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Structured Settlement Agreements | Avoid This Fundamental Flaw

by John Darer CLU ChFC MSSC CeFT RSP CLTC

When a structured settlement is part of the settlement package for your client's legal case, then the consideration MUST be cash and future periodic payments  (with the schedule expressly described). 

Language in a settlement agreement and release which does not create an obligation to pay future periodic payments is to be avoided. Without consideration being properly expressed the structured settlement could fail, with financial consequences to all parties, Defendant, Plaintiff and Insurers.

We sometimes see proposed settlement agreement language which says "Defendant or its Insurer will arrange for the purchase of an annuity". This is a potentially fatal mistake.  But why is it a fatal mistake? 

For starters, a properly formed structured settlement is not simply "buying an annuity"

There is unfavorable taxation on corporate owners of annuities, for which IRC 130 provides an express exclusion, if the requirements of IRC 130 are met. Most Defendants or Insurers do not want to retain the contingent liability of a long tail periodic payment obligation on their books and this is one of the reasons most structured settlements are created using qualified assignments. Lastly, the plaintiff or payee may not want to be tied emotionally or financially to the Defendant who harmed, them, or whose product or servce harmed them and the qualified assignment helps to accomplish this. .  

A qualified assignment is defined in the United States Internal Revenue Code of 1986, as amended, in Section 130.

IRC 130(c)

The term “qualified assignment” means any assignment of a liability to make periodic payments as damages (whether by suit or agreement), or as compensation under any workmen’s compensation act, on account of personal injury or sickness (in a case involving physical injury or physical sickness)—

(1) if the assignee assumes such liability from a person who is a party to the suit or agreement, or the workmen’s compensation claim, and

(2) if—

(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).   [emphasis added]

 

So if you want to use the "arrange for the purchase of an annuity" language, you're "batting 0 for 1 " out of the gate, violating  IRC 130(c)(1).

 

Look at any qualified assignment agreement and you will see the following:

 

A recital that includes:  "...under which the Assignor has liability to make certain periodic payments to or for the benefit of the Claimant" and (2) that the Assignor and Assignee wish to effect a "qualified assignment within the meaning of Section 130(c) of the Internal Revenue Code of 1986, as amended" and THEN

 

the first decretal paragraph which is usually titled Assignment and Assumption and states "Assignor hereby assigns to the Assignee, and Assignee hereby accepts and assumes, all of the Assignor's liability to make the Periodic Payments"

 

What are the consequences of violating IRC 130(c)

 

There is always a paragraph labeled "Failure to Satisfy Section 130(c)" in a qualified assignment agreement.  I sometimes refer to it as the "sneaky S.O.B. clause". The paragraph is designed to provide relief to the assignment company in the event it has booked an obligation that does not qualify for the tax exclusion that IRC 130 gives the assignment company.

 

If there is a IRC 130(c) failure the unwind provisions in every assignment agreement provide for the qualified funding asset or annuity to be placed in the hands of the Assignor. There is unfavorable taxation on corporate owners of annuities, for which IRC 130 provides an exclusion.  In trhe eveent of a qualifie assignment unwind  for failure to satuisfy IRC 130,  the Defendant or Insurer which has taken a write off for a novated claim in a prior year will likely have to recognize the value of the asset as income and there will be an asset liability mismatch after taxes have been taken into consideration.

 

For the plaintiff who has executed a qualified assignment release and pledge in the hope of getting secured creditor status, they can kiss that goodbye in the event of a IRC 130(c) failure. They become a general creditor of the defendant or insurer in the event of IRC 130(c) failure, or worse, if the qualified funding asset is placed in their hands following the unwind they have an asset which may now potentially produce some taxable income, with respect to interest.

 

            

 

The requirements of IRC 130 are not difficult to satisfy, so try not to get cute with settlement documents by inserting "arrange for purchase" language. Stick to what the tax code says. This is fundamental Structured Settlements 101.

Using Structured Settlements May Help Older Plaintiffs/Lawyers Get More Out of Social Security

by John Darer CLU ChFC MSSC RSP CLTC

Instead of taking social security retirement at age 62, a plaintiff or his/her/their contingency fee earning lawyer can wait until age 70, maximize retirement credits and receive more benefits!

Whether you are an injury victim,  a survivor of someone who has died a wrongful death or a personal injury trial lawyer or contingency fee lawyer with the ability to structure attorney fees,  a structured settlement can help you get there.  A structured settlement can be designed to replicate,  what you would receive from social security if you began taking it at age 62 or 65, giving you stable income to age 70 or more.

