1. Structured Settlement Annuities in Special Needs Settlement Planning Jack Meligan, CSSC, BCFE Michele Whitmore, CSSC, CFP®

2. 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?

3. Settlement Planning Financial Planning Litigation What is Settlement Planning?

4. 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

5. 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

6. Are Structured Settlements Bad? A fairly dumb question

7. Which is the Best Tool? Hammer Pliers Screwdriver Ratchet Saw Wrench

8. 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

9. Best Settlement Planning Tool? Structured settlement annuity Mutual fund Exchange traded fund Supplemental needs trust Settlement preservation trust Money market fund

10. 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

11. Hacks with Dollar Signs in Their Eyes Nasty defense tactics Unqualified hacks Over-structuring

12. 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

13. How to Recognize Professional? Credentials Loyalty to plaintiffs Planning approach Professional Experience

14. How Much to Structure? If appropriate to structure any

15. 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

16. 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

17. 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

18. SNT SS Annuity Investment Account Cash Flexibility Risk of Losing Tools of Settlement Planning

19. 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

20. Predictable Medical Expenses Attendant care Predictable medical expenses Equipment replacement Regular transportation upgrades Medications

21. 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

22. Diversification Multiple annuity companies Methods of payment (i.e. monthly vs. lump sums) Cash, investments and structured settlement annuities

23. Companies Life CompanyA.M BestFitchMoody'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)

24. 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

25. Jackie - Alternatives SNT needed Life care plan – needs $10,000/mo. in FedEx money Trustee recommending portfolio How does this stand up?

26. 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

27. Jackie – Testing Alternatives Structured Settlement Stocks T-Bonds 50%/50%

28. Portfolio vs. Structure

32. What if Things Change Stuff Happens!

33. What if the Situation Changes? Life comes at you fast What can change? –Death –Miraculous recovery –Further injury –Family misfortune –Opportunity –Etc.

34. 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 …)

35. 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.

36. Factoring

37. 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

38. 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

39. Settlement Language Pitfalls

40. Settlement Documents Settlement Agreement and Release Qualified Assignment Court Order Approving Settlement

41. Process: Required Documents Settlement Negotiation (Agreement is reached) Settlement Agreement & Release (Parties & settlement amounts identified, defendant released) Qualified Assignment (Schedule of payments set forth & obligation assigned) Court Order (Approves settlement design often involving SNT trustee as Payee)

42. 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

43. 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)

44. 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…”

45. 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

46. 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)

47. 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

48. 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

49. 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)

50. 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

51. Safety of Annuity Companies What if the sky falls?

52. Have They Seen Worse Times? New York Life1845 MetLife1863 Pacific Life1868 Prudential1875 Amer. General1900 Liberty Life1919 Allstate 1931 Symmetra1957 Hartford1810 John Hancock1862

53. Companies Life CompanyA.M BestFitchMoody'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)

54. 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

55. 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

56. Where Can This Bite Me? What to Watch Out For

57. 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

58. 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

59. Other Potential Problems Improper beneficiary designations Improper liquidity considerations: –while injury victim is living –at injury victim’s death

60. Questions?