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If You See a Qualified Assignment and Release Like This, Seek a Second Opinion

by Structured Settlement Watchdog

A Qualified Assignment and Release which includes the following, raises more questions than answers. If you see one it probably deserves a second opinion.

QUALIFIED ASSIGNMENT AND RELEASE

Defined Terms

Assignor:___________________ Qualified Settlement Fund,  ( QSF may be adminstered by company related to settlement planner)

Assignee: Qualified Assignment Company related to the settlement planner.

Qualified Funding Asset:  Annuity

Issuer of Qualified Funding Asset :  Metropolitan Life Insurance Company

12. In exchange for "legal payment rights" pursuant to 5891 of the IRC, to the Periodic Payments specified in Paragraph 15. Claimant hereby releases and discharges the defendants and/or respondents with regard to the Periodic Payments, and agrees to only look to  (name of Assignment Company owned by settlement planner firm holding company)

_____________________________________________________________________

SIDE BAR (sponsored by "What's Your Vector Victor?")

Why is the Clamaint releasing and discharging "Defendants and/or Respondents" in the settlement planner's Qualified Assignment and Release document from a QSF?  Wouldn't the "Defendants and/or Respondents" have been released and discharged when the money was deposited in the QSF under the "resolve or satisfy" clause in  § 1.461-2(c)(2)?

Claimant is to Respondent as Defendant is to Plaintiff. See my September 18, 2014 post, What's the Difference between Plaintiff or Claimant, Defendant or Respondent?

________________________________________________________

13. In the event of notice of an application to any court for the transfer of the payment rights under this agreement, (name of Assignment Company owned by settlement planner firm holding company) reserves the right to  effectuate an immediate transfer of ownership of the "Qualified Funding Asset"

Metropoltan Life Will Not Issue a Structured Settlement Annuity to a Settlement Planning Firm's Assignment Company

This author has confirmed with Metropolitan Life Insurance Company, that Metropolitan Life Insurance Company WILL NOT issue a structured settlement annuity to a qualified assignment company other than its own. Furthermore, since MetLife spun off its retail division to form Brighthouse,  a transition which was finalized August 7, 2017, MetLife does not issue retail annuities.

Factored Structured Settlement Payments Bought as an Investment Are Not An Annuity

The acquistion of someone elses' structured settlement payment rights is not the purchase of a structured settlement annuity, in accordance with National Association of Insurance commissioner (NAIC) Statutory Issue Paper No. 160, or an annuity under the laws of most states. In 37 states, investors in other people's structured settlement payment rights do not have the same statutory protections.

What is a Qualified Funding Asset?

According to IRC 130(d)

"For purposes of this section, the term "qualified funding asset" means any annuity contract issued by a company licensed to do business as an insurance company under the laws of any State, or any obligation of the United States, if—

(1) such annuity contract or obligation is used by the assignee to fund periodic payments under any qualified assignment,

(2)the periods of the payments under the annuity contract or obligation are reasonably related to the periodic payments under the qualified assignment , and the amount of any such payment under the contract or obligation does not exceed the periodic payment to which it relates,

(3)such annuity contract or obligation is designated by the taxpayer (in such manner as the Secretary shall by regulations prescribe) as being taken into account under this section with respect to such qualified assignment, and

(4)such annuity contract or obligation is purchased by the taxpayer not more than 60 days before the date of the qualified assignment and not later than 60 days after the date of such assignment".

 

It is clear from the plain reading of IRC 130(d) that obligation refers to any obligation of the United States. So the puzzle is what is the settlement planner getting the payee into here? 

 

If you would like more information on the essentials of  structured settlement documentation, this video may be helpful.

 

 

Los Angeles Single Claimant QSF Decision Goes Plaintiff's Way Despite Notable Inconsistency in Moving Papers

by John Darer CLU ChFC MSSC CeFT RSP CLTC

How a Single Claimant Qualified Settlement Fund Was Recently Used to Circumvent an Insurer's Approved List of Structured Annuity Markets

Qualified Settlement Fund News  "Hear Ye Hear Ye, Get Yer QSF"

A.  The High-Low Arrangement

A high-low arrangement is a private contract that, if signed by litigants before trial, constrains any plaintiff’s recovery to a specified range.[Trial and Settlement: A Study of High-Low Agreements J.J. Prescott University of Michigan, Kathryn E. Spier Harvard University, Albert Yoon University of Toronto, Journal of Law and Economics, vol. 57 (August 2014) 

B. The Controversy

The parties in a Los Angeles County case had negotiated a  high-low arrangement. Post trial it appears that the Plaintiff, through counsel, demanded that the funds be paid into a single claimant qualified settlement fund, precipitated on the Defendant's insurer's apparent unwillingness to fund a structure with Independent Life Insurance Company, a structured settlement annuity issuing life insurance company not on its approved list.