For example, an attorney with the highest Average Indexed Monthly Earnings (AIME) collecting social security beginning at age 62 will draw in approximately $1,992 per month.; beginning at age 65 will draw $2,431 per month and holding out to age 70 will draw $3,425 per month for those drawing in 2014.

While there are other factors such as your health, family history and your perspective on longevity that go in to such a financial decision, maximizing social security should be explored.

 

Structure Attorney Fees if You Are Thinking About The Future

by John Darer CLU ChFC CSSC RSP CLTC

"Structured settlements are for attorneys who are thinking about the future. Attorney Fee Acceleration is for attorneys who are thinking in the present and looking to advance in the moment".  So says Lulaine Compere of RD Legal Funding, LLC a Cresskill, New Jersey company that provides cash to settling lawyers "with ants in their pants".

Lulaine Compere, perhaps unwittingly, in "Legal Funding 101", is the greatest living billboard for structured attorney fees.

People don't plan to fail. They fail to plan. Attorneys are no exception this old adage.  If the "leading edge" of the seat of your pants is well worn, then perhaps it's time to think about the future.

I know lawyers that structure large and small cases and do it consistently. I know at least one that has amassed a seven figure annual income from aggregate structured attorney fees.

"It is always wise to look ahead, but difficult to look further than you can see"

Winston Churchill

It is always wise to look ahead, but difficult to look further than you can see.
Winston Churchill
Read more at http://www.brainyquote.com/quotes/topics/topic_future.html#y8umBF0GXW7iHWCj.99

It is always wise to look ahead, but difficult to look further than you can see.
Winston Churchill
Read more at http://www.brainyquote.com/quotes/topics/topic_future.html#y8umBF0GXW7iHWCj.99

It is always wise to look ahead, but difficult to look further than you can see.
Winston Churchill
Read more at http://www.brainyquote.com/quotes/topics/topic_future.html#y8umBF0GXW7iHWCj.99

Does Anybody Buy Structured Settlement Payments From Small Structured Settlements?

by Structured Settlement Watchdog ®

While there are companies that buy structured settlement payment rights from small structured settlements, such transactions make little sense due to the costs involved.

Because there are certain set costs associated with a structured settlement factoring transaction such as fees paid to lawyers for the court hearings mandated by state structured settlement protection acts, certain administration fees charged to the buyer by the annuity issuer, plus a profit margin for the buyer and /or buyer's investors to account for, the seller would likely have to sell more than they need to raise cash.

For example, I received a call in the last few months from a woman who was soliciting bids to raise $2,000 to pay for a funeral of one of her parents. The amount she'd have to sell was in well in excess of what she needed due to the attendant transaction costs. It did not seem to make sense. I suggested that the annuitant hold off selling her structured settlement payments, wait for the payments which were due to arrive a short time after and work with the funeral home to come up with better payment arrangements. 

Note: "Buyer" in this context refers to a buyer of structured settlement payment rights from annuitant who owns them.

Last updated August 29, 2021

Why Won't Travelers Structure Attorney Fees? Missed Opportunities For Both Sides

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

Travelers Insurance Company is a major supporter of structured settlements but Travelers will not participate in structured attorney fees as a long standing corporate policy.

Plaintiff lawyers who have cases heading towards settlement involving Travelers insureds should not count on the ability to structure their legal fees those cases [ see my May 5, 2011 post Travelers Insurance Doesn't Structure Attorney Fees, So Plan Accordingly].

But what of other companies? Having seen and heard of a few instances in recent times where other carriers have elected not to participate in structured attorney fees I decided to investigate if this is a growing trend or random isolated instances. On the two recent cases one involved a stand-alone structured attorney fee. In the other structures were contemplated for both the minor plaintiff and the attorney.

In the case where the minor plaintiff structured as well, the defense did not have a structured settlement broker at a 2011 mediation.  The broker that was eventually assigned in 2012 did not show up when rated ages were requested on the minor plaintiff by the plaintiff's expert in the year or more preceding the settlement when the case clearly warranted a rated age.  Nor did he or she show up when the rated ages were renewed in 2012. I say that not to chastise the unnamed industry colleague (who I greatly respect), but to remind ALL structured settlement stakeholders of the value of having representation early in the game.

The other case was a stand alone case. The plaintiff was not structuring. The plaintiff attorney is a straight shooter and not a jerk by any stretch of the imagination.

Why would an insurer, defendant, run-off company, or TPA adjusting on behalf of them not want to structure attorney fees?

