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1 2018 National Conference on Special Needs Planning and Special Needs Trusts Understanding Structured Settlements Michael W. Goodman, Esq., CSSC October 18, 2018 NFP Structured Settlement President, Co Founder Certified Structured Settlement Consultant Past President of National Structured Settlement Trade Associate (NSSTA)

2 What is a Structured Settlement? A structured settlement is method of settling a personal injury lawsuit/claim by making payments according to a schedule uniquely tailored to satisfy the needs of an injured claimant in an effort to minimize tax liabilities and maximize investment growth while protecting the plaintiff misuse of funds with a financial plan which often includes single premium annuities, bond trusts, custodial agreements and reversionary trusts. All proceeds from a structure are completely tax free because Internal Revenue Code Section 104(a)(2) provides that money received through periodic payments is compensation for a physical injury. Structures are created by funding a life insurance company annuity that offers an unlimited number of payment stream options. Payments can be equal, or amounts can vary over time. They can begin immediately or be deferred until you require them, and they continue as long as you choose. Underwritten and guaranteed by a large insurance company The underlying investment is a fixed interest annuity

3 Applicable Laws Relevant to Structures IRS Sections 104 Allows certain compensation for injuries or sickness to flow income taxfree to the recipient. IRS Section 104(a)(2) Personal physical injury IRS Section 104(a)(1) Workers compensation claims IRS Section 130 Allows for a qualified assignment to a third party IRS Section 130(c) Allows the property/casualty carrier or self insured to transfer its liability to make periodic payments to a third party assignment company, possibly obtaining a full release.

4 Reasons to Consider a Structured Settlement Provides financial security and diversification It is tax free and does not have any administrative or management fees Eliminates the burden of dealing with a large cash settlement Offers unlimited flexibility Protection for the plaintiff Estate protection for heirs Perfect settlement solution for minors Capital protection for minors Courts favor Settlement solutions with needs based planning It is backed by highly rated insurance companies

5 The Industry COMPANY ASSETS AM BEST S&P MOODY S FITCH COMDEX American General Life Ins. Co. $178.70B A (15) A+ A2 A+ 81 Berkshire Hathaway Life Ins. Co. of NE $19.61B A++ (15) AA+ * * 100 Metropolitan Life Ins. Co. $396.50B A+ (15) AA- Aa3 AA- 94 Metropolitan Tower Life Ins. Co. $4.92B A+ (15) AA- Aa3 * 95 New York Life Ins. Co. $176.76B A++ (15) AA+ Aaa AAA 100 Pacific Life Ins. Co. $128.65B A+ (15) AA- A1 A+ 90 Prudential Ins. Co. of America $266.16B A+ (15) AA- A1 AA- 93 United of Omaha Life Ins. Co. $22.80B A+ (15) AA- A1 * 93 United States Life Ins. in the City of NY $29.43B A (15) A+ A2 A+ 81 USAA Life Ins. Co. $24.66B A++ (15) AA+ Aa1 AAA 99 Notes: Asset data is for Year End 2017 from the Life Insurance companies statutory annual statements All ratings shown are accurate as of May 10, 2018

6 Industry Totals Life Carrier H2018 YTD AmGen / USL $476,956,481 $612,392,962 $687,751,545 $385,608,472 $129,951,515 Berkshire Hathaway $1,454,924,325 $1,305,950,647 $1,503,668,179 $1,276,934,470 $759,759,590 Liberty Life $608,144,605 $547,970,547 $513,153,640 $522,243,052 $41,187,811 MetLife $868,000,000 $772,000,000 $815,200,000 $897,000,000 $381,200,000 Mutual of Omaha $46,118,749 $98,148,544 $141,507,991 $130,827,391 $30,847,077 New York Life $311,526,531 $367,982,453 $486,688,725 $700,729,331 $398,598,726 Pacific Life $772,942,000 $871,333,000 $1,185,831,443 $1,185,853,950 $712,125,170 Prudential Life $711,650,000 $771,800,000 $398,500,000 $333,380,000 $383,420,000 USAA - - $72,000,000 $117,800,000 $73,000,000 TOTALS $5,250,264,705 $5,347,580,168 $5,804,303,539 $5,550,378,683 $2,910,089,889 *Included both Qualified and Non Qualified. Source: Industry poll

7 Licensing Twenty years ago, securing a license for all of the life insurance companies was challenging. Only a few brokerage firms had a license with every market. Over time, this changed and all brokerage firms had licenses with all carriers providing the structured settlement product. Recently, securing a license has become more challenging. NFP Structured Settlements is proud to be licensed with every carrier in the industry. Below are some of the life companies that do not license every brokerage firm. USAA Life (Rated A++ Superior by A.M. Best) American General (Rated A by A.M. Best expected to get an upgrade in the future). It is likely this trend will continue. Does your consultant have access to all markets?

