Frequently Asked Questions
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Q4. Can structured settlements be used in Wrongful Conviction/Wrongful Incarceration/Wrongful Imprisonment cases?
Q8. What is the advantage to the plaintiff in choosing a structured settlement instead of a lump sum settlement?
Q 17. What is a "substandard" case and what is its impact on the cost/benefit of the structured settlement package?
Q 25. May the plaintiff name specific individuals as beneficiaries and reserve the right to change the beneficiaries?
Q 26. How has Periodic Judgment Legislation affected the periodic payment approach to resolving liability cases?
Q 27. Can any party or the casualty insurer receive part of the commission back from their structured settlement broker?
Q 31. Can the Creative Capital Team assist in Medicare, Medicaid, ERISA and other lien matters, as well as MSA Allocations?
What is a tax free structured settlement? A tax free structured settlement is a tool used by plaintiffs to tailor make a benefit payment plan designed to meet their current and future financial needs without any concern about future investment market performance. Whether the stock or bond market rises or falls, a plaintiff’s structured settlement is secure. To be a TAX FREE structured settlement the underlying lawsuit or claim must be one seeking damages for physical injury, physical sickness, or wrongful death.
All TAX-FREE structured settlements are compliant with Internal Revenue Code Section 104(a)(2) [or 104(a)(1)-Workers’ Comp structures] and Section 130(c) in cases involving a Qualified Assignment.
BEWARE of so-called “130X Structured Settlements” or “Plaintiff Controlled Structured Settlements” and similar other TRUST based settlements that are NOT COMPLIANT with Code sections 104(a)(2) and 130(c). Unlike REAL STRUCTURED SETTLEMENTS these products are offered based on HYPOTHETICAL ILLUSTRATIONS which ASSUME a FICTICIOUS rate of return, charge SET-UP FEES, and provide benefits which are NOT GUARANTEED. Additionally, it is reported that some cases of these types have simply run out of money. Many such settlements have lost money when the investment markets have declined. Indeed, a spokesperson for one of these companies, while speaking at a CLE program, admitted that her company’s products lost 29% during a single down year of the stock market.
In stark contrast are real structured settlements. They are tax compliant, and bona fide quotes are provided. All future periodic payments are guaranteed and are not dependent on future market performance. They can provide a lifetime of benefits that cannot be outlived – the money will never run out. Nothing is hypothetical.
Does the defendant pay the full cost of the settlement at the time of settlement? Yes. In structured settlements the defendant pays 100% of its cost of settlement immediately and is completely released from the claims and causes of action asserted against it by the plaintiff. The defendant pays the up-front cash portion of the settlement to plaintiff and plaintiff’s counsel for deposit into plaintiff’s attorney’s escrow account. The defendant’s cost of the FUTURE PERIODIC PAYMENT portion of the settlement is also paid in full at the time of settlement by check or wire transfer directly to the LIFE INSURER (or its affiliated Assignment Company) issuing the annuity used to provide the future periodic payments to the plaintiff.
Can you provide an example of how this works? Yes. Let’s say the plaintiff and defendant agree to a structured settlement where the defendant’s total cost is $1,000,000 and half of that amount ($500,000) is paid in up-front cash and the other half ($500,000) is used to fund an annuity that will provide $750,000 in future periodic payments. The defendant will pay the entire $1,000,000 cost of settlement immediately. The parties will sign all required documents immediately. And the plaintiff will never have to deal with the defendant again. The Life Insurance Company issuing the annuity will then start making direct deposits (or it will send checks) directly to the plaintiff for the entire period of the scheduled FUTURE PERIODIC PAYMENTS.
Can structured settlements be used in Wrongful Conviction/ Wrongful Incarceration/Wrongful Imprsonment cases? YES. In virtually every such case, especially those involving long term wrongful imprisonment, the plaintiff has experienced numerous, often repeated, physical injuries, sometimes at the hands of other inmates or prison guards. Exposure to noxious odors, chemicals and the like often cause physical illness, as does prolonged intense fear.
