Structured settlements and mass torts, not for the "do it yourself" crowd...

As a follow up to my article and commentary last week I shot an edition of Speaking of Settlements in which I discuss again the problems that occur when a settlement planner decides to "do it themselves" in a complex situation. Structured Settlement brokers at work

Actually the situation and case I am discussing is even more distressing than I outlined in my prior commentary, largely because the litigation provided for several sub qualified settlement funds to be created on a firm or regional basis, and in almost every instance, the law firms either decided to not provide planning for their clients or elected to have their QSF set up by firms that have never done a taxable damage QSF.

How do I know this?

All you need to do is read the filings in federal and state courts to determine that in a couple of cases the documents were pure boiler plate from previous mass tort's, typically pharmacutical litigation.

While any structured settlement professional is free to work with whom ever they want, I think it would benefit our profession greatly if brokers would refrain from providing "free solutions" to lawyers who either don't understand the value of a qualified settlement fund, or don't want to pay for the value it does provide.

Free solutions and/or do it yourself...neither is how I'd want to have my claim settled.

“ I don’t need your help, I can do it myself…” Structured settlement industry hubris at it’s best.

My New Years resolution is to recommit to a weekly column and thankfully the structured settlement and legal profession provide me with endless sources of news, entertainment and examples of borderline idiotic behavior to discuss and comment on.

Today’s story is a look at a recent case I have been working on, one that is a very large, multi-claimant settlement that took years of effort on the part of the attorney’s involved, complex negotiations, hard fought court room victories and millions of funds expended, with the final result being an outstanding settlement for a group of business people who had suffered economic loss.

As we all know, or one would think we should know by now, that if a case does NOT have elements of personal, physical injury as a basis of the claim, the settlement is not afforded tax free status under IRC section 104 and all of the proceeds are taxable. That was and is the reality in this particular situation. However, as most of us know, just because a case has taxable damages doesn’t mean you can’t structure, in fact, the ability to structure and spread out payments on a taxable case is arguably even more valuable given high marginal rates on federal and state income taxes. Therefore it is vital in my professional opinion to make that option known to the legal community and assist them in providing planning tools to their claimants.

So far so good, right?

Now, in this case, as in many other big multi-claimant cases, it was necessary to create a section 468B qualified settlement fund for the firms to receive the clients payments, communicate the planning options to the clients and then disburse funds to the claimants in a orderly and compliant fashion. We do this so that any liens, disputes, allocation issues and compliance checks can be resolved, as well as to make sure there is no constructive receipt of the money by the claimant in the event they wish to structure or plan their award. It is a time tested standard of practice in matters such as this and one that is becoming routine in multi-claimant litigation.

That said, it does take some specific expertise to draft the documents, select local and administrative trustees, select a custodial financial institution, issue 1099’s, sign off on structured settlements and disburse checks. This is not your standard IOLTA account, “lets just write the client a check”, type of situation and law firms are becoming increasingly aware that they probably should engage a firm with demonstrated experience in administration, compliance and planning to get this all to work according to plan and to make sure the clients are happy with the process.

So, back to my case and my story.

Our firm is working with several law firms to assist them in an orderly fashion to do the administration and to put them in touch with LOCAL structured settlement experts who will be meeting with the claimants to discuss planning options. We do this so that no claimant can come back at a later date and say they were not informed they could structure their claim or that a competent local planner wasn’t available to answer their questions and assist them with this decision. It is a great way to get this done as we handle administration, compliance, back office and communication while the local planner is afforded an opportunity to meet with a claimant in a professional fashion to discuss options and issues face to face.

As part of this process we also offered our services to several other law firms who were part of this litigation who informed us that they had structured settlement experts they prefer to work with. So, we of course offered to work with these settlement experts to handle the administration and to give them the ability to write the structures and handle the processing. The response, boiled down to it’s simple best, was they wanted to handle everything themselves, despite the fact, that to my knowledge, that they had never handled a case of this complexity on a taxable settlement before. Their decision to not divide responsibility but instead keep “control” was driven out of what I can only assume is some fear that my firm would “steal their client” or possibly they didn’t see the value in using an expert but instead learning on the job so they can do it themselves.

Fine with me, we have plenty to handle on our end and lots more cases yet to come and I’m the last person in the world who wants to force or coerce anyone to work with my firm.

You would think this is the end of the story, but it’s not.

The “Do it yourself” firm went out, got someone to “craft”  a qualified settlement fund so they could presumably control their client. They filed the QSF with the court and awaited the windfall that obviously was their dream. The only issue is a minor detail that cropped up which my firm discovered by looking at the court filings. Their qualified settlement fund was clearly a “boiler plate” of a personal physical injury settlement they or their “expert” had created which included language and powers that specifically prohibited structuring any claim other than a physical, personal injury.

In other words the governing document on file that was intended to allow for the structuring of taxable damage awards was instead, due to a complete lack of oversight by the settlement firm, prohibiting them from doing any structures.

Obviously I am not going to name the firm or outline the exact case, I have no desire to needlessly embarrass someone when I am sure they are sufficient humiliated by presumably having to relay that egregious error to their client. However, this extreme example does drive home what I have been trying to stress for years now and that is the necessity for each of us to realize what we do well and to stop trying to be all things to every client so as to capture every last possible commission dollar. How in the world anyone ever expects the legal community to take us seriously as problem solvers with this type of careless behavior is beyond me.