8 Competitive Pricing Best Rated Ages American General Best Long Term Rates USAA Berkshire Best Short Term Rate Met Life Pacific Life

9 When to Use a Structure Personal physical injury or physical sickness cases involving: Wrongful death Temporary or permanent disability Minor or mentally incompetent person Elderly claimants Cases with long term financial needs including: Medical expenses required for a life care plan Tax free, secure income Mortgage Other cases where long term payments exempt from federal income taxes are desired. Sexual Abuse Case with proof of physical injury

10 Benefits for the Injured Party (Plaintiff) Tax free Guaranteed payments Vital due to ongoing future costs of medical care and lost income Prevents dissipation 30% of settlement recipients spend the settlement money within 2 months 60% within 2 years 90% within 5 years Protects asset sensitive government benefits ensuring no offset of Medicaid and/or Welfare Tax free rate of return is approximately 3 4% annually Taxable equivalent between 4.5 6% (dependent on individual tax rate)

11 Key Points to Consider Tax free status only applies for physical injury settlements Terms of the structure must be established beforehand There can be no constructive receipt. In order to properly effectuate the structure it must be funded directly from defendant to the life insurance company issuing the annuity to ensure tax free status. Structured settlement industry is similar to real estate industry with brokers representing both plaintiff and defendant Property and casualty companies try to feed business to their own related life company

12 Approaching Settlement Timeline of Planning Pre mediation / Negotiation discussions Coordinating with your settlement consultant as early as possible

13 Case Analysis Structured Settlement Analysis Catastrophic case: Life and Family Care Planning for Disabled Individual pre and post resolution Is a structured settlement appropriate for your client? Future Medical Care Dissipation Prevention Risk Tolerance/ Guarantee of a Structured Settlement Financial Diversification Estate Planning (commutation) Tax Planning If a structure is appropriate, it is necessary to review the following: Split funding Financial Integrity of the Life Insurance Company Rates Secured Creditor Status Commutation and Internal Factoring at Life Companies Berkshire Hathaway Structure Fees

14 Case Analysis continued Analysis preparation for a mediation What is the true net amount needed in light of Medicaid, Medicare, Health Insurance, other Third party benefits? What is the scope of expected liens from third party payers? Are there Medicare Set Aside considerations for future medical expenses? Identify ALL potential barriers to third party benefits eligibility. What is the client/family s financial status is there a safety net beyond third party payers? Future Medical Care/Medicare Set Aside Considerations Dissipation Prevention Risk Tolerance/ Guarantee of a Structured Settlement Financial Diversification Estate Planning (commutation) Property & Casualty Insurance Companies/ Medical Malpractice Insurance Companies: what is their interest in a structured settlement, if any? Is there a financial interest? Special Needs and other Trusts, restricted monies (Medicaid vs. Medicare, SSI vs. SSDI, etc.)

15 Case Analysis continued Post Resolution Analysis and Due Diligence Lien Resolution Medicare, Medicaid, Insurance Medicare Set Aside (MSA) Consideration Ensure Competitiveness and Integrity of the Life Insurance Company if structure is utilized Preserve benefits if they are deemed essential for client Cash allocation, recurring monthly needs, expenditure budget family need and vision Housing Issue: ensure there is enough liquidity

16 Substandard Annuities (Medical Rated Age) Injured party often has a reduced life expectancy Substandard annuities created for these cases Significantly increased benefits

17 Medical Rated Age Example Auto Accident Claimant Age 51 (Male) Injuries have healed and did not lesson his life expectancy As part of the settlement, the parties negotiated periodic payments which would pay the claimant $1,000 per month for life with twenty years guaranteed. The cost of this annuity should have been $213,505. Medical records were obtained showing that the claimant was being treated for: Active tuberculosis Had a long history of heavy alcohol and tobacco use. As a result of these details, the annuity was issued at a cost of $204,476, resulting in an appropriate adjustment of $9,029, or 4.22%. This can also work the other way by increasing the clients benefit if you are investing a specific amount.

18 Document Requirements To properly effectuate the structure we need to make sure all the following are met: No Constructive Receipt the structure funding should be issued from the defendant and made payable directly to the life insurance company issuing the annuity payments Appropriate structure language should also be incorporated into the petition/order for any minor or wrongful death case Required annuity language must be incorporated in the final closing documents Release and or the Addendum to Release Under IRC Section 130, a qualified assignment document must be executed by all parties. This transfers the obligation from the defendant to assignment company to fund and make the periodic payments in the future.

