by John Darer® CLU ChFC MSSC RSP
In his review of a draft of NYU Law student Jeremy Babener's Dissipation Paper "Justifying the Structured Settlement Tax Subsidy: The Use of Lump Sum Settlements" , Patrick Johann Hindert is once again "pimping" ASSOCIATE Professor Adam Scales, author of the 2006 Fordham Law Journal treatise "How Much is That Doggy in the Window?". Scales' 2002 "one hit wonder" for the Wisconsin Law Journal on structured settlement factoring is described by Hindert as "remarkable" for allegedly exposing "false dissipation statistics" and "mischaracterization" of the stats to promote a negative and false psychological profile of injury victims"
Hindert refers to structured settlement industry myths and considers them "especially pernicious", related and long-standing:
- Myth #1: injury victims squander lump sums. Nine out of 10 lump sum recipients dissipate the entire amount within five years.
In keeping in line with Babener's focus I've chosen to address "Myth #1".
A Google search of "90% 5 years structured settlements" comes up with a significant number of industry players using the 90% 5 year numbers, including firms associated or previously associated with industry leadership. But does it rise to the level of "pernicious"? The purported statistic is essentially not compelling to a tort victim who is deciding to take a structured settlement; perhaps meaningful to an attorney. Maybe such usage of the "90% squander in 5 years" is the result of poor research, or failure to question earlier industry teachings of Hindert and others . It's more than simply a game of telephone, however;. it's more like the telling of The Passover over the generations.
Either way structured settlement companies are discouraged from using the purported statistic and to focus on real life experiences which many do and, at least in my opinion, are more meaningful anyway to those who make the decisioons to accept structured settlements.. I would discourage these players from continuing to promote it in whatever form.
What is the definition of Pernicious?
|1.||causing insidious harm or ruin; ruinous; injurious; hurtful: pernicious teachings; a pernicious lie.|
|2.||deadly; fatal: a pernicious disease.|
|3.||Obsolete. evil; wicked.|
Merriam Webster states that "pernicious" implies irreparable harm done through evil or insidious corrupting or undermining.
Does what is described rise to the level of "especially pernicious"?
Isn't the egg really on Patrick Hindert's face folks? Babener cites to Hindert's testimony in Congressional hearings (see below footnote, underlined for emphasis, from Justifying the Structured Settlement Tax Subsidy" The Use of Lump Sum Settlements.
127 CONG. REC. 30462 (Dec. 10, 1981) (statement by Senator Max Baucus, introducing the Periodic Payment Settlement Act of 1981) (“[I]n many cases because it assumes that injured parties will wisely manage large sums of money so as to provide for their lifetime needs. In fact, many of these successful litigants, particularly minors, have dissipated their awards in a few years and are then without means of support.”); , 97th Cong. 2nd sess. 7, 82, 84 (1982) (statement of Patrick J. Hindert, President of Benefit Designs, Inc., a consulting firm for personal injury case parties) (testifying that lump sum plaintiffs “are frequently back on the public dole” due to the dissipation of their award, and that lump sum recipients are “frequently ill-equipped psychologically, physically or educationally to assume the investment and mortality risks associated with managing money to satisfy anticipated future financial requirements”); id. at 87 (1982) (written statement of David M. Higgins, Esq., Overton, Lyman, & Prince
Talk about self-flagellation!
As to Jeremy Babener's Dissipation Paper, Hindert has jumped the gun.
I have had the opportunity to review Babener's draft. While it is close to complete, I saw no compelling need to critique it here until it was completed. Cognizant of the disastrous and embarrassing efforts of former Indiana Law Student Laura J. Koenig to address the subject in 2007 (she "weighed in" way too much on Scales) and to his credit, Babener has made an exhaustive effort to engage many industry thought leaders on the subject. However, while I agree a new dissipation study might be helpful, I have suggested to Babener that his final product should include:
A. Some discussion of sudden wealth syndrome.
Avoiding "sudden wealth syndrome" Jay Macdonald
Windfall Not Always a Blessing Psychologists Say Boston Globe July 10,2004
Sudden Wealth Syndrome Money Meaning & Choices Institute
I don't think it is reasonable to dismiss the anecdotal evidence or personal experiences of the settlement planner, structured settlement broker or a personal injury lawyer who has represented hundreds or thousands of plaintiffs. One recovery management firm has handled over 25,000 cases compared to the dipsy doodle JG Wentworth non statistical sample survey of 116 clients that Hindert spewed 5 blog posts about (when one or none might have been enough).
Babener indicated to me that he has done the research on Sudden Wealth Syndrome and is considering including it in the final version of the published paper.
B. A comprehensive summary of the tax law associated with structured settlements and how it affects the stakeholders, the government and the taxpayers when discussing the tax subsidy.
The tax exemption for personal injury damages goes back to the early part of last century.
A structured settlement involves a contractual obligation to pay future periodic payments in exchange for a release. It can be argued that each future periodic payment is compensation for damages from physical injury or physical sickness. A structured settlement is not simply the purchase of an annuity. A structured settlement cannot be paid without the consideration being reflected in this way.
Rev Ruling 79-220 dealt with an annuity purchased by an insurance company, owned by the same insurance company and subjecting the plaintiff to the claims of the general creditors of that insurance company. Furthermore the insurance company could only get a pro tanto discharge of the periodic payment obligation and remained contingently liable in the event of annuity issuer insolvency.
With some exceptions, IRC 72(u) does not consider annuities owned by non natural persons to be annuities. One such exception, IRC 72(u)(3)(C) is a qualified funding asset (as defined in, but without regard to whether there is a qualified assignment),
Subsequently the introduction of IRC 130, pursuant to the Periodic Payments Settlement Act of 1982, permitted qualified assignments of periodic payment obligations. A qualified assignment benefits both plaintiff and defense. The plaintiff no longer had to rely on the general credit of the defendant or defendant's insurer. Furthermore a self-insured defendant or defendant's insurer can write off the cost with the novation of the periodic payment obligation by the qualified assignment.
The win-win was further improved when IRC 130(c) was subsequently amended to permit the structured settlement annuitant to be a secured creditor.
In 1996, IRC 104(a)(2) was amended to narrow the exclusion to physical injury and physical sickness.
"Tax subsidy" benefits
Injured parties who have an incentive to enter into such transactions and, through the exclusion that enables qualified assignments, permits them to do prudent planning so that if they do enter into such transactions they are not later victims if the defendant or defendant insurer goes bust. From an "in the trenches" standpoint I can relate that plaintiffs appreciate the tax subsidy, even if they are in a low bracket.
Defendants and insurers have an incentive to use qualified assignments to be able to write off the cost of the structured settlement. It can be argued that the tax subsidy enables the defendant or insurer to finance elements of damages on a net basis. Surely one can argue that over the long haul such savings reduce the costs of litigation to the company and its shareholders. Lower costs mean improved bottom line and more taxes paid to Uncle Sam.