In one case we are familiar with the plaintiff, an innocent man, was involved in a physical altercation almost every day for nearly 23 years. His “daily” physical injuries ranged from bruising, to stabbings, to knee injuries involving torn ligaments and cartlidge. Some of his injuries required surgery. 100% of this plaintiff’s injuries and illnesses were a consequence of his wrongful conviction and wrongful imprisonment. Click Here for Case Studies on Wrongful Imprisonment Casees.
Why were structured settlements created? To establish an approach that enables plaintiffs to retain their settlement. It is not only important for plaintiffs to obtain a good recovery, they must have the ability to retain their money. Many plaintiffs in physical injury matters have been further victimized after a cash settlement. With no investment risk tolerance and volatile financial markets many plaintiffs have lost their settlement dollars and means of survival through poor financial decisions and losses even when professional advisors were utilized. In response to this serious situation a structured settlement was created to provide tax free guaranteed payments for a fixed period and/or life along with upfront cash. The structure approach offers the plaintiff safety, security and peace of mind that he would not otherwise have in a cash only settlement.
What is the role of CCI as a settlement consultant? Structured settlements created the need for a specialist to help advocate for the client and facilitate settlements. Creative Capital utilizes its expertise and experience in law, insurance, valuation, etc. to become an integral part of the team that helps achieve a successful resolution of the case. Creative Capital never charges a fee for services. For A List of CCI’s Services Click Here.
If Creative Capital does not charge a fee for services how does it get paid? Creative Capital is paid a one time commission by the life market(s) used to issue the annuity. Due to the anti-rebating/anti-price discrimination statutes in almost every state, even if the life companies paid no commission, they would provide the same benefits for the same cost. As a result, CCI truly represents a no cost item for all its services.
What is the advantage to the plaintiff in choosing a structured settlement instead of a lump sum settlement? The biggest advantage is certainty. Most plaintiffs, particularly those with catastrophic injuries, need a settlement that is guaranteed to last a life time. They have zero Investment Risk Tolerance. They cannot chance the uncertainty of the stock or bond markets. Their settlements represent the one and only opportunity to protect themselves. Unlike gainfully employed earners who do not have to live off their investment portfolios and can, therefore, take risk, plaintiffs require GUARANTEES.
Another advantage is the tax savings. Under IRC Section 104(a)(2) and Section 130, all up-front cash payments and all Future Periodic Payments made to the plaintiff in bodily injury cases are excluded from taxation. That includes the earnings on the amount put into the structure which are also 100% TAX FREE.
Payments made to the estate after the plaintiff's death, AS WELL AS PAYMENTS MADE TO DESIGNATED BENEFICIARIES are also excludable from income tax. Had the plaintiff received a lump sum (tax free) and invested it, the interest would be subject to taxation. In a structured settlement, both the principal used to purchase the "Qualified Funding Asset" ( annuities) and the interest earned are received by the plaintiff tax free and the plaintiff’s beneficiaries free of income tax.
As mentioned above, other benefits include absence of investment risk, plus management-free income, flexibility in structuring payments to fit individual needs, and protection of funds against premature dissipation, fraud and greed.
Do casualty insurers favor structured settlements? The answer is “sometimes.” Structured settlements, if properly negotiated, may provide a bridge to close a gap between plaintiff’s DEMAND and defendant’s counter offer. For example, if both sides recognize that a case is valued at roughly $1M, would it not be a good settlement if the defense can spend $975,000 and provide the plaintiff with a structured settlement benefit plan that the plaintiff would need $1.25MM in cash to replicate? In this type of a settlement the plaintiff receives more than he or she would otherwise have accepted in cash, and the defendant pays a little less to settle, thereby closing the file. Especially when there are liability issues and the parties have reached a seemingly insurmountable impasse, a structure can often accomplish the goal of both sides avoiding the risk of an adverse verdict.
