Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and Commentary

Growing the Primary Market | "The World According to Carp"

by John Darer CLU ChFC CSSC RSP CLTC

Patrick Hindert's latest series on growing the primary structured settlement market smacks of sour grapes. Patrick Hindert is a former President of the National Structured Settlements Trade Association, although no longer a member (purportedly over a dispute over how much he should pay in dues). Predictably he trashes NSSTA, although now he no longer has the opportunity to draw on material he was exposed to from sitting on NSSTA committees such as its legal committee.

Hindert's crtiticism centers on the same old story : single claimant qualified settlement funds and the structured settlement transfers.

The single claimant qualified settlement fund "ship" has sailed. Get over it.

It is worthy to note that a single claimant qualified settlement fund,  if it were ever ruled on favorably by Treasury, would increase opportunities to sell recycled structured settlements to personal injury claimants and structured attorney fees backed by those cash flows. Coincidentally the primary market panel at the 2013 NASP annual meeting features a discussion about recycled structured settlements. 

Regarding structured settlement transfers, Hindert states

"IRC 5891 and the state structured settlement protection statutes have  solidified structured settlement transfers (i.e. factoring transactions) into a growing market that complements and potentially expands the traditional primary market. The ability of structured settlement recipients to sell their payment rights subject to judicial oversight and approval arguably improves the structured settlement product by adding a liquidity feature in the event of "over structuring"  or unanticipated cash requirements. Instead of capitalizing on settlement transfers to improve and expand its market, NSSTA (through bylaw amendments)  has threatened its members with suspension or expulsion if they sollicit(sic) or promote secondary market transactions. By continuing to criticize "structured settlement factoring", without participating in the secondary market, NSSTA and its members undermine their own product".

The structured settlement secondary market provides a valuable service to structured settlement annuitants and other payees of periodic payments such as lottery recipients. The good that the structured settlement secondary market does however,  is undermined by bad business practices such as forum shopping, examples of which you can read about in my recent posts. Note that our information is that the practice is not confined to an isolated company.Forum shopping mocks the law, mocks Congress and state legislatures that respectively, passed VTTRA 2001 and state structured settlement protection acts and, if left unchecked, deprives the United States Treasury of tax revenue from the 40% excise tax that should be levied on those that violate the federal law.

Is it Hindert's opinion that these practices should not be criticized?

Furthermore, and unrelated to forum shopping, the June 28, 2013 deposition of David Springer of Sovereign Funding Group in the Woodbridge case portrays a stunning example of deceptive business practices of some in structured settlement secondary market that are even tolerated by the Better Business Bureau of Greater Maryland!   Here is a guy who admitted under oath to making up stuff on his LinkedIn profile, admitted to creating false LinkedIn profiles, false Google+ profiles, endorsed himself via his fake personae in public facing social media, admitted to submitting false information to the Better Business Bureau and admitted to impersonating his wife because he was not legally permitted to work in the United States at the time he did it. Many factoring companies highlight their BBB records as something that consumers should rely on. That's unfortunately very Pollyanna.

Is it Hindert's opinion that these practices should not be criticized?

Then you have companies that are not registered to do business in the states in which they solicit business. One company that is a member of NASP that for years has listed a corporate headquarters in Maryland, with the Better Business Bureau,  but the State of Maryland provided us with a certification that the company, was never registered in Maryland (using either of the two business names contained in its BBB report). Nevertheless the company has an accredited A+ from the Better Business Bureau of Greater Maryland. Other companies operate out of mailboxes or virtual offices so the consumer or investor never really knows where they really are.

Is it Hindert's opinion that these practices should not be criticized?

Still other companies rely on lead generation websites, financially incentivizing poorly supervised search engine optimization folks who have little to no financial background, or licensing.  The unfortunate "sprouts"are numerous sites with bogus testimonials, bogus review sites, financially illiterate blog posts and spam.  Who is supervising these companies?

Is it Hindert's opinion that these practices should not be criticized?

Why is it that Hindert has not discussed ways to improve the regulation of the structured settlement secondary market to help consumers and individual investors?

