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Structured Settlement Annuities
o Plaintiffs are “ordinary mortals,” they don’t think like attorneys do. Many attorneys view low interest rates as the main reason they would recommend against structures today. Structures are competitive and SECURE. When I meet with a family, when they hear about the safety of structured settlements and hear that they can meet all financial obligations that would “keep them up at night” through the structure AND, in most cases, have cash left over to spend, give away to family or charity, or invest more aggressively, they most of the time feel “why wouldn’t we structure?” The security OUTWEIGHS the effects of low interest rates. o Plaintiffs simply don’t value structures for the same reason as plaintiff attorneys do. Plaintiff attorneys often tout the tax-free nature of the money, but it is only in the rarest of cases is that the main selling point for the family. o Medical underwriting. When the plaintiff has had significant injuries, or has any other medical condition that would effect life expectancy, whether related to the cause of action or not, getting a “substandard age rating” can mean significant discounts in cost of benefits or increases in amounts of benefits. o Variable Structured Settlement Annuities. A structured settlement annuity that is tied to the market via various index mutual funds, so as interest rates/the market heads back up, so will the return, with all gains being tax-free!
o Despite a common perception, a structured settlement is more than simply buying an annuity. In the context of a lawsuit, a structured settlement is a complex transaction requiring substantial knowledge and experience. Qualified plaintiff structured settlement consultants are more than annuity salespeople. They are experts in a field that requires substantial training and specialization. More specifically, they are partners in the settlement process who ensure that the needs of the injured party are fulfilled to their maximum potential, while making sure IRS guidelines and regulations are followed. o Most of my clients view me as a “settlement consultant,” not just a structured settlement advisor. I bring much more than structures to the table. § I attend more mediation than most attorneys do. I have insight into what other cases have been settling for, how many big insurance groups tend to negotiate, etc. § I help manage the plaintiff’s expectations. I would argue this helps both sides. Again, I work in the field of settlements and handle hundreds each year. I see what cases settle for and can cite cases (without mentioning names to maintain the confidentiality I am bound by) for the plaintiffs. It is very helpful. § I get to know the plaintiffs. How can anyone consider helping with a financial plan without getting to know the person the plan is intended to help? In bonding with the plaintiff, I am morally, ethically, and professionally responsible for them and them alone. It is my job to protect them from whatever could come up to create financial havoc in their lives, whether it be unscrupulous investment people, family members (whether they have the best or worst of intentions), future and current spouses, protecting them from the IRS, protecting their eligibility for public benefits, etc. § I am familiar with various public benefit programs and how structured settlements work in tandem with each. § I have relationships with money managers, trust banks, trust attorneys, estate attorneys, life insurance specialists, life care planners, mediators, and other professionals who may be brought in to help either the plaintiff attorney or the plaintiff. § I ONLY represent plaintiffs and their attorneys! A person CAN’T SERVE TWO MASTERS! If a plaintiff attorney uses someone who does both plaintiff and defense settlement consulting, be aware that most have a conflict of interest. · The Supreme Court decided in Macomber v. --- that the defense’s structured settlement person is not required to do what is right for the plaintiff as they are employed by the defense! · If the defense broker is on any Property & Casualty’s “approved list” they must generate a certain amount of premium for the related life company to stay on that approved list. The closing ratio for defense cases tends to be around 40%. If the defense broker can’t meet the premium minimums for the related life companies on their defense cases, are they making it up on their plaintiff cases? You be the judge!
o Combination of structured settlement and a trust product is unbeatable for plaintiffs. The structure can provide the lifetime income, while the trust can provide the liquidity for the unforeseeable emergencies. o Medical underwriting. Again, the injuries/health condition of the plaintiff could result in favorable medical underwriting, resulting in more money for their money, while still ensuring that they never outlive their money. o The security structures offer are unbeatable when the settlement is received to “make them whole.” For victims and their families, particularly after 9-11, people realize that there are investments out there that could get them higher returns, but they also realize that they could lose their money. Again, rates of return are not the main reason to use structures—peace of mind is more powerful!
o Cons: v Money is “locked up” and not fluid. o Pros: v Money is “locked up” and not fluid. v Helps both sides in coming to a reasonable settlement amount. v Is a guaranteed lifetime payment because it is a life insurance product. No other product out there can guarantee benefits for life. Period. v Plaintiff attorneys, claims adjusters, defense attorneys can have peace of mind that this plaintiff will not run out of money. It’s a socially responsible method of settling a claim. v We can help plaintiffs stay eligible for public benefits by channeling structured settlement benefits into Supplemental Needs Trusts/Special Needs Trusts. v Is one of the least risky investment vehicles out there.
o The Structured Settlements Protection Act was signed into law in 2002 need to get the exact date. v If someone wants to sell their structure to “grey market” factoring companies, they must take their case to a court in their jurisdiction for approval. Legislation is vague enough to let the judges interpret as they see fit. The language reads that selling their future payments must be “…in the annuitant’s best interest.” v Limits how much factoring companies can charge now, making the factoring transactions not so predatory. o The courts love structures for minors and incompetents. I have done very inventive plans that stretch payments out much longer than most judges have seen before. The families and the judges have been excited to see the comprehensive plans that really can provide benefits for life, not provide for situations where the plaintiff may become vulnerable by receiving very large lump sums down the road. I have yet to have a plan rejected by any judge, even after having heard numerous times that the plaintiff attorney thinks the judge “will never” approve it.