How is CCI able to provide the win-win situation described in the last answer? Simple. A window of opportunity exists at the moment of settlement. If the plaintiff took cash and left, he or she could purchase an annuity or make an investment that would provide a monthly cash flow. However, some or all of that cash flow would be taxable. Since the entire cash flow from a structure is tax free, the plaintiff would have to invest a greater amount to achieve a greater gross monthly cash flow in order to have a net after tax amount equal to the amount CCI can provide as part of a structured settlement. In the preceding answer, the plaintiff would need $1.25MM to achieve a net after tax amount equal to what the defendant can provide for $975,000. If the case was valued at roughly $1MM, both plaintiff and defendant are better off with the structure.
Who is involved in the negotiation of a structured settlement? The plaintiff attorney assisted by the CCI structured settlement consultant, and the defendant or casualty insurer's attorney (or claims examiner)work together to facilitate a settlement. The Creative Capital representative will attend settlement conferences, mediation and court conferences and hearings to help settle the case. Perhaps more importantly, the CCI Team will review plaintiff’s Life Care Plan (defendant’s plan as well when it is available), factor in reasonable amounts for Pain & Suffering, and provide an analysis of what the defendant’s TRUE EXPOSURE is if the case were to go to trial. At CCI we counsel that all cases should be negotiated based on the defendant’s EXPOSURE, not the plaintiff’s needs. Anyone who has ever sat in or participated in a casualty company LARGE CASE COMMITTEE meeting knows that carriers focus primarily on their exposure in setting their reserves and in authorizing counter offers. It is AFTER the defendant has agreed to pay TRUE VALUE on a case that we then design a structured settlement to guarantee that plaintiff’s future NEEDS will be satisfied.
Some of the nation’s TOP TRIAL LAWYERS engage the services of CCI to assist them in EDUCATING THE DEFENDANT, the Mediator, and the Judge as to DEFENDANT’S EXPOSURE to help achieve appropriate settlements.
At what point is the structured settlement negotiated? Negotiations can be conducted before a case goes to trial, during trial, after trial or during an appeal. The early identification and settlement of cases can often result in the greatest utility to the plaintiff and greatest savings on defense costs to the defendant or carrier. In order to insure the ability of plaintiff to secure a structured settlement, plaintiff’s counsel should reserve the right to have a structure in writing. For CCI’s suggested language as to what to put on the record to preserve plaintiff’s right to structure, click here.
Is it ever too late to do a structured settlement? Yes. Once the plaintiff has the unqualified right to receive the amount proposed for the structure it is too late to negotiate a tax free structured settlement. For example, when a defendant's appeal from a lump sum judgment has been denied and no further appeals are possible, the plaintiff has the absolute right to receive the lump sum awarded. At this point a structured settlement cannot be achieved. However, if further appeals are possible – such as when the time for a party to seek leave to appeal has not yet expired, a structured settlement may still be negotiated.
How do structured settlements compare with lump sum payouts in terms of yield and safety? We all know that there are high risk/high yield investments available. Unfortunately, most plaintiffs cannot risk the vagaries of the investment markets. Imagine a plaintiff who put his entire settlement into a stock portfolio in 2007 right before the market crash. Or a plaintiff who put his entire settlement into mutual funds before the Dot Com catastrophe of 2001-2002. Having to draw from a portfolio that suddenly lost 40%-50% or more (2008), or that lost upwards of 70% (2001-2002) meant that entire settlements were wiped out in short order instead of lasting a life-time.
If we compare “apples to apples”, a lump sum payment invested in any non-speculative tax free or taxable instrument generally cannot match the tax-free yield of structured settlements. The tax free government subsidized protection of structured payouts, together with the yield of annuities provided by financially secure life insurance companies make the periodic payment approach a superior settlement vehicle.