On the subject of recycled structured settlements,  what industry standards are put in place to avoid conflicts of interest?  For an investor, including a primary market claimant, an attorney structuring their fees, or  a retiree to get a better return, the discount rate to the seller must be higher meaning less cash or more periodic payments sold to raise what the seller needs.  The best cash flow for an investor may be from the factor that charges a 16% discount rate to the seller as opposed to a 7% or 8% rate.

I'm skeptical that Hindert is blind to the fact that NSSTA members are knowledgeable about and, DO in fact have long standing relationships and open dialogue with members of the structured settlement secondary market and refer business.    

Hindert's commentary often engenders a narrow focus on growth of the personal injury market, but fails to recognize other products and solutions offered by NSSTA members, both within and outside of the personal injury space, both within and outside of litigation solutions, a fact that would be underscored by simply scanning a few industry websites instead of trading on old information in his noggin.

Is it the job of NSSTA to be the"ginsu"of trade associations, to teach its members how to sell life insurance and long term care? These are solutions that I offer my clients, but frankly, as someone who is certified in long term care (CLTC), I obtain my long term care information from the AALTCi, FMOs, American College courses and external sources. 

Does NASP lead the structured settlement secondary market, or is it led by its members? What influence does a single company that controls over 70% of the secondary market have over NASP?

What business is NSSTA in?

On October 14, 2013 Hindert recognized that "the United States structured settlement industry" ,   played an important historical role influencing the development of risk based capital (RBC) requirements for insurance companies". There's a start.  And in 1993 there was only NSSTA. Read more about RBC in Hindert's text book.

 

 

 

 

Single Claimant Qualified Settlement Fund | On "The Mark"

by John Darer CLU ChFC MSSC RSP CLTC

Finally another structured settlement industry commentator has spoken out about single claimant qualified settlement fund abuse.

For years 4structures.com LLC has admonished plaintiff attorneys on its website:

"Plaintiff attorneys should be cautious about using a Qualified Settlement Fund when their settlement planner is promoting it on the basis of "full market access" to structured annuity companies. Exactly the opposite is now true when your case involves a single claimant, In such circumstances the limitations to your client on a large case might mean that the client is not able to meet an annuity diversification objective. This could reflect poorly on the plaintiff attorney. Who needs that?"  

Moreover, I began blogging about the potential abuse May 16, 2006!

San Francisco tax attorney Robert Wood was dismissive of single claimant qualified settlement funds in his text "Qualified Settlement Funds and Section 468B" which was published in January 2009.

Now Scottsdale, Arizona based settlement Mark Wahlstrom, who is also Chairman of Sequence Media, states in an April 29, 2013 blog  " Single Claimant Qualified Settlement Funds (QSF), Fools Gold for Plaintiff Settlement Planners":

"However, the answer... should not be the careless and casual use of the IRC 468B qualified settlement fund process so as to add additional expense, process and potential IRS audit scrutiny to the settlement procedure simply so they don't have to split a commission with a defense broker"   (emphasis ours) and

"However, the result of this over reach by plaintiff brokers on single claimant cases has now led to a situation where there are no life insurance companies that will underwrite a structure on a single claimant case  (i.e. take a qualified or non qualified assignment from a single claimant qualified settlement fund) , forcing structured settlement brokers and settlement planners to look at alternative products or approaches, or to go back to their clients and explain how their time and funds on setting up a QSF were wasted"

Structured Settlement Market Consolidation Continues as John Hancock Out

by John Darer® CLU ChFC CSSC RSP CLTC

Another structured annuity issuer is to leave the market.  I heard the rumor last week and that has been backed up by an email today.  John Hancock Life Insurance Company and John Hancock Life Insurance Company of New York will cease writing structured settlement annuities effective March 8, 2013. 

Is the world coming to an end? Not at all.  Consolidation is normal in business markets. It is business as usual, with the exception of the single claimant QSF market, which will effectively be dead.

John Hancock is a major insurer who has just made a business decision to withdraw from a particular line of business. The company is not going out of business and will honor its commitments to existing structured settlement annuitants.