A. They Didn't Offer It

Comments

While acknowledging that the defense controls the offer and setting aside blanket policy like Travelers,

• A claims adjuster or defense attorney shouldn't be faulted for not having a corner on all the good financial ideas. But that doesn't mean it does not make sense for it to be part of case resolution if there is no additional cost  and the risk is eliminated.
• A claims adjuster or defense attorney shouldn't be faulted for any misperception on any individual case,  that the plaintiff or plaintiff attorney might not be interested in a structured settlement because they haven't had the opportunity to spend time with the plaintiff or plaintiff attorney to discuss their financial plans. But that doesn't mean it does not make sense for it to be part of case resolution if there is no additional cost and the risk is eliminated.
• A plaintiff attorney should not be at fault for the case load demands of the claims adjuster of defense attorney that may have meant that a structure was not considered.

B. Toys Thrown Out of The Pram Response

Let's be frank about this, sometimes what is happening is (and you don't have to admit it) someone is casting

• A "Bafongul" to the plaintiff attorney for doing their job.
• A "Bafongul" to the plaintiff attorney because the plantiff attorney "was a jerk" in the eyes of the adjuster during a contentious litigation.

Comments

• Ivan Pavlov's research on conditioning "salivation and digestion" did not involve lawyers.
• The idiom  " You can catch more flies with honey than with vinegar" applies when you are likely to be seeing the same attorney on other cases. And of course, in the immortal words of the late Vicki Sue Robinson, you can "turn the beat around" too.
  

 C. Perception of Risk in Structuring Attorney Fees

Transactional Risk Fear that if he transaction is not done right it could come back to bite them

Credit Risk Fear that in the unlikely event of an insolvency, that the insurer might have to pay some portuon of the obligation again (the ELNY fallout) after the file has been closed and in excess of the policy limit.

Comments

• If the transaction is not done right it could come back to bite. But that's why both sides should retain their own credentialed structured settlement expert.
• The ELNY case is a one off. Buy and holds have not been "de rigueur" since the Periodic Payment Settlement Act of 1982, when a novation using a qualified assignment became available.Other vehicles that support structured attorney fees include the use of reinsurance and non qualified assignments. Structured attorney fees may also be funded using Treasury Funded Structured Settlements
  

D. Lack of Familiarity with the Structured Attorney Fee Transaction

It is easy to understand that when unfamiliar with something, the safe route is to not do it. But are you missing an opportunity?

Conclusion

1. We encourage claims adjusters and lawyers to be armed with a "full deck of cards" when at the negotiating table. Structuring legal fees can help provide lawyers with a secure and stable tax-deferred income for a period of time, or for life.  Payments can be used to smooth out law firm cash flows, serve as a supplement to qualified retirement plans, which limit contributions. There is a value to this.
2. Plaintiff lawyers should already be working with a structured settlement expert in advance of a mediation and/or settlement negotiations and be mindful to address structured fees as part of the mediation statement.

 

 

 

 

 

 

Structured Attorney Fees | Year End Tax Planning

As we get to the business end of the year, lawyers and law firms who specialize in medical malpractice, aviation, construction, maritime, auto, employment and other specialties, whose income is derived from contingency fees, should provide some consideration to structured attorney fees as part of year-end tax planning. Structured attorney fee expert John Darer™ explains in this latest podcast on deferred compensation for lawyers. John Darer CLU ChFC CSSC RSP provides a variety of annuity and non-annuity funded tax deferral solutions for structured attorney fees. Offering over 25 years of experience, based in Stamford, Connecticut and serving clients in NY/CT/NJ and throughout the United States, he holds insurance licenses in over 30 states. For a consultation please call 888-325-8640

Structured Settlement Tips | How To Calculate Structured Settlement Interest Rate

by John Darer® CLU ChFC MSSC RSP CLTC

How do you Calculate the interest rate on a structured settlement? 

The calculation of interest rate on a structured settlement is easy if you know a structured settlement expert with annuity issuer software, or an Excel spreadsheet. But it's the context that is important to be sure that you have the right information.

Rate of Return on a Structured Settlement

Consider a couple of possible contexts in which what is being referred to as a "structured settlement interest rate" can fall:

A. The Internal Rate of Return (IRR) of a structured settlement is an important financial calculation used in comparing alternative investments.

The IRR is the constant rate of interest that would be needed to be applied to a defined deposit to produce defined future cash flows at certain amounts and times. It is especially useful in comparing two or more sets of uneven cash flows.

The IRR can vary by the types of structured settlement payments.

• If there is a period certain annuity, or one or more payments treams are a period certain, then the IRR is calculated seperately to the end of each certain payment period. 
• If the structured settlement is for a period certain and life thereafter (i.e payments are life contingent after the certain period has ended), then the IRR is typically calculated to normal life expectancy.
• A structured settlement expert should be able to provide you with IRRs for several different life expectancy scenarios as well as to the end of the certain period so that you can plan accordingly. once again, when evaluating structured settlements with multiple payment streams, it may be helpful to have the IRR of each payment stream calculated.
  