Defendant contended that (1) there was no settlement;  (2) Plaintiff's Broker was employed by an affiliate of Independent Life; (3) that Independent Life is on the insurer's "do not use" list; (4) that payment into a single claimant QSF creates unnecessary risks for the insurer. The insurer stated its concerns about Independent Life's viability, referencing its March 31, 2021 quarterly statement. [Case Caption: Brayan Resendez, and Individual, Plaintiff v Mulholland Tennis Club, a California corporation et al. Superior Court CA  Los Angeles County Case BC681291]

The Plaintiff submitted an August 4, 2021 declaration from Eastern Point Trust Company CEO Glen Armand who notably stated that "he and EPTC have created, served as trustees, and provided QSF administration for thousands of cases just like that in this matter" had "the IRS has conducted audits of other similarly situated QSF's  for which EPTC is trustee and were established under the same circumstances, method and documents as the Resendez QSF. The IRS has not issued any adverse findings or deficiencies in those audits related to the surrounding facts and circumstances, qualification, construction, or operation of audited QSFs".

Trotted out as an example of where the Defendant's insurer had funded a single claimant QSF in July 2021,  Plaintiff's structured settlement specialist Nick Coccimiglio attached a check that redacted the amount of the check, but left the insurer's policyholder (and likely releasee), claim number and the name of the qualified settlement fund ( possibly also identifying the surname of the plaintiff in that case) for public consumption. It is unclear whether or not the settlement agreement in that matter included a confidentiality clause.            

B.  Inconsistencies in Plaintiff's Supplemental Briefs and Declaration of Structured Settlement Specialist Raise Eyebrows of Casual Observer

In the "Plaintiff's Supplemental Brief in Response to Defendant's Supplemental Brief in Opposition to Plaintiff's Ex Parte Application to Enforce Settlement", filed with Hon. Rupert A. Byrdsong,  Plaintiff alleges that on the one hand "the Plaintiff's financial interests are the paramount consideration in this matter". On the other hand the insurer has no interest in the protection of plaintiff". Yet the Declaration of Nick Coccimiglio attached as Exhibit A to the same brief states, at #5 " Everyone working in conjunction with the Brayan Resendez settlement is acting on his behalf and with his best interest in mind"   

The best interest appears squarely focused on the yield of the structured settlement annuity, or does it?

Plaintiff counsel states in the aforementioned brief that "Mr Coccimiglio, at the direction of Brayan Resendez, conducted a market survey and obtained various quotes from eight insurance carriers that issue structured settlement annuities. Plaintiff desires to use Independent Life Insurance Company. It was determined that as compared to other potential structured settlement annuity companies, plaintiff would see a benefit of 5.8 percent greater income than the next best carrier New York Life. For Brayan Resendez, that translates into more than $100,000.00 in gained interest as a result of his annuity investment".

Coccimiglio declares under penalty of perjury on August 12, 2021 at #2 of Exhibit A that "I have done (an) initial market survey with respect to various rates for proposals involving settlement funds of Brayan Resendez. I have recommended that he establish a structured settlement program with Independent life Insurance Company.

But then at #5 of Exhibit A, Coccimiglio states in seeming contradiction, that "The QSF... It assures that Brayan Resendez can have access to that money to make investment decisions in a time frame that is comfortable to him. It gives me time to work with the life companies to put together the best possible financial investment plan for Mr. Resendez' future. If Plaintiff had already determined to use Independent Life as stated in plaintiff counsel's reply brief and Coccimiglio already recommended Independent Life in #2 of his August 12, 2021 Declaration under penalty of perjury, why the superfluous language in #5?

Consider the following:

The use of single claimant QSFs or attempted used of single claimant QSFs is nothing new

It is well known that Independent Life's assignment company will accept a qualified assignment in such cases and it may be the only one.  The top rated structured settlement annuity carrier in terms of third party ratings, cited in the plaintiff's  cited Supplemental Brief had the second best yield, but any diversification play might be moot since upon information and belief New York Life will not take assignments from single claimant qualified settlement funds. While others have an official stance against such practice, unconfirmed rumors suggest that business exceptions have been made at certain times in the past. It certainly would be great if there was a consistent business practice. 

Common reasons for use of single claimant QSF

• Plaintiff wants to structure with a life insurance company not on an insurer's approved list
• Plaintiff's attorney wants to defer attorney fees using a standard structured settlement annuity and the defendant's insurer has a policy about participating in such settlements
• Plaintiffs or attorney want to utilize market based structured settlements as part of an allocation of settlement proceeds and (1) not insurer approved list and/or involves an attorney fee and the insurer will not participate; and in some cases
• Sometimes just a money grab by plaintiff settlement consultant

A notable example where a Court concluded that it would not force the defendant or its insurer to pay into a QSF

in a 2011 decision, the Florida circuit court in Hillsborough County ruled that where the plaintiff and a defendant reached a settlement agreement in resolution of the plaintiff’s claims, but the defendant did not agree to pay the agreed-upon settlement proceeds to a Qualified Settlement Fund (“QSF”) created pursuant to Section 468B of the Internal Revenue Code and related treasury regulations, the court would not force the defendant or its insurer to do so. In Martinez v. Tampa Bay Academy, et al., Case No. 06-CA-007546 (Hillsborough Cir. Ct.), Judge Sam Pendino found that, under such circumstances, an enforceable settlement had been reached for the defendant or its insurer to pay the agreed-upon settlement proceeds to the plaintiff or the trust account of the plaintiff’s counsel – but not to a QSF.