To our friends employed there who are waiting for the shoe to drop, we wish them well as they make their transition

 

 

Single Claimant QSF| Minnesota CPA and QSF Administrator Weighs in

by John D. Darer CLU ChFC CSSC RSP

A Minnesota CPA  has 'bellied up" to the single claimant qualified settlement fund "bar". Chris Lordan states in his blog  'Though slightly indirect, the regulation seems to allow for the formation of a QSF with only one claimant. Evidence in Private Letter Rulings supports the idea that the single-claimant QSF is legally durable".

Lordan recommends a law school paper written by Jeremy Babener of Lane, Powell in Portland, Oregon.http://www.lanepowell.com/wp-content/uploads/2011/12/Structured-Settlements_BabenerJ.pdf

He says" One area of uncertainly regarding QSFs is whether a single-claimant QSF complies with the governing regulations and Section 1.468B of the Internal Revenue Code. Is a single- claimant fund legally compliant with the QSF regulations?  While every situation is unique, don’t let an uninformed statement by a party to the settlement derail your plan because you have only one plaintiff.

Lordan, who is also a qualified settlement fund administrator, fails to acknowledge that currently only one Best "A+" annuity funding qualified assignee admits it will take a qualified assignment from a single claimant QSF.

Today there must be another valid reason to do a single claimant QSF and incur the attendant costs. In 2000, when I was involved in my first QSF, MOST qualified assignment companies would accept an assignment from a qualified settlement fund that involved a single claimant. A settlement planner could were imposed by an insurer or Defendant. Furthermore, in many cases back then, the short term interest might have been sufficient to cover the QSF administration costs. That is probably not the case today.

It is also worth mentioning that the tax advice given on these transactions has been from a VERY small universe of attorneys and accountants, some of whom, unlike Mr. Lordan, are not even tax specialists. I'm not knocking them, but legal and tax opinions usually have disclaimers. I reckon that the aggregate amount of professional errors and omissions coverage in place for these professionals for the last decade is far less than the amount of money placed into structured settlements from the single claimant qualified settlement funds they have opined on.

I should add that I contributed $15,000 in 2003-2004 to the collective effort to get Treasury to issue a Revenue Ruling to clarify the issue, because I felt it was right at the time. Despite being on the Treasury Priority Guidance plan from 2004-2009 however, the fact remains that there has been no ruling from Treasury.

 

 

 

 

Prudential "Rock Blocks" Structures From SIngle Claimant QSFs, including Structured Attorney Fees

by John Darer CLU ChFC MSSC CeFT RSP CLTC

The next time you get a piece of The Rock, it won't include a single claimant qualified settlement fund.

The Prudential Insurance Company of America dealt a massive blow to promoters when it announced March 19, 2012 that it will no longer write structured settlement annuities stemming from single claimant qualified settlement funds ("QSF") effective immediately.

The Prudential defines a single claimant QSF as a fund either established for the benefit of a single
claimant or, for multiple claimants who do not have “competing interests” (e.g., plaintiff family
members). Prudential will not provide for “derivative” claims from the injured party, i.e., a loss of
consortium or an emotional distress claim by the parents and/or siblings for the personal injury
victim.

The Prudential takes the position that when the funds are deposited into a QSF for a single claimant,
and there are no other factors to be negotiated under the settlement, the claimant has received
economic benefit of the assets**. Prudential does not consider lien holders or other non-claimant creditors (attorneys, medical providers, Medicare or Medicaid) as substantial additional obligations to be satisfied prior to the claimant’s ownership of the assets transferred to the QSF  (EMPHASIS ADDED)

**Read  NJ Claims Qualified Settlement Fund Assets "ARE Available to Beneficiaries"  February 28, 2012

It is Prudential’s position that the attorney’s portion of the funds deposited into a QSF is
constructively received by the attorney and the attorney derives an economic benefit from those
funds unless specific circumstances exist. This is based on the fact that the amount of their fee
is known at that point so there are no other factors to be negotiated. Prudential will accept the
assignment of attorney fees that flow through a QSF when ALL of the following conditions exist:
• The attorney and his (her) client agree to structure the attorney’s fees prior to services being
rendered.
• The case involves multiple claimants who have competing interests.
• There are multiple attorneys representing different claimants.
• The attorney’s fee is dependent upon the settlement their client is awarded.
• The amount their client will receive was undetermined at the time the funds were placed
into the QSF

 • There must be an attestation that ALL of the above conditions exist.

