by John Darer CLU ChFC MSSC RSP CLTC
With a few settlement planners dabbling in structured settlement derivatives it won't be long before the question is raised about whether or not a Medicare Set Aside can be funded with structured settlement derivatives labeled " secondary market annuities". A possible argument for is that such vehicles carry higher interest rates and thus can reduce the cost of the MSA even further than an annuity.
You cannot fund a Structured Medicare Set Aside arrangement with a "secondary market annuity". You cannot fund a Medicare Set Aside arrangement with a "secondary market annuity" because a "Secondary Market Annuity" is not an annuity. A "Secondary Market Annuity" is a scam label for structured settlement derivatives.
The CMS Medicare Set Aside Self-Administration Tool Kit includes an attestation letter entitled "Worker's Compensation Medicare Set-Aside Arrangement (WCMSA)-Account Expenditure for Structured Annuity" Download Account-Expenditure-for-Structured-Annuity-Attestation-Letter
The account holder must attest annually...choosing from one of the following
I the undersigned attest that I have a structured annuity WCMSA and have used the annual monies from the WCMSA account for the period of ____to ____ to pay for the following:
I the undersigned attest that I have a structured annuity WCMSA and have exhausted the annual money (and any applicable acrry-over from pevious years) in the WCMSA account for the period of ___ to ____ to pay for the following:
I the undersigned attest that I have a structured annuity WCMSA and have completely exhausted all monies in the WCMSA account to pay for the following:
Do you want to attest, or do you want to advise your client to attest, to having an "annuity" that is not, in fact, an annuity?
CMS Memo Q5 7/23/01 refers to "structured settlement"
- IRC 5891(C) defines structured settlement as follows:
(1) Structured settlement The term “structured settlement” means an arrangement—
(A) which is established by—
(i) suit or agreement for the periodic payment of damages excludable from the gross income of the recipient under section 104(a)(2), or
(ii) agreement for the periodic payment of compensation under any workers’ compensation law excludable from the gross income of the recipient under section 104(a)(1), and
(B) under which the periodic payments are—
(i) of the character described in subparagraphs (A) and (B) of section 130(c)(2), and
(ii) payable by a person who is a party to the suit or agreement or to the workers’ compensation claim or by a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with section 130.
- IRC 5891(C)(2) defines the term “structured settlement payment rights” means rights to receive payments under a structured settlement.
When doing at WCMSA allocation the CMS guidelines require that you Identify if the set-aside is paid out as a lump sum or an annuity. If the set-aside is paid out as an annuity, you must identify the following:
1. Name of the carrier
2. Cost of the annuity
- the cost of the structured settlement derivative, which is not an annuity, is not the cost of the annuity from which the structured settlement payment rights are derived]
- in its 2016 WCMSA Guide Version 2.5, CMS says "If annuities are involved, use the lifetime payout amount in the total instead of annuity purchase price and include the annuity rate sheet to support your calculation".
3. Proposed initial deposit (seed money)
4. Minimum annual deposit for the balance of the claimant’s life
5. Annuity starting date
6. Length of annuity
7. Annual payout of annuity
8. Annual funding date
If That Wasn't Enough....
- Structured settlement derivatives are not able to make life contingent/lifetime payouts
- The cost of insurance to cover the potential of vacated transfer order could not be taken out of the MSA.
- The legal expenses to fight an attempt to vacate the transfer order or negotiate a rescission of an order cannot be charged to the MSA.
- Chopped up streams of income sewn together like a patchwork quilt are not an annuity.