Back to the Basics of Structured Settlements

As you continue to provide the best service and dedication to your clients, it is impossible to know everything that could benefit your client’s ultimate recovery. But what you do need to know is that you have experts available to you that know how to handle various settlement scenarios. A settlement consultant provides you and your clients with alternative ways to settle your cases as well as protection from legal malpractice. Your valued consultant can become more than just a vendor; she can be an extension of your firm.

There are many moving parts to consider when settling a case, from protecting your clients’ medical and government benefits, considering Medicare’s guidelines, and resolving liens.  Additionally, one of the most beneficial and secure options for your client to consider is a structured settlement. Read the article, as published in the Orange County Trial Lawyers Association Gavel, here.

What is a Structured Settlement?

The first structured settlement appeared in the United States in 1975 and is a financial package custom designed for the plaintiff that is to be paid by the defendant or the insurer in future periodic payments. The parties agree on the package, the defense then funds its obligation by purchasing an annuity from a life insurance company. The goal of a structured settlement is to protect the injured party and guarantee income to assist in paying the future medical care, life expenses and prevent spendthrift. The greatest benefit of a personal injury structured settlement is that all the payments are guaranteed and are 100% Federal and State Income Tax-Free [see Internal Revenue Code, Sec. 104 (a)]. A structured or periodic payment settlement can be simply defined as “any series of payments made other than a single lump sum amount.”

A structured settlement is flexible and is based on your client’s particular needs. The payments can be paid monthly, quarterly, annually, in lump sums, with COLA increases, joint and survivor and paid in any period of time desired.

In addition to personal injury claims, other types of settlements such as employment, divorce, property, and discrimination may benefit from a structured settlement.  These scenarios are not tax-free, but still take advantage of being tax-deferred until the annuity begins to pay out.

The most important thing to remember is this: DO NOT TAKE POSSESSION OF THE SETTLEMENT FUNDS as that would constitute Constructive Receipt.

What amount of settlement is necessary for a structured settlement?

There is no magic number. It should be based upon the following considerations:

(1) How well will my client manage their finances? Do we need to consider spendthrift protection, protection from other family members or friends that may have “better investments” for your client?

(2) Is your client a minor? For example, $5,000 rewarded to a 5-year-old child could be placed in a Blocked Account with minimal interest rates. However, a structured settlement could easily double, if not triple the investment and is both state and federal income tax-free. Additionally, the parents have the opportunity to direct the distribution past the minor’s 18th birthday. Orange County Superior Court requires the purchase of an annuity where the net sum distributable to a minor exceeds $25,000 and the minor is less than 15 years of age.

(3) Does your client have benefits that need to be protected? Does your client require a Special Needs Trust or Medicare-Set Aside?

If any of these issues apply to your client, they should consider a structured settlement.

When the defense already has a consultant, should the Plaintiff have her own consultant?

Absolutely. If you have a working relationship with a consultant that you trust, that consultant will have your client’s best interest in mind. She will prepare a rate comparison sheet that represents all the annuity companies that offer a structured settlement annuity so that you and your client know you are getting the best rate of return.

Another way to look at a structured settlement transaction is like a real estate transaction. You can sell a house utilizing the expertise of one agent representing the seller and the buyer; however, with whom does the fiduciary responsibility lie? Is it in your client’s best interest?

Will having the Structured Settlement consultant at mediation facilitate settlement?

There are different philosophies on this subject; however, when the parties understand the role of a consultant, having the consultant attend indicates that everyone is serious about getting the case settled and the use of a structure is beneficial to all parties.

Benefit for the Plaintiff: The consultant can show the injured plaintiff the opportunity of lifetime security without the problem and anxieties of investment risk, money management, and financial decisions. She can also reiterate that the payments are guaranteed and tax-free.

Benefit for the Plaintiff Attorney: The consultant can assist the attorney in assuring the client that they will receive guaranteed, tax-free income. It is also a protection for the Plaintiff Attorney against legal malpractice.  Also, the attorney has the added benefit to receive fees tax-deferred through a structured settlement.

Benefit for the Defense: It is an alternative approach in negotiating a settlement along with cost savings for them and they can close the file sooner, reducing their reserves.