Despite  being on the Priority Guidance Plan of the United States Treasury for several years the issue of single claimant qualified settlement fund was unceremoniously dropped in late 2009. Efforts to incorporate it into changes to IRC 104(a)(2) at February 2010 hearings failed. It is believed that only one company remains that will accept structured settlements from a single claimant qualified settlement fund. As such, heeding a claim appearing on the website of a settlement planner claiming give full annuity market access using such a strategy is simply setting the attorney up for malpractice claim
 

 

Qualified Settlement Fund: Why Single Claimant QSF Could Mean Malpractice

by John DarerⓇ CLU ChFC MSSC RSP CLTC

I was surprised to hear that certain plaintiff lawyers in Upstate New York are STILL routinely using single claimant qualified settlement funds when structured settlements are being considered. The status quo has changed. Could following the advice of  single claimant "QSF jockeys"  mean those attorneys may be unwittingly facing malpractice exposure for not looking out for the best interest of their clients?

Single claimant QSF promoting settlement planners have recommended it "as a method to get around insurance company approved lists and get a "full market survey". The reality is anything but in 2011. Unlike 2000, when this author believes the first QSF was done in Erie County ( in Buffalo), when many companies would accept qualified assignments from single claimant QSFs, in 2011 there is just one New York licensed company that will.  While it is a quality company, unless you are sure John Hancock Life Insurance Company of New York has the best rates, or your case is of  size where diversification beyond John Hancock is not a concern, your client's best interest may not be served. [ In March 2013 John Hancock stopped writing structured settlement annuities]

Plaintiff lawyers who think that their structured settlement broker will stand shoulder to shoulder with them SHOULD be concerned. Do the math! If a structured settlement broker carries a $1 million single limit policy, or even a larger aggregate that must be divided by multiple brokers it's painfully easy to see that there is simply not enough insurance coverage to adequately protect you or your clients.

n addition to the annuity market limitations, there is still tax controversy about single claimant QSFs. In his address to the Academy of Special Needs Planners March 11, 2011, noted settlement tax specialist Robert Wood said "The regulations seem to allow the possibility of a single claimant QSF. Indeed, they include language instructing that a QSF may be “established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability....”87  Nevertheless, the Regulations fail to address whether the doctrines of constructive receipt or economic benefit would be triggered on a transfer for the benefit of a single claimant. The IRS has, to date, failed to definitively answer this question. Hence, the best advice is to avoid the controversy by establishing a QSF with multiple claimants.  (emphasis ours)

Some QSF jockeys will ply plaintiff lawyers with a "cocktail" of legal opinions written by other tax counsel who wax eloquently on the subject. Yet would an examination of their errors and omissions policy limits and the times the same advice was given, leave them, the brokers and the attorneys exposed if the advice proves to be wrong?  

Then there are added costs to Plaintiffs with a single claimant qualified settlement fund. There are costs to set it up and costs to administer it. There are records that have to be kept and one or more tax returns to be filed.  I recently spoke to a trustee on a settlement management trust who told me that the QSF trustee failed to file 3 years worth of tax returns on a case.

In a presentation labeled "Best Practices in Qualified Settlement Funds" to the Society of Settlement Planners in March  2006  RIchard B Risk, Jr.,  a Tulsa Oklahoma  lawyer who offers legal advice on QSFs to attorneys and structured settlement brokers (he also administers QSFs), stated that QSF principal might need to be used to pay QSF expenses if earnings do not generate enough to cover them and that a structured settlement producer may pay all or part of funding administration costs.  GIven today's virtually zero short term interest rates, who believes earnings will be sufficient in 2011? Risk cites the ABA Model Rules of Professional Responsibility, 1.8(f), independent judgment and client consent and even states that the plaintiff's attorney may pay all pr part of those fees. The presentation is still posted in the "Video and Graphic Pesenations" (sic) section of the Risk Law Firm website at the time of writing (August 24, 2011 at 1:48pm EDT). However, when mass marketing of "no cost qualified settlement funds" by Buffalo based structured settlement firmto NYSTLA members came to light in 2007,  an opinion was sought from the New York State Insurance Department Office of General Counsel which opined on September 24, 2007 that it was illegal to do so under New York State insurance law.  Here is a copy of the opinion.