19 Beneficiary of Structure Primary beneficiary Contingent beneficiary Multiple primary and contingent beneficiaries allowed Eliminates the structure flowing through probate

20 Trusts for Minors Probate court approval variations from county to county Broward County Dade County Palm Beach Will approve: Will approve: Will approve: Guardianship Structures Guardianship Structures Guardianship Structures Trusts

21 Ohio H.B. #595 Provisions included: Allowing judges the discretion to create a trust for minor beneficiaries until the minor reached age 25 when the trust would be in the best interest of the minor. This would allow probate court to have continuing jurisdiction over a minor s settlement or judgement for injury up to an additional seven years. At the court s discretion they would be able to release all or some of the funds before age 25 in certain situations, such as paying for college, starting a business, or buying a home. By granting the court continuing jurisdiction over the settlement, the court would prevent an 18 year old beneficiary from using significant funds for unintended or inappropriate purposes.

22 Case Example Structure and Trust Net to Claimant $1,700,000 Structure $1,000,000 Trust $700,000 Settlement Protection Trust Benefits of structure and funding a trust.

23 MSA Consideration and Update Medicare Secondary Payer Compliance as it relates to Medicare futures has become such a concern for all parties that settlements are frequently delayed over these issues. Having a thorough understanding about the obligations of all parties when it comes to this issue is of paramount importance. First and foremost, the issue only arises when a settlement involves a Medicare beneficiary or someone with a reasonable expectation of becoming a Medicare beneficiary within 30 months. Liability Medicare Set Asides (LMSA) Update It s been noted that CMS feels that LMSA responsibility belongs to the plaintiff.

24 MSA Funding Funding an MSA with a structured settlements verses a lump sum has its benefits: Tax free Benefit the interest earned on the structured settlement is completely taxfree. Rated Ages can reduce the cost of funding an MSA. Guaranteed Payments. Unlike a lump sum settlement, a periodic payment settlement will provide guaranteed benefits at specified payment dates to assure the MSA is financially secure. A structured settlement is less expensive than paying the MSA with a lump sum. This provides the possibility that there may be additional settlements funds available to settle the claim. With a lump sum MSA, the claimant must spend the entire amount of the MSA before Medicare will cover Medicare expenses related to the injury. Whereas if the MSA is funded with a structure, Medicare will cover any expenses over the claimants current MSA balance per year.

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26 Commutation Upon Death of Claimant Allows the beneficiary to commute a portion of all the structure payment upon the death of the claimant. Typically, this elections needs to be made at the time of settlement. Most life companies require the inclusion of commutation language in the: Settlement Agreement and Release Qualified Assignment and Release (QAR) or the Qualified Assignment, Release and Pledge Agreement (QARP) Application

27 Commutation Upon Death of Claimant COMPANY Determined at Time of Settlement Optional to Commute Upon Death Additional Language Required in the Release and QAR/QARP Percentage of Present Value American General Life Ins. Co. X Yes 95% Berkshire Hathaway Life Ins. Co. of NE X Yes 95% Metropolitan Life Ins. Co. X Yes 95% Metropolitan Tower Life Ins. Co. X Yes 95% New York Life Ins. Co. X Yes 94% Pacific Life Ins. Co. X Yes 95% Prudential Ins. Co. of America X Yes 90% United of Omaha Life Ins. Co. X Yes Not Available USAA Life Ins. Co. X No Not Available

28 Structured Settlement Protection Acts Revised laws further protect the injured party and their families. Florida, Ohio, Wisconsin, Illinois, and Virginia Transfer Petitions must be filed in the county where payees reside All Payees attend the hearing on the transfer petition(unless the court determines that good cause exist to excuse payee from attending) Transfer Petition must include summary of all previous transfers by the transferee and a Summary of any transfers that were denied.

29 Michael W. Goodman, Esquire Certified Structured Settlement Consultant Michael, a principal of National Financial Partners (NFP), is a managing partner of NFP Structured Settlements with offices in Florida, Ohio, Pennsylvania, West Virginia, California and Georgia. One of only 550 Certified Structured Settlement Consultants in the country, Michael has been active in the structure industry since 1991 and has produced over $1.5 Billion in structured settlement annuities in that time. He has been involved in more cases than any other consultant in the country. In addition to managing NFP Structured Settlements, Michael works with plaintiff attorneys and their clients throughout the country presenting structured settlement options and coordinating efforts to ensure that plaintiffs continue to receive all public benefits available. He is a Past President of the National Structured Settlement Trade Association (NSSTA), where he led the way in changing and strengthening the Structured Settlement Protection Act s (SSPA) laws in five states, providing more protection for structured settlement recipients. He also manages NDC Advisors (NDC) a trust administration company. Within the past five years, NDC has become one of the largest trust administration companies in the country working exclusively with personal injury clients. Michael received a Juris Doctor with Honors from the University of Florida College of Law and has been admitted to the Pennsylvania Bar. He graduated Cum Laude from Williams College with a Bachelor of Arts degree in History. Upon graduation from Williams, Michael was inducted into the Massachusetts College Football Hall of Fame. Michael W. Goodman, Esq., CSSC NFP Structured Settlements Telephone: mgoodman@nfp.com