What are the components of a typical structured settlement? There is a wide range of benefits, depending on the circumstances of the case. Each case is individual and each settlement is different. However, options frequently considered include:
Level payments made monthly or at other appropriate intervals
Payments that increase over a period of time
Payments with increases in level amounts or percentage increases
Payments guaranteed for life, or for a fixed period of years or both
Level payments supplemented by periodic payments of lump sums
Payments which are indexed and have the ability to increase when the S&P rises, but cannot fall when the stock market declines.
Can structured settlements take inflation into consideration? Yes. When negotiating a structured settlement, inflation is a key factor in determining the payout plan and can be covered via an annually compounded inflation factor in structures funded with annuities. As noted in the answer to the last question, an indexed settlement annuity is also available to assuage inflation concerns.
What is a "substandard" case and what is its impact on the cost/benefit of the structured settlement package? A substandard case, also commonly called a “rated age” case, refers to a catastrophic injury and a shortened life expectancy for the plaintiff. Potentially fewer years of life annuity payments (because of the reduced life expectancy) translates into greater benefits for the plaintiff. If the plaintiff lives longer than the life company anticipates, payments will continue for plaintiff’s entire lifetime.
Who is responsible for the safety of the structured settlement? Creative Capital will only use those life companies rated A, A+ or A++ by AM Best Company, an independent insurance appraisal firm. Creative Capital prefers the larger life companies with top ratings from Moody's, Standard & Poor's or Fitch.
What is a Qualified Assignment? Under Section 130 of the IRC the defendant or casualty company, assigns its liability to make future payments to a "Qualified Assignee". Once this is done the defendant and casualty company are out of the case with the same result as in a cash lump sum settlement. This is legally called a "novation". The “Qualified Assignee” then purchases an annuity from its affiliated life insurance company as the assignee’s source of paying the plaintiff. The life insurance company sends all payments directly to plaintiff via checks or wire transfers. Qualified Assignments are important because plaintiff’s prefer the adversary relationship with the defendant and carrier to terminate at settlement. Plaintiffs also prefer to have an ongoing financial relationship with a life company of plaintiff’s own choice. Finally, it is only when a Qualified Assignment is executed that plaintiff may have a security interest in the annuity pursuant to IRC 130.
Can the plaintiff be a secured creditor and have a lien on the Qualified Funding Asset? Yes, whenever a Qualified Assignment pursuant to IRC Section 130(c) is executed.
Can an attorney structure his or her fee? Yes, attorneys can structure their fees and receive tax-deferred guaranteed payments even if the plaintiff does not structure. Click Here for More Information on Structured Attorneys’ Fees
Are structured settlements limited to cases involving physical injury or physical sickness? No. Creative Capital (CCI) has handled many non-physical injury structured settlement cases over the years including: employment cases, property damage, wrongful mortgage foreclosure, punitive damages, disability claims, workers' compensation and Long Shore Harbor Workers' Act (LSHWA) claims, landlord tenant disputes, business disputes, law firm break-ups, attorneys' fees, and more. [ It is important to remember that in order for the Future Periodic Payments to be TAX FREE, the underlying lawsuit or claim must be one seeking damages for physical injury, physical sickness, or wrongful death. ]
In cases where plaintiff’s damages are taxable, structured settlements often result in tax savings to plaintiff via tax deferral. For example, in many cases the need to structure a taxable settlement may be more compelling than in a tax-free settlement. The Alternative Minimum Tax rules (AMT), when triggered, often prevent the recipient from deducting attorney's fees and expenses from the gross taxable settlement. For example:
Gross settlement $2,000,000
Fees & expenses - 900,000
Net recovery $1,100,000
Federal, state & local
taxes on gross ($2M) - 1,000,000
Net to plaintiff after tax $100,000
By structuring the payout over a number of years, we are usually able to bring the recipient below the AMT threshold in every year. In addition, since receipt does not take place in a single year, the recipient earns tax-deferred interest on money that would otherwise have been paid in taxes in year one. In fact, the recipient earns triple tax deferred interest on 1) the principal; 2) the interest; 3) the taxes deferred from year one.