A number of other states follow the same rules as New York in this regard.

Judges in Erie County, Onondaga County, Monroe County,  Chautauqua County, Niagara County, Albany County and counties in between should be vigilant for infant compromise submissions where there is a single claimant qualified settlement fund.

The single claimant QSF is sometimes simplistically marketed to defense interests by the QSF jockeys under the "pay one price and get out of Dodge" theory. I've spoken to attorneys who see an appeal in that, but if you are a municipal government, hospital or business in the community why would you want the negative PR when the parents of some poor child realize that their child was taken advantage of for the financial gain of the structured settlement broker or settlement planner who recommended it, that the QSF represented a needless increase in costs with little to be gained in terms of better structured settlement rates or prudent diversification. This could be a child of one of your taxpayers, your voters, your clients , customers or insureds.

There are still plaintiff lawyers in Update New York who believe (perhaps because they have been told) that the QSF is necessary to get around rebates paid by structured settlement brokers to insurance companies. But has anyone asked their sources to prove it? 

If you are a plaintiff and your attorney is suggesting that you participate in a single claimant qualified settlement funds, pay close attention because you might not be able to avail yourself of the best choices when it comes to structured settlement annuities.

Do the math!

Single Claimant QSF= Single Structured Settlement Market

Single Claimant QSF: Plaintiff Cannot Compel Defendant and Insurer to Pay Into QSF Says Florida Court

by John Darer CLU ChFC CSSC RSP

A plaintiff cannot compel a Defendant or its Insurer to pay settlement proceeds into a Qualified Settlement Fund involving a single plaintiff says a Florida Court Order dated June 2, 2011.

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.”

Despite the fact that the establishment of a qualified settlement fund had already been approved by the court in a settlement with a co-Defendant, the Court here stated

“... there was no agreement between Plaintiff and Tampa Bay Academy to pay the settlement amount into any [QSF], and that neither Tampa Bay Academy nor its insurer is obligated to consent to pay the settlement amount into any QSF. Therefore, the Court will not order Tampa Bay Academy or its insurer to pay the settlement into any QSF.”

An interesting aspect of this case is that Plaintiff settled with one of the co-Defendants and that co- Defendant agreed to pay those settlement proceeds into the QSF. On the other hand the Insurer for Tampa Bay Academy thought otherwise and hired the Philadelphia law firm of Drinker Biddle & Reath, LLP to argue its case.

Plaintiff argued that Tampa Bay Academy and its insurer should be required to pay the settlement proceeds into the QSF in order to satisfy Martinez’s alleged need for a “safe harbor” for settlement proceeds while Martinez and other interested parties negotiated the allocation of settlement proceeds, and while a special needs trust was established for the benefit of Martinez.

According to the write up by Drinker Biddle and Reath, LLP. the motion was opposed on the basis that

1. payment into the QSF was not a term of the settlement agreed upon by Martinez and Tampa Bay Academy
2. Tampa Bay Academy and its insurer could not be forced to pay into the particular QSF identified by Martinez because Tampa Bay Academy was given neither notice of the establishment of that QSF nor an opportunity to object to same
3. payment into a QSF in the context of a single plaintiff case could result in adverse tax consequences to Martinez, Tampa Bay Academy, and its insurer; and Martinez’s purported reasons for wanting a QSF were unpersuasive.

Single claimant qualified settlement funds continue to be controversial among structured settlement stakeholders in recent years.

Despite the fact that the 468B statutory requirement is for "one or more claims" some have argued that that's not what Congress intended, or that there are issues related to structuring benefits out of single claimant QSF due to the economic benefit rule. Clarification was sought from the United States Treasury Department in 2003 and was on the Priority Guidance plan for 6 years before being left off the 2009-2010 Guidance Plan.  Nationally recognized tax expert Robert Wood has suggested avoiding single claimant QSFs until there is guidance.

