structured settlement annuities in special needs settlement planning jack meligan, cssc, bcfe...
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Structured Settlement Annuities in Special Needs
Settlement Planning
Jack Meligan, CSSC, BCFEMichele Whitmore, CSSC, CFP®
• Settlement Planning is a profession that helps recipients of settlement proceeds use those proceeds to achieve their post-loss goals and transition successfully into their post-settlement financial lives.
What is Settlement Planning?
Structured Settlement Annuity
• Issued by an insurance company• Payments are fixed and cannot be
changed (SPIA)• Lump-sums allowed (No need to be
“substantially equal”)• Interest included in payments is not
taxable
Structured Settlement Annuity
• IRC 104(a)(2) – excluded whether paid as lump sum or periodic payments
• IRC Sec. 130 – Qualified Assignment – allows defendant to transfer liability to a third party
• Actual and constructive receipt issues
Which is the Best Tool?
• Ridiculous question• Depends on the job
at hand• Some tools more
useful than others• No BAD tools
unless used incorrectly or for wrong job
Best Settlement Planning Tool?
• Structured settlement annuity
• Mutual fund• Exchange traded fund• Supplemental needs
trust• Settlement
preservation trust• Money market fund
Are Structured Settlements Bad?
• Bad question• Depends on job• Structured
settlement can be a wonderful tool when used correctly by a professional
• Structures sometimes get a bad reputation
When All You Have is a Hammer….
• Your professional should use a comprehensive approach to settlement planning
• Don’t work with a one trick pony annuity hawker
How to Recognize Professional?
• Credentials• Loyalty to
plaintiffs• Planning
approach• Professional• Experience
To Structure or Not to Structure
• What’s the proper amount to structure, if any?– Needs analysis– Liquidity analysis– Life care plan analysis– Meet baseline needs and
not a penny more– FedEx money- absolutely,
positively has to be there
Advantages of Structured Settlements
• Can’t get at the money• Rated ages• Tax-exempt income• Lifetime payments• Fixed, guaranteed
return• Match fixed cash flows• Secure• No need to manage• Low dissipation risk
• Medical underwriting• Bad is good – not just injury related• Full market survey• Adds substantially to payout• Baby who got rated age of 79 – took
cash at recommendation of trust officer, money exhausted, everyone sued
Rated Ages
SNT
SSAnnuity
InvestmentAccount Cash
FlexibilityFlexibility
Risk of LosingRisk of Losing
Tools of Settlement Planning
• Predictable, ongoing needs can best be met with annuity
• Structured settlement annuities are flexible in design.– Lifetime payments– Period certain
payments– Lump sum payments
Square Pegs and What to Structure
Predictable Medical Expenses
• Attendant care• Predictable
medical expenses
• Equipment replacement
• Regular transportation upgrades
• Medications
Do NOT Structure…
• Expenses projected for next 5 years (except attendant care)
• Examples:– Home renovations for
accessibility and safety purposes
– Vehicle modifications– Emergency reserve for
unexpected expenses
Diversification
• Multiple annuity companies
• Methods of payment (i.e. monthly vs. lump sums)
• Cash, investments and structured settlement annuities
Companies
Life Company A.M Best Fitch Moody's Standard & Poors Weiss
Allstate Life A+ 15 (2) A (6) A1(5) AA- (4) A- (3)
American General Life A 15 (3) AA- (4) Aa3 (4) A+ (5) C+ (7)
Hartford Life A 15 (3) A (6) A1 (5) A+ (5) B+ (4)
John Hancock A++ 15 (1) AA+ (2) Aa1 (2) AAA (1) A- (3)
Liberty Life Assurance A 9 (3) A+ (5) A2 (6) A- (7) B- (6)
Metropolitan Life A+ 15 (2) AA (3) Aa2 (3) AA (3) B+ (4)
New York Life A++ 15 (1) AAA (1) Aaa (1) AAA (1) A (2)
Pacific Life & Annuity A++ 15 (1) AA (3) Aa3 (4) AA (3) A- (3)
Prudential A+ 15 (2) AA-(4) Aa3 (4) AA (3) B (5)
Symetra Life A 12 (3) A+ (5) A2 (6) A (6) B (5)
Case Study - Jackie
• 12 year old little girl• Catastrophic brain
injury• Rated age of 45• Annuity
– $10,000/mo.– 3% COLA– Lifetime payments– $3,000,000 cost
Jackie - Alternatives
• SNT needed• Life care plan –
needs $10,000/mo. in FedEx money
• Trustee recommending portfolio
• How does this stand up?
Jackie – Testing Alternatives
• Structured settlements– No taxes– No trust fees apply
• Non-structure alternatives– Stocks– T-Bonds– 50%/50%
• Back tested using actual returns going backwards
What if the Situation Changes?
• Life comes at you fast
• What can change?– Death– Miraculous
recovery– Further injury– Family misfortune– Opportunity– Etc.
What if Claimant Dies?
• Accelerated payment of the annuity at death (commutation rider)
• Family needs?• Estate Tax (IRC Sec.
2039(a) – The gross estate shall include the value of an annuity or other payment …)
Commutation Riders
• If the claimant dies after the purchase of a structured settlement annuity by the Assignee, and there are any remaining and unpaid guaranteed payments under this structured settlement annuity, a percentage of such payments will be commuted and paid to the designated beneficiary (or to the claimant’s estate) in a single sum.
• The amount of the commuted payment will be calculated using 95% of its annuity purchase rates in effect at the time of claimant’s death, for the same or similar certificate.