It is important to stress that a structured settlement is not like a bank account

There is no passbook statement or monthly status report. You basically get your payments in the mail, or by the more popular direct deposit,  when scheduled. While the interest is implicit, in the annuity,  a structured settlement is a contractual guarantee backed by the annuity policy representing the full faith a and credit of a regulated annuity issuer.

Some of the "cheap labor" hired by search engine optimization firms for some cash now pushers have misrepresented that you don't get any interest in a structured settlement. Not true.

Not true, unless when you established the structured settlement you agreed to accept less than what you put in. It is possible that you just need to better understand what you have. Such statements ,when they occur,  unfortunately show that the makers are either (1) ignorant (2) dishonest or (3) prone to exaggeration.

B. It is important to distinguish between the Internal Rate of Return and the Present Value.

With the present value calculation the defined inputs are (1) Future Values (amount and timing of payments) and (2) the discount rate. When it comes to selling structured settlement payment rights there are interest rates used which are referred to as " discount rates" because the buyer must reduce the future payments to be sold to their present value (as opposed to future value). The mandatory disclosures in such transactions,  may actually include two rates (1) the statutory discount rate and (2) the effective discount rate. The effective discount rate is the true cost of foregoing the future payments in exchange for a lump sum and is a critical comparison tool.

To someone who is financially trained much of this stuff is rudimentary however, in a time period where cash now pushers increasingly use terms that they purport to overlap between the primary and secondary market for structured settlements it lays a foundation for consumer confusion.

If you need help to determine the rate of return on a structured settlement please contact me at 888-325-8640, or complete a contact form here

Contact Structured Settlements Expert Now 888-325-8640 | Structured Settlements (4structures.com)

You can also call me if you need a structured settlement quote at the same number or to discuss your case.

Just Want a Structured Settlement Quote? 4structures.com 888-325-8640

Last updated May 12, 2024

 

Structured Settlement Documentation: Why All The Special Structured Settlement Documents?

by John Darer® CLU ChFC MSSC RSP CLTC

Proper documentation of structured settlements in settlement agreements, releases and qualified assignments and, where applicable, infant compromise orders, surrogate decrees and probate orders and qualified assignments, is essential to achieving the goals of all parties to the settlement. 

Structured settlement expert John Darer™ of 4structures.com, LLC, takes you through the role and purpose of the key structured settlement documents in this informational pod cast.  Viewers of this video may also find John Darer’s video “ What is a Qualified Assignment” to be very helpful.

 

Post Settlement Structured Settlement Underwriting | The Good and The Bad Explained

by John Darer® CLU ChFC MSSC RSP CLTC

What is Post Settlement Underwriting?

Post settlement underwriting is a legitimate business practice** that has been alleged to have been abused by some structured settlement brokers representing casualty and liability insurers. The gist of the allegation is that AFTER a plaintiff has agreed to a specific benefit stream from a structured settlement, on occasion, certain "actors" in the structured settlement brokerage community will see if they can get a better rate for the Defendant or Insurer and go to a further step of allegedly concealing this from the unsuspecting plaintiff and plaintiff attorney,  sometimes by allegedly barring the Plaintiff from retaining a broker of their own.

**one might consider post settlement underwriting  "legitimate" where the case has settled,  the global settlement funding amount has been determined,  final terms of the structured settlement are being negotiated and additional medical information is submitted to see if a better price can be obtained on the structured  annuity or annuities, with full disclosure to both sides. Whatever savings there is on the annuity price has no impact on the global settlement funding amount.  Where a Medicare Set Aside is being considered, a better rated age could mean less is needed to fund the MSA, an attractive solution for both sides.

Why The Bad Aspect of Post Settlement Underwriting Is Virtually Impossible in New York

This alleged bad aspect of the practice of post settlement underwriting,  is a virtual impossibility in states with structured settlement protection acts, like New York, Florida, Massachusetts and Minnesota, whose statutes mandate a disclosure of cost to be made by the Defendant or Defendant's legal representative at the time structured settlement is negotiated  (See New York General Obligations Law §5-1702 and comparable statutes in the other states) .  Were post settlement underwriting to take place in New York, wouldn't the Defendant and the Defendant's attorney have significant personal exposure for fraud?

New York General Obligations Law §5-1702 and How it as Intended to Add To the Integrity of Structured Settlement Transactions

Watch John Darer's podcast on New York General Obligations Law §5-1702 which discusses New York's Structured Settlement Protection Act as it applies to the establishment of structured settlements and the burden it places on the Defendant or Defendant's legal representative.