A decade ago most of the qualified assignment companies for the life insurance companies issuing structured settlement annuities, freely took assignments from qualified settlement funds. Many settlement consultants advising plaintiffs would pitch the single claimant QSF route to get around a restrictive selection of annuity markets by a casualty insurer. Yet what was once a strong argument no longer is, as few companies will permit a qualified assignment out of a single claimant QSF.

 

Single Claimant Qualified Settlement Fund: Private Letter Ruling?

Pat Hindert and I seem to be killing one bird with two stones, or at least two stones thrown from the opposite side of the Single Claimant 468B bird.

"There is no black and white, only shades of gray" goes the chorus to the 1960s tune by Barry Mann and Cynthia Weil and sung by the Will-o-Bees and The Monkees (see below). This tune could be the theme song of certain structured settlement planners, settlement consultants, settlement planners, or whatever they want to label themselves today,  who prefer to operate in the gray area of 468B, possibly because the black or white might not be what they want to hear.

When the clarification was removed from the Treasury Priority Guidance Plan after many years, some privately told me that being in the gray was OK, because what if Treasury came back with something unfavorable? Jack Meligan and Dick Risk knew it, which had to be the reason for their attempt to back door the single claimant 468B issue into a February 2010 IRS hearing on 104(a)(2).

Concurrent with the Society of Settlement Planner's legal effort to clarify single claimant 468B which began in or about 2003,  I learned that my late friend Richard Halpern DID seek an IRS Private Letter Ruling on single claimant 468B. During one of the numerous conversations I had with Richard prior to his untimely death from cancer in December 2009, Richard detailed his thoughts on single claimant qualified settlement funds. And what may come as a surprise to many people, they were not a whole lot different than what Marty Jacobson  presented at NSSTA this month.

A leading tax authority on structured settlements, Robert Wood recommends "avoiding the single claimant controversy by establishing QSFs with multiple claimants"

A newly minted erudite LLM from NYU Law School has a lot of good things to say, but if we were to stack all of the the errors and omissions insurance of the single claimant QSF "jockeys" out there and the attorneys that are providing the tax advice (such as "the gentleman from Oklahama") to them and their clients, is it enough to cover the shortfall if they are all wrong?

Given the hundreds of thousands the SSP and its members expended on Skadden Arps legal advice related to the Treasury clarification that did not happen, what's an additional $50,000 for a Private Letter Ruling? 

 

Can You Structure Pre Death Pain & Suffering and Claims of Decedent?

by John Darer® CLU ChFC MSSC CeFT® RSP CLTC

Can you structure damages paid for pre-death pain and suffering or other elements of damages originating PRIOR to the decedent's death? 

Can a decedent's heirs avoid these elements of damages by simply allocating 100% to wrongful death when the facts of the case show that litigation was commenced many years before a decedent's death and in which the decedent's pain and suffering was extensively pleaded in the years leading up to the decedent's death, day in the life videos were produced and used to support the case, mediation briefs documented the suffering, there were projections of loss of earnings etc.

Consider the following:

1. Auto accident case
2. Litigation commenced 5+ years before decedent died
   
3. Plaintiff was in excruciating pain for 5+ years before he died,
   
4. Plaintiff left 2 minor children
   
5. Litigation commenced shortly after the accident occurred and stretched an additional 2 years after his death. The case caption was amended to the "Estate of" after the decedent died.

Discussion

A.  Decedent's pre-death pain & suffering must pass through his/her estate.

 
"Proceeds from causes of action originating before the decedent's death, such as pain & suffering, become part of the decedent's gross estate"  Death and Damages Can Be Taxing-Jeremy Babener NYU Law, Trusts and Estates Journal (Penton Media) April 2011 citing Rev Rul 69-8 1969-1 CB 219 and IRS Technical Advisory Memo 98-11-006 (November 24, 1997) (award to plaintiff's trust included in plaintiff's estate upon his death; and  Estate of Jeanne M. Houston v Commissioner of Internal Revenue Service  TCM 182-362 (June 28, 1982) (claim of wrongful death of husband included in widow's estate upon her subsequent death)

 

B. All the property that a person owns is part of his or her estate. An estate can include clothes, jewelry, tools, cars, musical instruments, a house, land the house is built on, cash, bank accounts, retirement accounts, stocks, bonds, annuities and other items. The aforesaid damages are an additur to the taxable estate of the decedent. Applicable Estate and/or inheritance taxes (after any applicable estate tax deductions) and executor fees (administrator costs, if dies intestate) must be paid BEFORE the remainder is divided among survivors and closing of the Estate. 

