

What federal tax rules govern the use of structured settlements and qualified assignments?

One ANSWER appearing on an industry website: "In order to protect the public, Congress specified in Section 130 the requirements to establish a qualified assignment:

• The assignee assumes the liability from the defendant;
• Both the victim (and his/her attorney) and the defendant agree that the payment schedule cannot be "accelerated, deferred, increased or decreased";
• The payment stream may be excluded from the recipient`s gross income for tax purposes;
• The injury must be a physical sickness or injury; and
• A highly secure funding asset (such as an annuity or U.S. Government obligation) must be used to fund the payments".

While the statement on the other website is true by itself, it is an incomplete answer, because it completely ignores the FACT that the terms of Rev Proc 93-34 provide assurance that a designated settlement fund or qualified settlement fund will satisfy the "part to the suit or agreement" requirement set forth in IRC 130(c)(1). 

This is of importance to lawyers who handle mass torts, class actions and those who participate in class action lawsuits.

To wit, please find the relevant text of Rev Proc 93-34 

"Section 4
.01 A designated settlement fund or a qualified settlement fund will be treated as "a
party to the suit or agreement" within the meaning of section 130(c)(1) of the Code if
each of the following requirements is satisfied:
(1) the claimant agrees in writing to the assignee's assumption of the designated
or qualified settlement fund's obligation to make periodic payments to the claimant;
(2) the assignment is made with respect to a claim on account of personal injury
or sickness (in a case involving physical injury or physical sickness) that is either:
(a) a claim described in section 2.04(1) in the case of a designated settlement
fund, or
(b) a claim described in section 2.05(2) in the case of a qualified settlement
fund;
(3) each qualified funding asset purchased by the assignee in connection with
the assignment by the designated or qualified settlement fund relates to a liability to a
single claimant to make periodic payments for damages;
(4) the assignee is not related to the transferor (or transferors) to the designated
or qualified settlement fund within the meaning of sections 267(b) or 707(b)(1); and
(5) the assignee is neither controlled by, nor controls, directly or indirectly, the
designated or qualified settlement fund. For purposes of this section 4.01(5), examples
of control include an assignee that is a corporation the stock of which is owned by the
fund or an assignee that is a trust the trustee of which is the administrator of the fund.
.02 If an assignment by a designated or qualified settlement fund satisfies the
requirements of section 4.01 of this revenue procedure and all the other applicable
requirements of section 130 of the Code, the assignment is a qualified assignment within the meaning of section 130 and the transferor to the designated or qualified settlementfund will not be treated as receiving a deemed distribution described"

Recap of How Structured Settlements Work, including a helpful flow chart

What is a Revenue Procedure?

A Revenue Procedure or Rev. Proc., such as Rev. Proc 93-34 is a statement from the IRS or state tax authority intended to provide guidance to taxpayers with regard to the administration of laws and regulations.