 

Pre-Settlement Negotiation Agreements and The Same Old Tired Argument About Single Claimant QSFs

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Does the claimant control the claims dollars during settlement negotiations?

"If you have been asked to sign one of these agreements you need to fully understand the motivation behind AIG's insistence, which appears to be nothing more than an attempt to control the claims dollars that rightfully belong to the plaintiff in any other form of settlement",  says Mark Wahlstrom  April 11, 2018, on the Settlement Channel, in response to his allegation that AIG solicits an agreement that none of the settlement money will be paid into a settlement trust, qualified settlement fund or 468B Settlement Trust as part of a "disturbing trend".

Fact: The claimant DOES NOT control claims dollars.

Fact:  Each party is free to negotiate and make offers or demands in the form they choose and each can agree or disagree to terms.  That's why it's called a negotiation. A settlement arises as the result of a compromise.

Can Claimant Compel Defendant or Insurer to Pay into QSF?

Fact: A Defendant or insurer refusing to pay into a QSF is nothing new, just like the Pacific Life sales conference/incentive trip that Settlement Channel reported about recently, as if startled by a "new discovery".

Fact: A Florida Court determined in 2011 that a plaintiff cannot compel a Defendant or its Insurer to pay settlement proceeds into a Qualified Settlement Fund .In the matter of Martinez v. Tampa Bay Academy, et al., Case No. 06-CA-007546 (Hillsborough Cir. Ct.), the Court agreed with Tampa Bay Academy and found that the parties entered into an enforceable settlement … in cash from Tampa Bay Academy, in exchange for a full written release from Plaintiff as to all claims. The Court ruled that the settlement amount "shall be paid to Plaintiff, or the trust account of Plaintiff’s counsel, in exchange for a full written release from Plaintiff as to all claims.”  Read my July 2011 post on the case

Fact: Claims dollars to be paid to the plaintiff in cash do not "rightfully belong to the plaintiff" until a negotiated release which sets forth how specified claims dollars are to be paid has been signed.  If a claim is being structured the portion of claims dollars used to fund the structured settlement do not "rightfully belong to the plaintiff". If they did then there could be no structure.  There can be no constructive or actual receipt if there is to be a structure.

Structured Settlements from Single Claimant QSF RIP

Fact: The Single Claimant QSF issue with structured settlements is dead. Lichens are growing on the tombstone. No currently writing qualified assignee associated with a structured settlement annuity issuer will accept a qualified or non qualified assignment from a single claimant QSF.

Fact: There has been no published Treasury Ruling concerning the viability of single claimant qualified settlement funds and structured settlements. It has been more than a decade since the question was removed from the United States Treasury Priority Guidance list.

The issue of single claimant 468B and structured settlements, was originally placed on the Priority Guidance List following a June 19, 2003 submission by a group of settlement planners who individually put up substantial sums to hire the law firm of Skadden Arps, because such a ruling was deemed necessary. The Skadden Arps team included several former counsel to the IRS. Despite the fanfare and false start drum rolls and teases transmitted to plaintiff lawyers by certain settlement planners, Treasury removed the question from its priority guidance list without ruling. One such tease was from Dick Risk, the attorney who filed a poorly pleaded case against AIG in 2017, who wrote in Q2 2004, "Treasury Edges Toward Publishing QSF Single-Claimant Guidance".  Dick's teaser was still published in 2018, although guidance from Treasury hasn't materialized in almost 14 years. The next step was an effort by two individuals, including Risk, to attempt to hijack 2010 hearings on IRC 104(a)(2) that similarly resulted in complete failure.

The few remaining proponents rely on couched legal opinions from lawyers whose Errors and Omissions coverage is a nano-fraction of the open exposure if their opinions are not correct.  It would be interesting to audit the files of those who recommend prudent diversification of structured settlement annuity issuers, ostensibly mindful of state guaranty fund limits, yet rely on the opinion of a single lawyer or two, whose E&O limits are such a teeny-weensy fraction of the dollars associated with the QSF advice provided.

Any noise flitting about today is a simply a commission motivated thing, dressed in thrift shop level plausibility, by certain settlement planners who have failed to adapt, or refuse to adapt, to the modern civility. Abuse by some planners of single claimant QSFs certainly had a role in why no life insurers will take the aforementioned qualified assignments. Some of the planners may have even  abused their own clients by saying that it was needed so they could get a "full market survey" in lieu of an approved list, perhaps not mentioning that (a) they didn't have all the markets or (b) all (now) or as recently as 2013, only one company would take a qualified assignment from a single claimant QSF.

 

 

Qualified Settlement Fund | Lack of Disputes or Controversy Catches Attention of US Government

by John Darer® CLU ChFC MSSC CeFT® RSP CLTC

The United States government has opposed a St. Louis lawyer's motion for a qualified settlement fund in a qui tam/whistleblower case against K-Mart accusing lawyer Stephen Tillery of trying to dodge taxes on the proceeds.

The Qui Tam action in the case claiming K-Mart charged customers with insurance higher prices than customers who paid out of pocket. 

What is a Qui Tam Action?