C. Personal physical injury damages and physical sickness damages are excludable from gross income subject to the terms oi IRC §104(a)(2)

D. Money received as an inheritance is excludable from income under IRC §102(a)

E. IRC §130 governs qualified assignments. IRC 130 is a work around the taxation of income from annuities owned by non natural persons (see IRC 72(u)). Without the work around the cost of structured settlement would likely increase as there would be no tax exclusion to the assignee. The tax exclusion is critical in the majority of structured settlements where Defendants and their insurers have no interest in owning the annuities, or having a contingent liability. on their books.  We can easily point to non qualified assignment companies to prove our point. If the IRC 130 exclusion was not an issue for non natural persons then there would be no need for offshore domiciles such as Barbados and Ireland for non qualified assignment companies.

F. IRC  §130(c) (2)(D) makes no provision for payments received as an inheritance under IRC §102(a). To wit

 

(A) such periodic payments are fixed and determinable as to amount and time of payment,

(B) such periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments,

(C) the assignee’s obligation on account of the personal injuries or sickness is no greater than the obligation of the person who assigned the liability, and

(D) such periodic payments are excludable from the gross income of the recipient under paragraph (1) or (2) of section 104 (a).

G. The legislative history of the 1996 amendment to Section 104(a)(2) provides explicitly:  If an action has its origin in a physical injury or physical sickness, then all damages (other than punitive damages) that flow therefrom are treated as damages received on account of personal physical injuries or physical sickness whether or not the recipient of the damages is the injured party. For example, damages (other than punitive damages) received by an individual on account of a claim of loss of consortium due to the physical injury or physical sickness of such individual's spouse are excludable from gross income.  H.R. Conf. Rep. No. 104-737, at 300 (1996), reprinted in 1996 U.S.C.C.A.N. 1474, 1793. 

H.  Private Letter Ruling 200121031, 5/29/2001, IRC Sec(s). 104..."Because there exists a direct link between the physical injury suffered and the damages recovered, Taxpayer may exclude from gross income any economic damages compensating for such injury..." Source: Little Meyers & Associates

*****

On May 4, 2011  I posed the following question to several recognized tax authorities on structured settlements:

"Can the portion of settlement allocation reflecting the pre-death pain & suffering damages be structured to heirs? My understanding is that IRC 102(a) covers inheritances, any damages flowing from PI are not income taxable, IRC 130(c) only provides for assignment of IRC 104(a)(1) and IRC 104(a)(2)  What is bugging me is the severity and duration of the P&S being major part of the negotiation and prosecution of the case.

Your initial thoughts on whether or not this could be structured" 

 

The responses...

  

A. David Higgins The Settlement Law Group

"John:

 

I think you are the only broker or life company in the business that pays attention to this issue.  Damages suffered by the decedent before his death belong to the decedent and pass through his estate.  Those are excluded from the heir’s income as inheritances, not damages for personal injury".

David M. Higgins

THE SETTLEMENT LAW GROUP
11355 West Olympic Boulevard, Suite 200
Los Angeles California 90064
Tel: 213-833-0202
Fax: 213-291-8300
Cell: 310-415-3344

B. After this clarification from me

"...apologies for not being more clear in the question, I am aware of the Estate tax issue, my question is whether or not the damages that must pass through the estate can be structured? Clearly an allocation to wrongful death is a solution. However the unusual aspect of this case is the degree and duration of P&S, which seems to make an allocation to all Wrongful death more difficult. The Surrogates Court must approve the allocation. My client is an insurer. The provisions in a standard QA that permit an unwind (of the assignment) if IRC 130 (c) (isn't satisfied) brings into focus where my concerns lie here".

To which the answer was...

"...If the damages must pass through the estate, that would mean the damages to the estate are free of income tax, but then the beneficiaries of the estate are receiving money from the estate.  That may mean they are no longer  (IRC Sec) 104 damages.  (emphasis ours) This is a new and interesting issue, but I'd have to have someone hire me to be able to render an opinion." 