o I almost always advise my clients to negotiate in terms of a cash settlement. Once they get the case settled for the dollar amount that psychologically works for them and their clients, we decide on what the financial package should look like from there. That’s not to say that while we’re at the mediation I don’t run the numbers so they can see how much they’re going to need to meet their clients’ needs, simply that that is more of an internal information-sharing process.
o Life Care Plan: I, when given the chance, will do a LCP analysis to determine how much it will cost to fund the LCP before the mediation. o Are public benefits involved? How do we maintain the plaintiff’s eligibility for those benefits? Are there any state insurance programs/government programs the plaintiff may be eligible for? If so, what would those costs be to them? o The costs of annuities change frequently. The benefits quoted to you last week, last month, last year WILL CHANGE. I’ve had attorneys settle cases on illustrations I had prepared weeks, even months ago. Always check in with your structure consultant before using structured settlement numbers.
o It’s simple math. Most attorneys find themselves in the 40-50% tax bracket, including state income tax. If an attorney has a $ 100,000 fee and they take it in cash, they basically only have approximately $ 50,000 to invest. If they take that same $ 100,000 in a structure, they have the entire $ 100,000 to invest and they don’t pay a dime in taxes until the year it’s paid out. For example: § John Doe elects to structure his fees in the form of a retirement fund starting in 20 years, which will pay him monthly for life with a 20-year guarantee period. If the monthly benefit was $ 1,500 per month, the attorney wouldn’t pay any taxes on that money until the end of the year 20 years from now and then he would be 1099ed on the $ 1,500 times 12 months. The rest of the money is still growing, tax-deferred. Ideally, when a person is retired, their tax bracket is lower, thus their tax burden is also lowered.
o Recently courts throughout the United States have been asked to allow structured settlement annuity testimony on behalf of the defense as an accurate measure of the present value of future damages. Furthermore, a component of the structured settlement annuity process, “rated ages,” is being argued, again by the defense, as THE life expectancy of the plaintiff. This type of testimony, depending on the nature of the injury, can significantly REDUCE the numbers for future damages put before a jury. Example: The plaintiff’s economist may determine the present value of future life care expenses to be $ 3,242,000, but the cost to fund that via a structured settlement annuity may be $ 998,116. A huge discrepancy and a huge hit in the damages argument for the plaintiff attorney. o Structured settlement annuity testimony can have an especially convincing appeal to a jury. Juries typically like things simple and if they can avoid having to make tough decisions, such as deciding how long a person is going to live, they will find that path attractive. § The jury is told by the defense that the plaintiff can never outlive the structured settlement annuity payments and thus the jury does not have to decide how long the plaintiff will live. § The jury is told that if they award X in dollars that a structured settlement annuity will be purchased and that it will duplicate the plaintiff’s future care costs or loss of income. o The truth of the matter is that the structured settlement annuity testimony is misleading to the jury! Only the plaintiff suffers if structured settlement annuity testimony and rated ages are allowed in the courtroom! o Structured settlement annuities are NOT accurate methods of calculating the present value of the future loss of wages and/or medical expenses. § The defense would like the court to believe the cost of a structured settlement annuity is synonymous with the term “present value.” Present value is defined as the amount in today’s dollars that would be required to replace projected future dollar losses, allowing for factors of inflation, offset by interest. Structured settlement annuities are NOT a measure of present value because their cost can fluctuate from week to week. In other words, testimony heard by a jury today could be dramatically different from the cost at the time an award was made and judgment satisfied. As a rule, structured settlement annuity costs are only guaranteed for seven days. § Structured settlement annuities do not provide an accurate method for calculating life expectancy. A key component in calculating the present value of future damages is duration. Future medical damages are based on how long the injured person is going to live, i.e. life expectancy. There have been recent instances where the defense has attempted to introduce a rated age from a life insurance company as the life expectancy of the injured person. A rated age is not an accurate estimate of a person’s life expectancy. A structured settlement annuity is a life insurance product. The cost of the product is determined by the general principals of life insurance, including the “law of large numbers.” Simply stated, the “law of large numbers” holds that if you insure a large group of people over a wide range of ages and medical conditions, you can actuarially draw accurate conclusions as to how many policy holders are likely to die during a certain period of time. It does not provide the insurance company with data on who will die when! A rated age is NOT a life expectancy projection, but instead a method of calculating the cost of a structured settlement annuity.
o Recent Supreme Court/IRS/Treasury (?) decisions have made it clear that the plaintiff has the tax liability for the entire amount of the punitive award, regardless of the fact they will be paying their attorney from that award. o Through the use of a “non-qualified” structured settlement, ALL tax could be deferred. o Need more of the info from the Allstate speech at recent NSSTA conference…
o Oftentimes, the defense tells the plaintiff attorney that if they want a structure is can only be done through their “guy.” It has been an unnecessary roadblock to settlement in many cases. o Many attorneys “prefilter” which clients they will mention structures to. Many attorneys would be interested to know that, in 95% of my cases, their clients love them. Even the financially “savvy” ones. They tend to “get” structures and often love the idea of the tax savings. Structures make a great piece of almost all investment portfolios! Whatever part of their portfolio would go into fixed income investments, that piece could be the structure! It’s not all or nothing! Kelly Ramsdale of Dickson Ramsdale & Associates
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