A Qui Tam action may be brought by any party (as a relator) against an entity that is fraudulently collecting money from the United States government by filing false claims. The party bringing the suit – the relator – must have possession of information substantiating the claim of fraud against the government. The government shares a percentage of the monies collected, along with a share of treble damages and penalties if any, with the relator. The relator may be any entity including a private individual, trade association, or labor union. Congress authorized Qui Tam actions in the False Claims Act.

Internal Revenue Code expressly provides that nothing in any provision of law shall be construed in a manner whereby an escrow account, settlement fund, or similar fund is not subject to current income tax. Gerald Burke, the Assistant US Attorney, wrote that the Declaratory Judgment Act, which expressly includes matters with respect to federal taxes, does not permit a relator to seek a court’s assistance for a ruling on what a trust ostensibly created under Treasury regulations

The government contends that that there was no dispute about the amounts K-Mart should pay to states and the federal government; that there was no controversy concerning the releases K-Mart would receive in exchange for payments and that there was no dispute about the amount of (relator) Ireland’s share or his attorney’s fees."   [Source: Madison-St Clair Record]

Caution Should Be Exercised in Use of QSFs | In-N-Out is For Burgers

Many of my industry colleagues who still push qualified settlement funds involving single claimants or other QSF's where there is no legitimate controversy or dispute, where funds are essentially "in and out", should see this case a shot across the bow. None of the attorneys who give advice about qualified settlement funds, on which my industry colleagues rely, to advise trial lawyers and their clients about QSFs, have enough professional liability insurance to cover all the opinions given over the years.

Relator's counsel wrote that with a qualified settlement fund, K-Mart could make an initial payment without Ireland or his counsel immediately recognizing the income, which would give Ireland time to resolve liens against (original relator) Garbe’s estate, such as a substantial Medicaid lien.

He wrote that it would give Ireland time to determine the best means of distributing his substantial recovery in ways that serve Garbe’s interests.

In-n-Out is For Burgers Not Qualified Settlement Funds

 Image © Adrianadh | Dreamstime.com

 

Single Claimant QSF Investing in Structured Settlement Receivables, Is it Kosher?

by John Darer CLU ChFC MSSC RSP CLTC

Robert Wood, Esq.  San Francisco tax attorney, author of treatise on Qualified Settlement Funds and Section 468B made these important points about Single Claimant Qualified Settlement Funds June 23, 2014:

• QSFs may sometimes be used inappropriately to defer receipt of monies for protracted periods

• It seems more likely that the IRS would establish some sort of anti abuse rule addressing the inappropriate use of QSFs to defer income.

• To be cautious one should try to establish QSFs where there are multiple claimants 

Notwithstanding the transaction risk of structured settlement receivables, it seems clear that if you use a single claimant qualified settlement fund to invest in structured settlement receivables for a minor (or incapacitated person) paying out over an extended period of years, you do so at your peril.

While Wood opines in the 2014 article that what action the IRS would take, if it does, would be likely not be retroactive, that may not be enough to be prudent in the eyes of decision makers like judges and guardians ad litem who are charged with protecting the most vulnerable.

Structured Settlement Receivables/structured settlement payment rights are marketed to investors by promoters of these assigned contracts, including some settlement planners, in a wholly misleading way by calling them secondary market annuities when they are not annuities.

 

 

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

Settlement Planner Appears to Be Rebating Costs of Qualified Settlement Fund While Selling Insurance Product

by Structured Settlement Watchdog®

Is a member of the Board of the Society of Settlement Planners  engaging in rebating as that is defined under Arizona insurance law? 

Rebating

"Settlement Professionals, Inc. "pays all the costs of a QSF" says a statement made by plaintiffs in court documents in an Arizona case that involves the sale of an Annuity from American National Insurance Company. Does this violate Arizona law?  Source:  Case No: In Re Conservatorship of T.S. 1300GC2013 00063  Superior CT AZ Yavapai County  6th Supplement to Petition for Appointment of Conservator for a minor injured in a horseback riding accident  (in response to objections of the father and Liberty Mutual Insurance company to the 5th amended supplement)

Another statement in the public court documents submitted by lawyers Larry J. Cohen and Neil J. Harrington on November 4, 2013, answers the question concerning Costs of Establishing and administering the QSF expressly states '"These costs are borne by Settlement Professionals, Inc.

AZ Rev Stat § 20-449 (2016) . Rebates on life or disability insurance

A. Except as otherwise expressly provided by law, no person shall knowingly permit or offer to make or make any contract of life insurance, life annuity or disability insurance, or agreement as to such contract other than as plainly expressed in the contract issued thereon, or pay or allow, or give or offer to pay, allow or give, directly or indirectly, as an inducement to such insurance or annuity, any rebate of premiums payable on the contract, or any special favor or advantage in the dividends or other benefits thereon, or any valuable consideration or inducement whatever not specified in the contract.

If the statement is true,  the use of "a" vs "the" implies a routine rebate, then the obvious question is how many times and in how many states has the company and its associates paid rebates as those terms are defined under the laws of Arizona and other states where the settlement planner does business?  According to the Court documents, "Mr. Melligan (sic) has personally participated in over 100  (single claimant qualified settlement funds) and other advisors report similar numbers"

It begs the question of what communication was there between the attorneys and Settlement Professionals Inc., and/or between the latter and the plaintiffs or the minor's lawyers to prompt  making the express statements they did in the court documents. There had to be an understanding.