In a large case there is a need for quality administration, trust services, communication and client planning and counseling. The client is best served by a team approach where each professional is appropriately and transparently compensated for the value they provide and the client is given timely, objective planning assistance that lets them decide what if any funds they want to structure into the future. To assume any one firm in our industry can provide these services is foolishly prideful and leads to potential disasters that will continue to lower our professional standing with trial lawyers and their clients.

Hubris: “Overbearing pride or presumption; arrogance”. Sum’s it up nicely

Oil and Gas lease bonus payments, how to structure them for tax savings

In this weeks edition of Speaking of Settlements we look at one of the more innovative programs in the non-qualified market and that is the structuring of oil and gas lease bonus payments through the use of a structured settlement annuity device.

As many people in the structured settlement profession know, Allstate Financial has been a consistent innovator in the area of structured taxable damage awards, as well as structuring the sales of appreciated real estate through their structured sales program. They continue their progressive ways with the announced ability to now structure oil and gas lease bonus payments, allowing people who are leasing their land for oil and gas drilling to defer bonus payments into future years tax returns.

Oil and Gas lease bonus payments, how to structure them for tax savings

The reason this is so important and valuable is that the bonus payment is on top of the annual or quarterly lease payments and is typically a one time bonus up front. By being able to move those dollars into future years, you are able to spread the tax hit over time, earn interest on the funds while deferring, guarantee payments on a fixed schedule and ideally receive them when you are in a lower tax bracket or have other off setting deductions. Of course, on top of the tax benefits, many people just find the idea of being able to secure future payments with the bonus funds to simply be prudent financial planning and want to take advantage of that option now.

To learn more about the Allstate Financial Oil and Gas leasing bonus program, you can go to my firms website at www.wahlstromandassociates.com.

Structured sales and farm land, the boom in farm land prices creates tax planning opportunities for farmers

In this weeks edition of Speaking of Settlements, I look at the renewed interest by my farmers in using structured sales to spread out the tax hit and guarantee cash flow on the sale of their farm land. I also look at the recent surge of farmers who are leasing land to oil companies due to the discovery of shale under their property and the ability to collect oil and gas leasing bonus payments that can be structured as well.

The use of the structured sale has been on the back burner for several years now, largely as a result of the collapse of the real estate market and financing options for both buyers and sellers. It was a product originally conceived and used successfully for several years when people who own highly appreciated, low cost basis real estate, want to cash out and sell, but don’t want to write huge tax checks to the state and federal government on the capital gain. While we can all agree it makes a lot more sense to use 100% of your net sale proceeds and spread the money out over years, many people are still wondering what a structured sale is, and why it makes sense for those selling farm property.

In almost every case that has been referred to my office over the last year in which farm land is being sold or is under consideration for sale, it is a family owned farm that has almost no cost basis and close to 100% of the sale is going to be subject to capital gains tax. While the tax is a big issue, what is a larger problem is that with the sale of the farm, most farmers or their families are also losing their source of annual income, something they need to sustain through the investment income on the sale proceeds.

The structured sale allows them to design guaranteed payments, on a schedule that makes sense for their situation, paid monthly, annually and for years if not decades into the future. Combined with spreading out the tax hit, putting 100% of the net proceeds to work and creating a guaranteed cash flow and payment stream that provides income to the family, you can see why this is becoming increasingly popular during these uncertain market conditions.

If you want to learn more about structured sales and it’s use when selling farm property, contact my office through our web site at www.wahlstromandassociates.com and we will be happy to assist you.

S&P down grades five major life insurance companies to AA+ from AAA status

In what we can assume will be the first of several down grades for major life insurance companies in the structured settlement markets, S&P quickly down graded five premier life insurance companies yesterday from AAA to AA+.  The companies who were impacted by this are:

New York Life was dropped to a AA+

Northwestern Mutual Life Insurance was dropped to a AA+

USAA was dropped to a AA+.

Knights of Columbus was dropped to a AA+.

Teachers Insurance and Annuity. TIAA, was dropped to a AA+.

So what exactly does this mean and what are the implications for the life insurance industry and structured settlements in general? I address some of the concerns in this weeks video broadcast of Speaking of Settlements but in short the impact should be minimal other than to the pride of the companies listed above.

It is a sickening process in that each of those five firms went to great lengths over the last three years to do the things needed to retain a coveted AAA rating and in some cases make it a key element of their marketing campaigns, only to suffer this immediate down grade as a result of the fact that they hold a large portion of US government obligations precisely because they are so conservative and careful.

As I have been saying for years, our industry uses these ratings at our peril as the rating firms really could care less about the impact of their down grades on companies marketing and reputations and the idea of using S&P as a rating agency for life markets has been a bad idea for decades. I have always preferred AM Best as the best source of information on insurance company standards and solvency and they are not as reactive as the other firms.

Enjoy today’s video on the S&P down grade and it’s impact on the insurance and structured settlement profession, but it would be wise to stop using rating agency rankings as some sort of validation of safety and instead do your own research on markets and firm to match the right company to the right risk.