Structured Settlement Case Studies - Two Successful Case Studies

Understanding the value of utilizing a Plaintiff’s Structured Settlement Specialist is the first step in adding a vital new component to your services.

Developing successful strategies for introducing this service into your proceedings is the difficult next step.

Here are a few tactical approaches to consider, and two recent case studies where the approach worked. I believe that this tactic I am outlining will become industry standard in the next few years.

Background

At the moment your client executes the Settlement Agreement & Release, s/he has agreed (with full knowledge and consent) to allow the Defendants and their insurers to assign their liability for the future periodic payments to a third party C usually an assignment company affiliated with the annuity carrier. Once this has happened Defendants, their attorneys, and their insurers are all released from any and all future liability.

If your clients have relied solely on the advice of a Settlement Specialist selected by the Defense, can you be absolutely sure they’ve received the best counsel possible?

If anything should ever go wrong with the settlement structure — such as the loss of tax-exempt status, or even the discovery later on by your clients that a better deal could have been made — what recourse will your clients have? It is likely that the recourse they would seek in these circumstances would be to return to you, looking for some form of relief.

As Plaintiff’s counsel, you may want to encourage your clients to consult with their own Settlement Specialist. 

One with a sole obligation to their needs in any given case.

You may also want to advise your clients to select the Structured Settlement Specialist and negotiate for the right to designate the method and the company used for the settlement payments. After all, your clients have to live with the results of these decisions for the rest of their lives.

Defendants naturally like to control as much of the process as possible. Your task is to get Defendants (and their insurers) to allow your client to choose the Specialist and the funding method.

Here are a few suggestions on how you can make that happen:

Control Strategies

Here is an excellent tactic developed by Richard G. Halpern of Richard G. Halpern & Associates in Garden Springs, New Jersey:

In your first (or next, as the case may be) demand letter, detail the Structured Settlement Specialist and funding method you and your client have determined are in your client’s best interests.

You may even want to include language similar to the following:

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“We are aware that the Defendant traditionally dictates the settlement specialist and funding method. However, since your assignment of liability in the Final Settlement Agreement & Release will relieve you of any future legal or financial responsibility should your choices of Specialist or funding method prove flawed, I believe my client must be permitted to make the final selections. Therefore, the final Settlement Agreement must contain language designating (insert Specialist name here) as the Specialist and an annuity obtained from (insert carrier’s name) as the funding method. My client assumes all responsibility, risk, and liability for any future losses or adverse tax consequences. To this end, the following clause may be included in the Settlement Agreement:”

‘The parties to this Settlement Agreement acknowledge and affirm that the choice of the Structured Settlement Specialist and funding method were conditions of Settlement imposed by Plaintiff during negotiations. The Plaintiff shall bear full responsibility for the consequences of these choices.’  ”

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Defense should now accept your choice of Specialist and funding method.

If they do not, and instead insist upon their choice of Specialist and funding method, you should insist that the following language be included in the final Settlement Agreement:

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“The parties to this Settlement Agreement acknowledge and affirm that the choice of Structured Settlement Specialist and/or funding method were conditions of Settlement imposed by Defendant during negotiations. Defendant shall bear full responsibility for the consequences of these choices.”

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You can point out that it is hardly in your client’s best interests to allow Defendant to dictate the Specialist and funding method when there is no recourse for your client should these choices turn out badly. If Defendant agrees, you have preserved legal recourse for your client and performed due diligence. It is unlikely that the Defense will agree to such language without a fight.

If the Defense fails to accept either proposal and offers to settle for cash, raise your demand by 15 percent to make up for the cost of losing the opportunity of tax-free structured benefits.

If the Defense responds by stiffening their position and replying they will not increase their cash offer, they may have demonstrated bad faith. Such a move would suggest that the Defense is placing their own interests (i.e. their insurance company’s interests) above those of the insured, who is their true client.

You may want to call this to the attention of the Defense, as well as the Court.

Following are two case studies in which just such a strategy was employed. While there was reluctance on the part of the Defense to allow Plaintiff to exercise control over the Specialist and funding method selection, in the end, the best possible settlement was reached for the Plaintiffs.

Case Study #1

In a number of cases, the development of a structured settlement has as much to do with the continuity of caregiving provided by a lost parent or spouse as securing the growth and investment potential of a settlement sum. The following case study perfectly illustrates the effectiveness of a properly structured settlement in providing some degree of solace to grieving loved ones left behind as a result of a tragic loss.