Most States have Anti-Rebating laws

While a settlement planner might argue he/she or it is attempting to do the right thing for the client, the anti-rebating law in Arizona is perfectly clear, as it is in his/her/its home state and in most other states. In a September 24, 2007 opinion from the Office of General Counsel of the New York state insurance department opined that it was unlawful to "pay the expenses associated with a qualified settlement fund in connection with the sale or potential sale of structured settlement annuities or any other insurance". To underscore this point it is noteworthy that another settlement planner sought an exception to New York State's General Obligations law to be allowed to rebate or reduce commissions for insurance products placed for families of the 1983 Beirut barracks bombings. Here is a helpful 2009 legal analysis on the subject

Society of Settlement Planners Code of Ethics

The Society of Settlement Planners Code of Ethics adopted in 2008 and still current Rule 10(d)  states that a settlement planner shall not engage in unfair trade practices, including but not limited to: engaging, counseling or assisting another participant in the settlement process, including a client, to engage in conduct the planner knows or reasonably should know is criminal, fraudulent, illegal or is prohibited by law...".  In a February 25, 2003 press release for the SSP, Meligan was quoted "These illegal business practices... include...rebating ... against individual plaintiffs and categories of plaintiffs'. The law however,  does not appear to make a distinction about who can receive rebates. From the plain reading of the law, it appears that all rebates in connection with the sale of insurance (including annuities)  are "prohibited by law'. 

Original Petition of Appointment of Conservator does not mention Qualified Settlement Fund

The Original Petition in June 17, 2013 makes no mention of a QSF.

Structured Settlement Receivables

The settlement planner has also apparently advocated the use of what is mislabeled 'secondary market annuities" for the minor, to compete with traditional structured settlement annuities.  That structured settlement payment rights, which are not annuities (and not regulated insurance products), are called 'annuities" is misleading to the Court.  the petition also falsely states to the court that annuities issued from the secondary market are issued by Liberty Mutual.  Structured settlement derivatives are not annuities and therefore the statement is false on its face.  Even if arguendo the statement were true, Liberty does not issue annuities in the secondary market.

There is nothing in the petition that addresses the risk of investing in structured settlement payment rights (receivables). Read the immediate prior post for a cautionary story about how an elderly couple got shafted out of $150,000 investment in another deal involving another financial adviser (i.e. not Settlement Professionals, Inc.]  While a relatively novel idea at the time of the petition, the use of structured settlement derivatives is not without risk.  Is that risk in the best interests of a minor with a brain injury?

The 6th amended supplement  attempts to assuage those concerns by stating that "any secondary markets securities that might be used ...would come through First Capital Surety & Trust Company or the Bank of Utah'. I confirmed today that the former, now known as Capital First Trust Company did not ever, and does not currently, originate structured settlement derivatives.    

Comparison of Annuity Insurers

Liberty Life Assurance Company of Boston and American National both have A ratings from AM Best and Standard & Poors. Liberty has an A2 Moodys  Both companies had been in existence for over 100 years at the time of the petition.  Liberty Mutual, which guarantees the performance of Liberty Life  Download Liberty-mutual sample guarantee of Liberty LAB is ranked 76th on the fortune 500 . As of December 31, 2015 it had $121.7 billion in consolidated assets. In contrast ANICO, as of December 31, 2015, had $23.75B in assets. 

When a lifetime benefit is being contemplated for a minor.  Longevity is being considered and the size of the company backing the obligation is an important consideration. Payees from Executive life Insurance Company of New York learned that the hard way.

 Single Claimant QSF

Not satisfied with the Treasury having removed single claimant QSFs from its Priority Guidance plan after more than half a decade, in a February 2010 hearing in front of Treasury panel concerning IRC 104(a)(2) an attendee observed and published that Settlement Professionals, Inc.'s Jack Meligan and another SSP member recommended that the Treasury issue regulations explicitly holding the economic benefit doctrine not to be triggered in the context of single-claimant QSFs. He argued that such regulations are necessary as a result of the power imbalance in plaintiff-defendant negotiations.  The requested regulations never happened. Yet in the 2013 filings concerning a single claimant QSF in the instant case, the economic benefit doctrine is not addressed. Hmm.  In 2009, noted San Francisco tax attorney Robert Wood published a nice piece on the subject of single claimant qualified settlement funds and opined his preference for multi claimants.

 

 

 

 

 

 

 

 

 

 

 

Athene USA Upgrade to A- by A.M. Best | Athene Took Over Aviva USA

by Structured Settlement Watchdog®

There is some good news for people with structured settlements set up with Aviva Life,  CGU Life or Commercial Union Life following the acquisition by Athene of Aviva's USA operations in 2013.

A.M. Best has upgraded the financial strength rating to A- (Excellent) from B++ (Good) and the issuer credit ratings (ICR) to “a-” from “bbb+” of the members of Athene USA Group (AUSAG).

