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

Can You Get A Structured Settlement After Your Lawsuit Is Settled?

by John Darer® CLU ChFC MSSC CeFT® RSP CLTC

A Structured Settlement must be established as part of the settlement and details of the future periodic payments to you must be incorporated into the settlement documents as part of the consideration for the settlement.

If you receive your settlement as a lump sum, you cannot structure later because, according to IRS rules, this is considered either “constructive receipt”  (if a release has been signed but you're waiting for the money and there are no other restrictions), or actual receipt (if the money has been paid).

The only exception to doing a structured settlement after a release has been signed is where there is a Qualified Settlement Fund, such as often found in the huge class action lawsuits against drug and product manufacturers where there are large numbers of plaintiffs. Rev. Proc. 93-94 permits a qualified assignment from a qualified settlement fund, thus enabling a structured settlement in a similar manner as if it were established at settlement with a single defendant.

A single claimant qualified settlement fund however,  is of no help if you want a structured settlement because structured settlement annuity issuers and their qualified assignment companies generally do not participate in such cases at present.

Plaintiffs in litigation are in transition, having first suffered a loss, then gone through a long process of stops and starts as their case winds its way through the courts. Then a day will come as the case resolves at mediation,or sveral mediations, in a courthouse conference, in their lawyers office or in their living room,  where the plaintiff has to make a decision that will have a major impact on their life. 

For some plaintiffs its an overwhelming decision. That is why it is important to begin considering this option in advance of settlement as part of a pre-settlement planning process.

For those plaintiffs who want a stable source of income as the bedrock of their financial security, a structured settlement is a good option

A structured settlement is  like  a  'job they can never be fired from". In many cases the payments end up coming from a life insurance company that has been in business since the 19th century or the early 20th Century. Options for fixed increases, and indexed based on an objective formula tied to an index are possibole as well as other market based structured settlement solutions for plaintiffs or their lawyers who might be interested.

• Market Based Structured Settlements | How They Work (4structures.com)
• Prudential Income Advantage | Structured Settlement Index Linked (4structures.com)

Last updated May 3, 2024

Can You Structure Pre-Death Pain & Suffering? The Debate Continues

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

A respected industry colleague, who is not a tax attorney, remarked that Revenue Ruling 79-220 supports a structured settlement directly to the heirs of a decedent for pre-death pain & suffering and other elements of damages associated with the decedent's claims, as opposed to direct actions of survivors like wrongful death claims.

Let's look at the the express language of Revenue Ruling 79-220

Revenue Ruling 79-220, 1979-2 C.B. 74.

An insurance company purchased and retained exclusive ownership in a single premium annuity to fund monthly payments agreed to in the settlement of a damage suit. The issue was whether the exclusion from gross income under IRC §104(a)(2) applied to the full amount of monthly payments received in the settlement or only to the discounted present value of such payments. Payments were to be the same amount each month, guaranteed for the lifetime of the plaintiff or 20 years, whichever was longer. The IRS said the recipient may exclude the full amount of the payments from gross income under section 104(a)(2) of the Code, and that payments made to the estate after the recipient’s death are also fully excludable from taxable income.

Comments

1. Let's make clear what we are discussing are structures set up AFTER the deceased plaintiff's death. This article is not referring to cases that are settled with a structured settlement before the person dies and the payment stream from the structure is paid to the named beneficiaries on record with the structured settlement annuity issuer.
2. Revenue Ruling 79-220 refers to a buy and hold transaction when most of the transactions today are made via qualified assignment (corporate ownership of annuities is unfavorable tax wise, unless there is a IRC 130(c) exclusion)
3. The issue related to structuring pre-death pain & suffering and claims of the decedent relates to qualified assignments and the express language of IRC 130(c) which only permits damages excludable under IRC 104(a)(1) and 104(a)(2) to be assigned.
4. Revenue Ruling 79-220 clearly states that "payments made to an estate after the recipient's death are fully excludable from taxable income".

5. Revenue Ruling 79-220 DOES NOT state that payments made to an heir via an estate are fully excludable under IRC 104(a)(2). They may not be income taxable, BUT do such distributions come under a different tax code section that is not included in IRC 130(c)?