Working the “Factoring” Market
• Rarely recommended• Companies are
overly aggressive• Settlement planners
can provide guidance to protect the client
• Hint: Don’t call 1-800-CASH NOW
IRC Sec. 5891, which became effective January 23, 2002, allows for certain future payments to be “factored” to a lump sum with court approval.
Factoring Structured Settlements
• Court will consider “best interest” of payee and payee’s dependents
• Unapproved factoring transactions subject to 40% federal tax
Settlement Documents
• Settlement Agreement and Release
• Qualified Assignment
• Court Order Approving Settlement
Settlement Agreement & Release
• Settlement agreement should never state that plaintiff or SNT Trustee will purchase annuity
• Signals constructive receipt
• Defendant or its casualty insurer send check directly to annuity company
Settlement Agreement & Release
• Settlement agreement should not state “receipt and sufficiency is hereby acknowledged”
• Sufficiency is okay, but not receipt (since future payments have not yet been received)
• Settlement agreement should never put injury in doubt
Settlement Agreement & Release
INCORRECT: “Plaintiff claims that he sustained personal physical injuries, all as a result of the incidents…”CORRECT: “Plaintiff sustained personal physical injuries, that he claims are as a result of…”
Qualified Assignment
• “Qualified assignment” assigns obligation to pay future payments from defense or its liability insurer to assignment company
• Assignment company purchases and owns the annuity
• Take care not to allow secured creditor status
Court Order Approving Settlement
• Court must approve if minor or incompetent adult
• Court orders payment made directly to assignment co.
• Court orders payee of annuity is SNT Trustee
• No beneficiary other than SNT Trustee (to protect Medicaid’s interest)
Deficit Reduction Act of 2005
• Requires disclosure of any interest an applicant has in an annuity
• Disclosure required even if an annuity is irrevocable or not treated as an asset
• Insufficient disclosure may result in denial or termination of Medicaid eligibility
Does SNT Beneficiary Have Interest?
• Remember scenario for structure:– SA requires future payments paid by defense– Defense assigns obligation to make future
payments to assignment company– Assignment company buys and owns annuity– Court orders payments sent by assignment
company directly to SNT Trustee– Trustee is payee and only party who could
sell future payments
Does SNT Beneficiary have Interest?
• What is SNT beneficiary’s interest in annuity?– Not buyer, owner, payee or beneficiary– Never had receipt (actual or constructive) of
any of the funds– Cannot sell, accelerate, transfer, give away,
alter, receive, encumber, smell, touch or see the contract or any payment from it!!!
– Saleable = Countable (but, SNT beneficiary cannot sell payments, not the payee (Trustee) or owner (Assignment Company)
A Call to Action!
• DRA doesn’t address “Structured Settlement” annuities
• Different states may adopt different policies
• Need clear authority - issuance of POMS• Calling for coalition of ASNP, SSP, NSSTA,
NAELA, The Alliance, AAPD, and others to request clarity from SSA
• Until then, may be risk if you don’t follow the rules in DRA
Have They Seen Worse Times?
• New York Life 1845• MetLife 1863• Pacific Life 1868• Prudential 1875• Amer. General 1900• Liberty Life 1919• Allstate 1931• Symmetra 1957• Hartford 1810• John Hancock 1862
Companies
Life Company A.M Best Fitch Moody's Standard & Poors Weiss
Allstate Life A+ 15 (2) A (6) A1(5) AA- (4) A- (3)
American General Life A 15 (3) AA- (4) Aa3 (4) A+ (5) C+ (7)
Hartford Life A 15 (3) A (6) A1 (5) A+ (5) B+ (4)
John Hancock A++ 15 (1) AA+ (2) Aa1 (2) AAA (1) A- (3)
Liberty Life Assurance A 9 (3) A+ (5) A2 (6) A- (7) B- (6)
Metropolitan Life A+ 15 (2) AA (3) Aa2 (3) AA (3) B+ (4)
New York Life A++ 15 (1) AAA (1) Aaa (1) AAA (1) A (2)
Pacific Life & Annuity A++ 15 (1) AA (3) Aa3 (4) AA (3) A- (3)
Prudential A+ 15 (2) AA-(4) Aa3 (4) AA (3) B (5)
Symetra Life A 12 (3) A+ (5) A2 (6) A (6) B (5)
What if Insurer Goes Broke?
• Only A+ or better insurers should be used
• Even when they go broke, annuitants almost always get something
• Better odds elsewhere?• So far 700,000 insured structured
settlements– About 300 people didn’t get 100% of what
they were promised– 99.95% got everything, .05% got most
after delays and hassle
Are Annuities Safe in the Long Run?
• Fair question in these hard times• Safety begins with proper risk
management• Heavily regulated by state insurance
commissioners• Reserves, Capital, Surplus• Insolvency – does not mean they
can’t pay the bills• State guarantee funds
Watch Out!
• Where can this bite me in the &*#$@?– Not having a qualified settlement
planner on the team….but, wait, isn’t that the plaintiff attorney?
– If SNT attorney takes assignment from plaintiff attorney who has not retained an expert.
– Broker on case who has no duty to protect plaintiff’s interests
Watch Out!
• What about choice of funding vehicle(s)?– Plaintiff attorneys believe SNT attorneys
are experts in all areas– Liabilities:
•Improper coverage of special needs with funding vehicles
•Improper diversification of funding vehicles
Other Potential Problems
• Improper beneficiary designations
• Improper liquidity considerations:– while injury victim
is living– at injury victim’s
death