Background

Frank was an extremely successful, 45-year-old business executive with multiple business interests across several industries. During the test flight of a business jet Frank was considering purchasing, the plane crashed, killing Frank and the jet company’s test pilot. The investigation revealed that the crash was the result of totally negligent and illegal acts by the pilot. The liability in this case was complete. In other words, there were no arguments from the manufacturer of the jet.

Frank left behind a 15-year-old daughter. The mother of this child was a woman Frank never married and they were not living together at the time of the accident. The daughter lived with her mother, and Frank had provided regular and substantial child support to his daughter.

One other party of concern for the decedent was his 80-year-old mother. The mother is a remarkably vital woman in excellent mental and physical condition. She was currently managing her own substantial estate of between $500-600,000.

The economic loss reports at the time of Frank’s death indicated that he was earning more than $500,000 annually. The economic loss was calculated at $500,000-per year with a working life expectancy of another 15-20 years. The estimated loss to the estate in terms of Frank’s earning power was calculated at between $5-10 million.

The Planning Challenge

The bulk of Frank’s estate was left to the surviving 15-year-old daughter through a simple will with no Trust provisions. The daughter is currently displaying typical behavior for a girl of her age and for her circumstances. She tends to have wide mood and interest swings and displays some unstable psychological and emotional behavior. Frank had expressed to his business associates and to his sister (the personal representative in Frank’s estate) concern over this daughter ever receiving a large sum of money either due to his premature death or some other circumstance.

In a cash settlement, the proceeds to the estate would be held in conservatorship, but the daughter would have complete access to the funds at age the legal age of 18.

Adding to this challenge in the case were the concerns of the 80-year-old mother. While she is still very active, very capable and very comfortable with an estate of her own, it was Frank’s desire to leave something of his estate behind to assist his mother. Given her situation, tax considerations and the added burden of managing a substantial addition to her current estate were critical concerns.

The Solution

Plaintiff’s counsel approached us with the challenge of devising a structure for this settlement which would:

1. Protect the 15-year-old daughter from receiving a single, large sum (all of her settlement proceeds) before she was capable of handling and managing these funds
   while: 
2. Structuring the remaining settlement proceeds, earmarked for the mother, in a fashion where she would be unburdened by additional taxes and/or money management concerns

Using U.S. Treasury Bonds placed in a settlement trust, we structured the entire amount of the daughter’s portion of the estate (roughly $5 million).

Between now and when the daughter turns 18, a generous monthly allowance (for both her and her mother) for expenses to continue child support will be provided. At age 18, the daughter will receive a handsome lump sum for a car, clothes or whatever she chooses to spend it on. Also at age 18, the daughter will begin receiving annual payments for 8 years to cover the costs of college. The annual payments are geared to fund full room, board, books and tuition at a level comparable to the most prestigious Ivy League College. The 8-year annual payments are designed to provide adequate funding for four years of undergraduate studies and an additional 4 years, should she elect to pursue post-graduate studies.

For the 80-year-old mother, we decided to structure the entire amount of her proceeds from the settlement (roughly $1 million.) Typically, elderly beneficiaries are not seen as candidates for structuring, as they are not perceived to have long life expectancy compared to the investment vehicles available in a structured case. In this case, it was also atypical to consider structuring since the mother is already well off. But there was the concern for the mother in having to deal with the added management pressures (and additional income taxes) generated by the $1 million net settlement to her.

By structuring the mother’s payments annually over a 15-year plan, she will receive large annual payments, tax-free.

Should she die before the end of the 15-year structured payout, the remaining payments will flow to her named beneficiaries, also tax-free. This structure also is allowed to bypass the probate system.

The only remaining challenge in this structure is that of the additional estate taxes of whatever portion of the $1 million remains upon the death of the mother. The mother has a number of options, made easier by this structure. She can gift away some of these proceeds or establish a Charitable Remainder Trust to reduce her estate tax burden. She could even purchase additional life insurance products, obtaining them with discounted dollars, to pay estate taxes at the time of her death. The premiums could be paid for with funds from the annual payments within the structure.

Summary

With this structure, we achieved the two strongest desires of the decedent:

1. We ensured the safekeeping of the settlement proceeds for his daughter, allowing them to grow in a very secure investment tool (U.S. Treasury Bonds) while still providing a support allowance for her education, her future life and career plans, and retaining the tax-free status of the settlement sum.She was protected from the possibility of having to manage a substantial sum of money too early in her life.
2. At the same time, we were able to supply the decedent’s mother with an annual lump sum on top of her already comfortable lifestyle. These funds can later be passed on through the mother’s estate without income tax consequences for the beneficiaries and without the trauma and hassle of going through probate.