6. An heir is defined as a " person who inherits some or all of the estate of a recently deceased person. The legal successor is usually selected because he or she is related to the deceased by a direct bloodline or has been designated in a will or by a legal authority.
   Read more: http://www.investopedia.com/terms/h/heir.asp#ixzz1Q6U1yypQ
7. The unwind exclusion in every qualified assignment permits the assignee to jettison the obligation and the annuity if IRC 130(c) is not satisfied.  This could cause a massive taxable event to the a United States tax paying Defendant or insurer.
8. Without a Private Letter Ruling [or change/clarification to IRC 130(c)] are both Defendants/ Insurers and even plaintiffs leaving themselves exposed?

Do cases involving large amounts of pre-death pain and suffering come up every day? Perhaps not, but judging from one New York lawyer's blog they come up often enough to require vigilance.

The New York Injury Cases Blog, written by Plaintiff lawyer John M . Hochfelder of White Plains, New York is a good resource for news on pain & suffering.

Hochfelder speaks of a $3,500,000 verdict was upheld on appeal in Rivera v. City of New York (2d Dept. 2011).

During the terrible final 4 3/4 hours of Anna Rivera's life, she suffered enormous physical pain and terror from:

• unrelenting pain while gasping for air and struggling to survive;
• extreme fright, anxiety and confusion at not being allowed the presence of and comfort from her parents
• panic and fear from being physically restrained to the bed without the paralytic and sedatives
• choking and gagging from the endotracheal tube while having to endure the invasive intubation procedures three times without anesthetics, sedatives and muscle relaxants
• severe agitation from fighting and bucking against the endotracheal tub 

Other cases cited by Hochfelder...

• Reed v. City of New York (1st Dept. 2003) - $5,000,000 ($2,500,000 past - 6 years, $2,500,000 future - 30 years); 43 year old; brain damage with progressive tissue loss in lobes
• Paek v. City of New York (1st Dept. 2006) - $4,300,000 ($1,300,000 past - 6 years, $3,000,000 future - 40 years); 36 year old; traumatic brain injury with severe cognitive dysfunction
• Weldon v. Beal (2d Dept. 2000) - $5,000,000 ($2,000,000 past - 12 years, $3,000,000 future - 15 years); 26 year old; anoxic brain damage
• Evans v. St. Mary's Hospital (2d Dept. 2003) - $1,800,000 ($800,000 past - 13 years, $1,000,000 future - 31 years); 28 year old; anoxic brain damage 
• Schaffer v. Batheja (2d Dept. 2010), about which Hochfelder wrote in detail, here. The court approved a pre-death pain and suffering award of $2,500,000 for a woman in a coma who was only sporadically aware of her condition (she'd lapsed into a coma due to medical malpractice) for the 4 1/2 years until she died.

One of the nation's Leading authorities on settlement tax law, Robert Wood of San Francisco's Wood & Porter, refers to the IRS application of "narrow and unforgiving reading of the scope of section 104" in his  article " The Uncertain Effects of a General Release"  (May, 2, 2011 Tax Notes) .

What makes anyone believe that they will be any less "narrow and unforgiving" on the subject of Section 130(c)?

The stakes are high for defendants and insurers, and even plaintiffs who could lose secured creditor status if an IRC 130(c) unwind were to go into effect.

Where is the tax support to justify an allocation to wrongful death ostensibly to accomodate the amount someone wants to structure, or the structure broker wants to sell, after the case has been pleaded for years on pain and suffering of the decedent in order to jack up the numbers?

is there any structured settlement broker or settlement planner that has enough errors and omissions to cover the taxes and penalties resulting from a mistake? 

It would be a good thing for the life insurance companies issuing structured annuities and/or other stakeholders to obtain an IRS Private Letter Ruling or a fix to IRC 130(c) to be absolutely sure that payments made to an heir for the claims of an estate for damages paid to the estate for pre-death pain & suffering qualify under IRC 130(c).

Last updated September 2, 2024

 

 

 

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