Undisclosed post settlement underwriting is career suicide for a structured settlement broker. The rogue broker who goes down this path will eventually be found out.

Attorneys for both plaintiff and defense can protect themselves and their clients by utilizing the services of a structured settlement expert.

 

 

Why You Need A Structured Settlement Expert | 4structures.com LLC

by John Darer® CLU ChFC MSSC RSP CLTC

Both Plaintiffs and Defendants can be harmed by hiring structured settlement brokers who don't know what they're doing. They need to seek structured settlement experts the same way they look at other experts. Check their credentials and test their knowledge BEFORE you engage to avoid embarrassment or at worst, a legal malpractice claim.

Cookie cutters belong in the kitchen, not in settlement documents.

In more than 20 years in the structured settlement business I've seen some questionable document submissions that have been prepared by brokers, or their staff, that (and this is scary) have even made it past attorney review (if they have been reviewed at all)

Here are a few the deficiencies I've personally observed:

• Documents that do not demonstrate a clear understanding of the money that is being paid by whom, on behalf of whom , to whom and when.
• Surrogate's Court recited as a venue for filing a complaint in a medical malpractice case
• Defendant is named as a party (in one case more than 10 more times in the Settlement Agreement and Release as a party to be released yet party was not identified by name at least once?
• In New York, a cause has to do with a charity. An index number identifies a case that is pending in the Supreme Court of the State of New York.
• Referring to plaintiffs in a Settlement Agreement and Release in a manner other than they aoppear in the case caption (or amended caption if applicable)
• Use of an "all-plaintiffs-in-one" qualified assignment agreement where there are plaintiffs from the same family, fails to recognize that in doing so one exposes all of the other family members to being bombarded by calls from factoring companies if one of them decides to sell down the road.  Privacy should not be sacrificed merely for the convenience of folks that may not ever see these plaintiffs again (and that might include plaintiff structured settlement consultants)
• Failing to comprehend the transaction flow of a structured settlement, which generally involves the Defendant, its Insurer (or in some cases a qualified settlement fund trustee or administrator) making a promise to pay future periodic payments. Under the New York State General Obligations Law Section 5-1702 there are affirmative obligations on the Defendant (or Defendant's legal representative) to make certain disclosures about the structured settlement when a structure is created. In any case, but especially where there is a plaintiff driven structured settlement, defense counsels need to be aware of the NY GOL requirements and make sure the required disclosures are reflected in the settlement document. A locked in quote should be requested to verify that the cost is in fact as it is disclosed in the settlement documents. Where there are death cases that must also involve the Surrogates Court, or the settlement involves the New York Liquidation Bureau expect months of delays. Some annuity issuers will start charging lock in fees after a certain period of time. If the cost in not accurate who is responsible?
  
• Improper payees. With the exception of New York Life Insurance Company funded structured settlements (or the rare unassigned case or a structure subject to assumption reinsurance), the payee of the structured settlement funding check is the Assignee (not the Plaintiff or the annuity issuer). Make sure that the correct Taxpayer Identification Number (TIN) is being used.
  
• Failing to offer secured creditor protection when it is available to the plaintiff (with all but 2 structured settlement programs) even though it doesn't cost anything more,
  
•  Failing to recognize and account for the fact that the Releasing party may not be the same as the secured party when the Qualified Assignment Release and Pledge is used.
• The use the term "Assignee" in the structured settlement document before the Assignee has been identified. Be kind enough to refer to the paragraph where such Assignee is identified.
• Mixing apples and oranges. Correct is that "Neither" gets paired with nor. " Either" gets paired with "or"
• Setting a constructive receipt landmine. The words "receipt of which is hereby acknowledged"  have no place in the consideration for a structured settlement.
• Ignoring what is figuratively in this context, one of the three biggest lies in world (i.e."the check is in the mail"), by failing to include direct deposit or EFT in your discharge of obligation paragraph in the Settlement Agreement and Release.

Food for thought.

While I could go on and on, my message is that don't just need a structured settlement broker, you need a structured settlement expert.

At 4structures.com, LLC we started our New York / Connecticut structured settlement video podcast education series to assist plaintiff and defense counsel and their clients to better understand some of the nuances of structured settlements.

How a Structured Settlement Works: Structured Settlement Documentation

The Structured Settlement Rated Age Discount

Constructive Receipt: The Structured Settlement Killer

New York Structured Settlements Education Series: Take CPLR 50B Judgment or Settle Case?

Structured Attorney Fees/Deferred Compensation

Last updated November 15, 2021