Will a consultant provide protection against potential malpractice claims?

If you feel that it is not your place to bring in a settlement consultant or you believe that is it beyond your responsibilities as an attorney or you assume it will cost you more time, you may want to think twice. In the Grillo v. Pettiete et al, the attorney was sued for legal malpractice because he discouraged his clients from taking a Structured Settlement that was offered for their future medicals for life and settled for a lump sum. Within a few short years, the families (and the taxpayers) were left to pay tens of millions of dollars in medical costs. 90% of all settlement dollars, whether in a settlement, lottery or inheritance, is generally gone within 5 years. 25-30% is gone within 5 months! [1]

Even if your client declines the structure, it is wise to have a disclosure that states that you offered a Structured Settlement. Should they decline a proposal, have them write “Declined” with their signature and file it for your protection. Your consultant can easily prepare a proposal with information for you to visually show the client the benefits.

When should the attorney introduce a consultant to the client?

The options that a settlement consultant can offer and an introduction to a Structured Settlement Annuity should be discussed with your client early in the process. It creates skepticism when a consultant is introduced for the first time at the mediation or after the case has been settled. If you have already discussed the settlement amount with your client and have not discussed a structure as an option, their funds are generally already spent in their minds. To avoid the spendthrift syndrome, introduce your Structured Settlement Consultant to your client as soon as possible.

Can I structure my attorney fees even if my client declines to structure their award?

Yes, if the case qualifies under IRC 104(a) (1) or (2), a personal physical injury.  If you have explored the options of structuring your fees, you will see how tax deferral can assist you in growing your own personal portfolio. You can “stack” structures on top of each other. For example, a $40,000 attorney fee structured to a lifetime payment on a 40-year-old attorney, starting at age 62 will guarantee $1,000 per month for the rest of his life. This allows an expected benefit of more than $265,000 tax-deferred.  As cases settle, you could add on until you have accumulated the guaranteed monthly income that you desire. Your attorney fee structure becomes the foundation of your retirement and leaves other taxable funds available to be more aggressive with your investments.

With the market so volatile, how can I know that a structured settlement annuity is safe for my client?

Insurance companies rarely experience financial failure thanks to strong regulatory safeguards, but in the extreme instance when a failure happens, there are significant safety nets in place to protect consumers.

If an insurer appears to be in danger of failing, state regulators can assume control over the company. The regulators are charged with supervising the company’s turnaround, which can include selling it to another company, putting it into liquidation or into runoff. If a company enters liquidation, the regulators in charge make sure that policyholders are paid first before most other creditors.

Is it okay to accept a structure from a property and casualty company that would like to place the annuity with their “sister” life insurance company?

Yes. As long as you have a comparison sheet, which notes the rate of return (ROI) and the annuity company has a rating that you and your client are comfortable with, it is acceptable. Your settlement consultant will be sure that your client receives the best annuity for your client.

NOTE: In the case of a minor’s compromise in Orange County, the court requires comparable quotes as a comparison from other insurance companies if the settling insurance company is offering the annuity.

Is there a refund or “kickback” that goes from the structured settlement consultant back to the insuring property and casualty company?

No. Since Macomber v. Travelers Property & Casualty Corp., 261 Conn. 620, 653, 804, A.2d 180 (2002), the industry has been regulated against kickbacks. As a matter of fact, some casualty companies cannot even accept something as small as a promotional item.

How do I choose a qualified settlement consultant?

As with the legal profession, there are consultants that specialize in different areas and have different backgrounds. The National Structured Settlement Trade Association (NSSTA) has a certification through Notre Dame that can be obtained. It is the CSSC (Certified Structured Settlement Consultant). Verify that your consultant has the CSSC designation to ensure you are working with someone who is accredited and knowledgeable on issues pertaining to a structured settlement.

There are many moving parts to settling your case and taking care of your clients. Your structured settlement consultant can help to alleviate settlement issues and take care of you and your client.

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[1] Source: The Rutter Group, Ltd .from Flavahan, Rea & Tener, California Practice Guide: Personal Injury (TRG 1992) Chapter 4