The outlook for all ratings has been revised to stable from positive. (See below for a detailed listing of AUSAG’s group members and ratings.) AUSAG is the consolidating rating unit for the U.S. operating companies, which is focused on the fixed indexed and fixed annuity market segments.

Concurrently,A.M. Best has upgraded the ICR to “bbb-” from “bb+” to Athene Holding Ltd (AHL) (Bermuda). The outlook has also been revised to stable from positive. AHL operates as the holding company for the U.S. and Bermuda operations.

The rating actions on the AUSAG group of companies is based on additional cash capital contributed to the company in April 2015 and significant progress toward satisfying the material weakness issue as stated by A.M. Best in a press release dated Oct. 17, 2014, at which time the outlook for the ratings was revised to positive from stable. AUSAG is backed by a strong management team with proven ability to grow capital organically and from new capital generation in the private placement market, as well as the demonstrated ability to integrate Aviva, a much larger entity.

Not all is positive about the Athene integration with Aviva USA.  

A.M. Best clearly is not aware of what has happened with Aviva USA structured settlement annuitants.

Inquiries made to management at Athene last Fall suggest that there was a termination of the Aviva Capital Maintenance Agreement (CMA), a material sales inducement, involving a $100 Billion   UK Aviva subsidiary that still exists, that Aviva used in its filed sales brochures to induce the placement of an estimated $1 billion of structured settlement annuity business in the United States.  This termination is controversial because ALL of the Aviva sales literature, which would have had to have been filed with insurance regulators, and the CGU and Aviva  structured annuity contracts issued with a CMA , expressly stated the unambiguous words that the CMA was "absolute, unconditional, present and continuing". 

My communications with Aviva's legal department in London last fall were met with a turf off to Athene and Athene general counsel informed me in writing in late October 2014, of the CMA termination in October 2013, after some foot dragging.

Aviva structured settlement products were especially favored by many settlement planners because of its willingness to accept an assignment from a single claimant qualified settlement fund between 2000 and early 2009, when it it ceased writing structured settlements

There is nothing to suggest that Athene is financially impaired and the AM Best announcement is very good positive news. I hope that Athene's success continues.

Could structured settlement annuitants go after Aviva in the UK?

Some have suggested that in the event of financial impairment of Athene's assignment company and its parent fails to step up to the plate,  that annuitants could go after Aviva in the UK, to force them to perform on the CMA, but at what expense?  The experience of Executive Life of New York suggests that one cannot simply "let sleeping dogs lie'. 

 

Structured Settlement Payment Rights Are Receivables NOT Annuities | Non Qualified Assignments

by John Darer CLU ChFC MSSC RSP CLTC

Efforts to create an offshore alternative to a Section 130 qualified assignment (with the same tax treatment) for tort victims and structured attorney fees using structured settlement payment rights may ultimately put a dent in the rampant mischaracterization of structured settlement receivables (factored structured settlement payment rights) as annuities by the merchants of such financial investments.  The effort purportedly creates an offshore assignment corporation in Barbados [which would take over future periodic payment obligations from qualified settlement funds

A "patchwork quilt" is in my future?

(or defendants) and fund assumed future periodic payments to plaintiffs using a"patchwork quilt" of structured settlement receivables in lieu of traditional structured settlements annuities], has apparently uncovered that structured settlement payment rights would be treated as investments and not an annuity, according to our source.  

Evolution of Offshore Assignment Companies for Certain Types of Structured Settlement Transactions

IRC 72(u) Annuity Ownership | Non-Natural Person Rule

Generally, subject to IRC 72(u),  income from an annuity owned by a non-natural person (e.g. trust, entity, corporation) does not qualify for the same favorable tax treatment as an annuity owned by an individual.  IRC 72(u) was part of the Tax Reform Act of 1986 and was the result of  Congressional belief that prior law gave companies the opportunity to fund large amounts of deferred compensation for selected employees on a discriminatory basis. This situation created a disincentive to provide employees qualified plans (which must follow ERISA guidelines  [ see H.R. Rep. No. 426, 99th Cong., 1st Sess. 703 (1985); 1986–3 (Vol. 3) C.B. 703] 

Structured settlements that were entered into prior to the Periodic Payment Settlement Act of 1982 were funded on a "buy and hold basis".  Defendants or their insurers owned the annuities, were subject to taxes on investment income and retained the contingent liability on their books until the future obligation was complete.  Arguably aspects of this were problematic for some plaintiffs, defendants and insurers.  The plaintiff, as a general creditor had to have an ongoing relationship with the tortfeasor and had their future tied to the financial viability of the defendant or its insurer. 

The Work Around to the Non Natural Person Rule  | Periodic Payment Assignment

A work around to the non-natural person rule for settlements where damages were excludable under IRC 104(a)(2), was already in place in the Periodic Payment Settlement Act of 1982, which created IRC 130 and the so-called "qualified assignment".   A qualified assignment creates a substitution of periodic payment obligors. The assignment company takes on a periodic payment obligation from the defendant or insurer in exchange for consideration, the plaintiff consents to the assignment and agrees  to look only to the assignment company for the future payments. The defendant and/or its insurer,  gets a novation and can take down its reserves as a paid loss. In the case of a qualified assignment the plaintiff can also obtain a security interest in the annuity contract. Generally qualified assignments are only possible on damages for physical injury, physical sickness, wrongful death and post August 5, 1997 worker's compensation.