Case Study #2

In many instances, proceeds from a settlement must be called upon to provide a lifetime of support for victims and their families. Devising a structure in these cases becomes complicated when the victims face uncertainties about health care and an ability to provide their own livelihood. The following case is just one example:

Background

Loraine is a 4-year-old girl who was the victim of what is typically known as a bad birth experience (. She survived, but her birth resulted in terrific, debilitating injuries. Loraine’s mother also survived the ordeal, loves her daughter and is committed to taking care of her, but faces the prospect of a life of intensive caregiving for her daughter.

The case settled for $1.5 million.

In addition to the settlement proceeds, Loraine and her mother will receive support from Supplemental Social Insurance (SSI) and Medicaid. The local Shriner’s Hospital stepped forward to offer support and the bulk of Loraine’s hospital bills will be provided for until she turns 21.

The Planning Challenge

Plaintiff’s counsel approached us with the challenge of taking a settlement sum and structuring it to supply adequate support over the lifetime of care Loraine and her mother face. There was also the need to pay for some immediate requirements such as the incidental medical expenses not covered by SSI, Medicaid or the Shriners.

There were also immediate needs to situate Loraine and he mother in a proper home and to provide adequate transportation for Loraine’s mother to transport her disabled daughter. The settlement sum of $1.5 million is not an overly generous amount with which to plan a lifetime of support, complicated by the uncertain nature of medical expenses facing Loraine and her mother.

The Solution

After setting aside between $150-160,000 for the purchase of a house and suitable transportation, we structured a portion of the settlement proceeds to provide $2,000-per-month in income to cover the basic costs of everyday living and uncovered incidental medical expenses until Loraine turns 21. This will provide enough support for the incidentals not covered by Social Security, Medicaid or the Shriners without affecting the eligibility for any of these programs.

With the remaining $700,000 of settlement funds, we purchased two tax deferred annuities on Loraine’s behalf. We used separate, highly rated companies for the annuities in order to offer adequate diversification. The use of annuities offers the prospect of capturing the benefits of financial market gains while still maintaining the tax-free status of the settlement proceeds and securing the safety of the settlement’s principal.

These annuities will accumulate interest, tax-deferred, until Loraine or her trustees need to tap into them. After Loraine reaches the age of 21 (the time at which her $2,000 monthly payments end), she and her trustees may want to further annuitize one or both of these original annuities, extending the income. Any future income taxes assessed on the withdrawal of interest earnings from these annuities may be partially offset with the itemized deduction for medical expenses allowed to Loraine on her personal income tax return.

Typically, tax-deferred annuities would not be used for a younger person as there is a substantial excise tax penalty for drawing on the proceeds before the age of 59-1/2. They are generally used as an additional retirement savings tool.

There are, however, three exceptions to assessing an excise tax penalty on early withdrawal of annuity proceeds:

1. The death of the holder of the annuities
2. The total disability of the holder of the annuities
3. The lifetime annuitization of the full account value of the annuities. In the eyes of the law, Loraine is considered fully disabled, providing an exemption from excise penalties for early redemption of annuity proceeds.

Summary

With this strategy, we were able to devise an innovative financial plan which generates income and investment growth adequate to keep up with the anticipated medical expenses this young girl and her family face. The plan allows the flexibility for Loraine and her trustees to tap the majority of her funds at any time, without suffering adverse tax consequences, and without jeopardizing the ongoing income objectives of the structure.

To successfully take control of the structured settlement process, you must have a strategy for putting the ball in your court and putting the decision-making power into the hands of your client. Once you have that, you then need to employ the services of Structured Settlement Specialist trained and experienced enough to handle all the possible complications involved in planning a lifetime of financial security for you clients.

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These two case studies are just two of the many that have benefitted greatly by our Settlement Planning services.  By retaining our firm, the Plaintiff Attorneys for these cases were able to limit their liability and help their clients find solutions that were truly in THEIR BEST NEEDS… rather than the best needs of the Defense.

If you have a case, or would simply have a question, don’t hesitate to contact us anytime at 800-666-5584. 

We are here to help Plaintiff Attorneys limit their liability and protect their client during the financial aspects of a settlement.