Issues

1. While some may try to justify structuring such elements of damage under the "origin of claim" principle, there appear to be sufficient questions about whether structuring elements of damages that must pass through a decedent's estate is possible.

2. Defendants, their insurers and counsel should carefully review settlement allocations in cases with this peculiarity to assure that the allocation is reasonable given the facts of the case, raise the issue with opposing counsel in timely fashion and avoid participating in a structured settlements where the math on the damages doesn't work out. Remember there are unwind provisions in every qualified assignment if IRC 130(c) is not satisfied. The provision is there solely to protect the qualified assignment company in case some sneaky "S.O.B." tries to slip through a case in that does not qualify. You said you wanted a CLOSED file right?                                                 NOT THIS!

3. Plaintiff attorneys, be aware that defendants and insurers are under no obligation to pre-fund structured settlements. At their option, many do so as a convenience. Sometimes that works in your client's favor. If you have such a case it may be a good idea to propose a reasonable allocation that the defendants or insurers can live with and only structure the direct survivors actions.

4. Are you being advised to use a single claimant 48B QSF and think a single claimant 468B QSF will solve your problem because the QSF trustee doesn't care about an unwind of the qualified assignment? Think again!  If the unwind provisions are set in motion after an audit several years down the road,  who is going to own the annuity and the obligation of the QSF, if the QSF no longer exists? Who is going to pay the attorney fees of your client to sort out the morass that you counseled them to accept? 

5. Surrogate and Probate Judges should perform an extra careful review of submissions to make sure that an allocation is reasonable.

6. Should a fix to IRC 130 be sought that includes inheritances of this fashion under IRC 102(a)?

7. Lest anyone misinterpret me, I am not saying don't do structures on wrongful death cases.

8.. Some have suggested using a non qualified assignment but the idea needs further fleshing out.

Comments welcome!

 

S2KM Exposes "Spotted Dick"

"Spotted Dick" a steamed "sue it" pudding containing a dried fruit (single claimant 468B QSF)...

Well if it wasn't obvious before. it is obvious now that "The Dick" has spots.

Today Beyond Structured Settlements March 1, 2010

(Dick) Risk offered two comments after the (recent IRC 104(a)(2) hearing. First, what he, as commissioner of the IRS, would say to staff.

'The proposed revision is deficient, as pointed out in the written public comments and in the testimony at the hearing, as it fails to “prescribe all needful rules and regulations for the enforcement” of Code section 104, as the law requires. The clarification of the single-claimant issue can be resolved with a single paragraph, consistent with congressional history, court decisions and the agency’s previous rulings, without creating new policy. The definition of “personal physical injury or physical sickness,” as Congress has prescribed, which other commentators have recommended, also merits inclusion in this regulation. Fix it and publish it again as a revised proposal. I do not concur that the revision should be made final in its current state. Your duty is to serve the people, not operate for the convenience of the staff. Further, it is abusive to the people you are here to serve to have suggested during the hearing that they start the process over again by requesting that the single-claimant issue be placed on the Priority Guidance Plan, without giving any assurance that the result would be any different than when the request was first made, in June 2003, accepted as a project in April 2004, and finally abandoned in late 2009.

Second, his overall take of the hearing.

'I am extremely disappointed at the staff’s position in favor of pushing through a shoddy and deficient product for its own convenience that fails to address legitimate issues brought to its attention by comments from the public, rather than doing the job right". 

November 28, 2009

In his November 28, 2009 "sour grapes" about the Treasury Priority Guidance "swansong",  Patrick Hindert cited that Risk " interprets the decision to remove the single claimant 468B project from the Priority Guidance Plan as evidence that sufficient guidance favoring single claimant 468B QSFs already exists. Risk points to I.R.C. § 7805(d) which requires the Treasury Secretary to “prescribe all needful rules and regulations for the enforcement of [the Internal Revenue Code].” Risk concludes that Treasury’s decision is an acknowledgment that additional guidance is not “needful.” 

I guess that explains Dick Risk's wistful post hearing comments, as related by S2KM

All the more reason that a supporter of single claimant 468B doesn't want "poker choker" Risk running the plays.