What is a Non-Qualified Assignment? A Non-Qualified Assignment is a legal novation transferring the Future Periodic Payment Obligation from the defendant or its carrier to a third-party non-qualified assignee. Once that assignee accepts the assignment and assumes the future payment obligation, the defendant (and carrier) are fully and completely released from the future periodic payment obligation in exactly the same way as in a physical injury/sickness (qualified) case.
Why was the Non-Qualified Assignment developed? It was developed to allow the parties to obtain closure in the same way as in physical injury cases. Plaintiff is able to: defer taxable compensation and legally avoid taking a huge tax hit in a single year; sever all ties with defendant; substitute a highly rated financial institution for the defendant; obtain a negotiated benefit stream which is almost infinitely flexible and settle more easily at a cost more likely to be acceptable to the defense because of the tax advantages to the plaintiff. The defendant is able to: write off the cost of settlement; close its file; not have to act as guarantor of a life company; cut all ties with plaintiff.
May the plaintiff name specific individuals as beneficiaries and reserve the right to change the beneficiaries? Yes. The life companies permit this to be done based upon an IRS ruling. Private Letter Ruling (PLR No. 8426078) allows a plaintiff to name a natural person as beneficiary without adverse tax consequences. Revenue Ruling 79-220 allows tax free structured settlement payments to continue to the plaintiff’s estate after a plaintiff’s death. Some plaintiffs, therefore, choose to designate individuals (spouse, children, etc.) as their beneficiaries wile others name their estate as beneficiary and do their estate planning via a Last Will and Testament.
How has Periodic Judgment Legislation affected the periodic payment approach to resolving liability cases? In approximately thirty states legislation has been passed which mandates a structured (periodic) payout in certain "threshold" cases - even if the case does not settle and goes to trial, verdict and judgment. In these cases the plaintiff cannot win a cash lump sum verdict at trial. Proper identification of these cases is crucial to the parties' proper evaluation of the value of the case.
In New York, CPLR Articles 50-A and 50-B govern periodic judgments in cases that do not settle. CCI has a particular expertise in this area. Click Here for more information on New York’s Periodic Judgment Statutes and how CCI uses them to demonstrate a defendant’s true exposure as a tool to help plaintiffs achieve better settlements.
Can any party or the casualty insurer receive part of the commission back from their structured settlement broker? No, this is called a rebate. Most states prohibit rebating of commissions. Click here for CCI’s Certificate of Reliability and Assurances for details.
What is a CORA Certificate or CORA Affidavit? A CORA Certificate or Affidavit is a series of affirmative representations and warranties demonstrating that no party to the settlement is being taken advantage of. See Certificate of Reliability and Assurances for additional details by clicking here.
How can I obtain the protection of a CORA Certificate/Affidavit? CCI is the only structured settlement firm offering a CORA Certificate/Affidavit. If CCI is not the broker in your case you cannot expect to receive our CORA. However, we encourage you to go to our CORA page, or follow the links provided here to download the Certificate or Affidavit and print out a copy. Insist that the broker sign it, under oath, with all the applicable penalties for perjury. While most brokers will refuse to provide a CORA Affidavit, CCI will always provide it and will stand by its warranties and representations.
Is CORA important for defendants as well as for plaintiffs? Yes. Click here to download CCI's "Special message from Creative Capital's General Counsel".
Can the Creative Capital Team assist in Medicare, Medicaid, ERISA and other lien matters, as well as MSA Allocations? Yes. As an affiliate of Creative Capital, Precision Resolution offers comprehensive Medicare, Medicaid, ERISA and private insurer lien resolution services, as well as Medicare Set Aside Allocation reports.
Precision Resolution is a lien resolution firm that was built for attorneys, by attorneys. For years Precision has successfully reduced attorney exposure to compliance and lien issues while putting millions of dollars back into the pockets of the plaintiff through successful lien resolution.