Non Qualified Assignments

At the time a tremendous gap existed between structured settlement solutions that could be done for plaintiffs and defendants in settlements where damages where excludable from taxable income and those settlements that involved taxable damages.  Some defendants or insurers do not want to carry a contingent liability on their books as opposed to having a closed file.

Setting aside contingent liability, the IRC 72(u) non-natural personal rule was a potential barrier due to the taxability of income from the annuity. There was less flexibility in what could be offered because income payments had to be substantially equal and  begin within 13 months, while qualified structured settlements could have multiple periodic payment streams to address multiple needs.

SAFECO and Liberty Mutual were the Early Movers on Non Qualified Assignments

SAFECO offered a domestic non qualified assignment through its SAFECO National subsidiary, funded with annuities from SAFECO Life Insurance Company, now Symetra Life Insurance Company. The SAFECO National programs limitations meant that periodic payments were restricted to being "substantially equal" and had to "begin within 13 months"

In or about 1996,  Liberty Mutual introduced an innovative non qualified assignment program through Barco Assignments Ltd. Liberty Mutual initially used it as a alternative, more flexible method to settle its own worker's  compensation liabilities prior to August 5, 1997 (when IRC 130 was amended to include worker's compensation).  Liberty Mutual discovered that the Section 18 A2 of the Tax Treaty Between Barbados and the United States permitted the ownership of annuities to be taxed in the state of beneficial ownership.  To wit, see  excerpt immediately below:

"Annuities derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State. The term "annuities" as used in this paragraph means a stated sum paid periodically at stated times during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered)."

Liberty Mutual  and BARCO  subsequently expanded the scope of liabilities accepted by the non qualified facility and funded with annuities from Liberty Life Assurance Company of Boston.  As it stands today the Liberty/BARCO Assignment program features a Notice of Financial Commitment from Liberty Life Assurance Company of Boston and a guarantee of Liberty Life Assurance Company of Boston by Liberty Mutual. It is critical to note that both Liberty Life Assurance Company of Boston and Liberty Mutual Insurance Company, which has existed since 1912, are insurance companies subject to the scrutiny of an annual audit by state insurance regulators in all 50 of the United States. The program is only offered through licensed insurance agents and brokers. who are subject to regulation of sales practices, audit and enforcement by the insurance commisoners in each state that they are licensed.

A healthy dose of skepticism was exhibited by a few Liberty Mutual competitors following the introduction of the BARCO non qualified assignment program, but it was not surprising that Allstate and Prudential entered the non qualified structured settlement market. Prudential's was a brief sojourn, it withdrew in 2009. Allstate aggressively and creatively expanded the application in 2011 to include structured oil & gas lease bonus, structured celebrity endorsement fees before withdrawing from structured settlements altogether in March 2013, so it could focus on its core property casualty business.

Other Third Party and/or Structured Settlement Broker Driven Assignment Companies Spring Up

• Structured Assignments,Inc. (formerly Treasury Funded Structured Settlements International or TFSS-I) and later known as Structured Assignments, SCC), offering treasury funded structured settlements and a structured attorney fee product called Fee structured plus which marries the Structured Assignments Inc. deferred payment facilty with Vanguard mutual funds on the Midwest Trust advisor platform. While it was initially only available through IFS subsidiary companies the program has rolled out to a wider distribution in the last year.
• Kenmare Assignments Ltd., a deferred payment facility, domiciled in Ireland, started by several Chicago based settlement advisers, marries the Kenmare deferred payment facilty with investment Managers like Goldman Sachs, RBC and Morgan Stanley                                                        .
• Havelet Assignment Company, Barbados based non qualified assignment company, with $500,000 minimum.  Participants select from a small stable of money managers and there is a private placement annuity wrapper. 
• United States Periodic Payment Assignments, LLC  (DE), started by a Buffalo based structured settlement broker in 2013. The company also advertises that it has a Barbados based assignment company.   I have seen the brochure and heard that the company was offering a deferred payment mechanism for attorneys that would permit their own advisers to handle the investments and purportedly,  structured attorney fees funded by structured settlement payment rights at the most recent AAJ meeting in Baltimore. I reached out to Milestone's John Bair seeking to confirm this however, Bair refused to comment.
• This author understands that another primary market structured settlement broker is exploring a domicile for an assignment company in the United States Virgin Islands.

To the best of my knowledge, at this time few US based property and casualty insurers are participating in assignments to entities that do not use regulated insurance products or the SAI Treasury Funded Structured Settlement product. Moreover, there appears to be no life insurer issuing structured settlement annuities today, whose qualified or non qualified assignment company will accept a qualified or non qualified  assignment from a single claimant QSF

Some Settlement Planners Not Concerned With IRC 130 or Structured Annuities

Settlement planners with their own assignment companies are left with a complex multi step process that first attempts to use qualified settlement funds to segregate the assets from the defendant or insurer and then enter into assignments from the qualified settlement fund. Some settlement planners I have spoken to seem unconcerned about IRC 130 since they intend to use non traditional products to solve the plaintiff's needs, including structured settlement payment rights [reminder that we've already established that structured settlement payment rights are not an annuity] One settlement adviser who is appointed by many of the life insurance companies that issue structured settlement annuity contracts was heard to be bashing structured settlements at a meeting of Pennsylvania Association for Justice, according to our source.

Innovation is great but the intellectual challenge comes with a cost and 7 figure investments have been already been made by multiple people at the time of writing who seek to change the paradigm. One participant has gone to incredible lengths to chase down everyting that could go wrong and will not make the facility available for rollout until satisfied. After an hour of  intellectual stimulating conversation yesterday we both agreed that structured settlement payment rights are not annuities, they are an investment.

Some settlement planning solutions are taking on the air of a "flux capacitor", the fictitious  heartbeat of energy "that made time travel possible" in the Back to the Future trilogy.

The devil IS in the details. What this means is that those who propose these non traditional solutions must be well schooled, properly licensed, regulated and insured, and not only be to identify and show an understanding of the risks, but be able to articulate them to clients and their advisors.  In New York , for example the General Obligations Law Section 5-1702  expressly requires certain disclosures by the Defendant or the Defendant's legal representative to the plaintiff when a structured settlement is placed, there is no such obligation on the plaintiff adviser. A $1 million errors and  policy limit will be woefully inadequate to cover the risks associated with these types of transactions, in my opinion.

In particular the use of structured settlement payment rights to finance structured attorney fees may involve a multi step process that includes a QSF,  assignments to entities that have no regulated insurance company guaranteeing their performance, acquistion of structured settlement payment rights from unlicensed and, in some cases, unregistered companies, with the attendant risk of an excise tax on the investor, as settlement purchaser, if the deal is not done properly.  Acquistion of rights from a third party needs careful vetting to be sure that there has been no illegal forum shopping or fraudulent approach to the seller. As I have previously written bribes are rampant in the structured settlement secondary market. If such has been the case where the structured settlement payment rights have been used to fund an attorney fee structure, how does the seller get their money back and how does that affect the tax status of the attorney?

To be continued...

Related Articles

Risks of Investing in Recycled Structured Settlement Payment Rights  October 1, 2012

Factored Structured Settlements Come With Significant Risks | Atlanta Lawyer  November 16, 2012

PLR Sought on Tax Status of "Recycled" Structured Settlements?  April 2, 2012

 

 

The Single Claimant QSF | Potential For Abuse of Qualified Settlement Funds Observed by Leading Settlement Tax Authority

by John Darer CLU ChFC MSSC RSP CLTC

The Single Claimant QSF horse has been dead for half a decade.  It made a lot of people very successful while it lasted and it's presence was one factor that helped bring the structured settlement industry closer together, in my opinion.

Most significantly, unlike the decade from 2000-2009, no structured settlement annuity providers currently accept Single Claimant QSFs.  Pat Hindert, in his review of a recent article by San Francisco tax attorney Robert Wood observes on his blog,  "they have effectively shut down this strategic personal injury settlement planning opportunity for a wide scope of actual and/or potential structured settlement cases". First of all "Get over it!"  

Misplaced Blame

Then it's time for a fact check.   A number of structured settlement annuity issuers who did accept qualified assignments from single claimant QSFs left the market place, such as John Hancock and Aviva. Were "they" responsible for that corporate decision?

Adapt, improvise and overcome. Why continue to fight yesterday's wars in an industry that enjoys a greater degree of civility than it did 5 years ago and a far greater degree than it did 10-15 years ago?

Potential Abuse of Qualified Settlement Funds Observed by Leading Settlement Tax Authority

In closing I may as well saddle up old "Pepper" for a short "trail ride" and reminisce.  Robert Wood observes the potential for abuse in qualified settlement funds. Wood "chucks" out this "acorn":

"QSFs allow plaintiffs and attorneys to defer the receipt of payments or the recognition of income until distribution. To some, that may seem to be an enticing proposition. Indeed, there is no antii-abuse rule in the statute or regulations, nor do there appear to be any rulings or cases that test the bounds of the concept. Thus, one might debate the potential risk that an aggressive plaintiff or aggressive counsel might use a QSF as an incorporated pocketbook. With no express time limit on the existence of a QSF, a plaintiff or his attorney might use a QSF to defer paying tax on a recovery indefinitely, letting the money sit in the QSF to earn interest and dividends, then doling it out when needed"

Indeed,  in QSF Symposium 2012-2, Hindert appeared to advocate the following as an advantage of QSFs. QSF's were touted as part of the "settlement planning standard"

"Plaintiffs can conduct their settlement planning with a sum certain, using their own advisers, free from the pressures of litigation, with unlimited time to analyze and address tax, investment and government benefit issues"

I questioned Hindert on October 3, 2012 with Do Qualified Settlement Funds Offer "Unlimited" Time to Address Investments?.  Never got a response.

The "trail ride" is over.  Goodnight "Pepper".

Image 1: Wikipedia

Images 2 and 3 : Dreamstime

Robert Wood  article from Tax Notes June 23, 2014

Postscript:  The qualified assignment company for Independent Life Insurance Company, which entered the market in 2018 will take assignments on Single Claimant QSFs.