Page 22 - NC Triangle Vol 7 No 1

Structured Settlements Come of Age:
Market-Based Returns Using Your Financial Advisor
BY TACKER LECARPENTIER JD, CSSC SETTLEMENT PLANNING CONSULTANT
For nearly y years, traditional structured settlements have been extensively employed in physi-
cal injury and workers compensa- tion claims. ese specialized an- nuity plans: o er guaranteed future payments, pay bene ts free of federal, state and local income taxes and can be tailored in nearly in nite ways to dovetail with the claimant’s future medical and life care needs. Likewise, contingency fee attorneys can employ non-quali ed structured settlement plans for signi cant savings using tax- deferred future payment plans, while providing for their and their family’s own future nancial needs.
TAX CONSIDERATIONS
While the guarantees of a tradi- tional structured settlement plan pro- vide valuable security for the claimant, some claimants and their attorneys are savvy enough to allocate their assets from a settlement and fee agreement with slightly more risk/reward. By tak- ing their funds in a cash lump sum at settlement, they can incur signi cant tax obligations, especially for the at- torney.
Likewise, a claimant in an employ- ment case has immediate tax con- sequences when taking a lump sum at settlement. Like the attorney, the aggrieved employee’s receipt of non- physical injury settlement funds in- curs a present year, income tax obli- gation. And it is signi cant in larger settlements!
Until recently, structured settle- ments were solely backed by US Trea- sury bonds and high-grade corporate bonds. A frequent criticism over the
past ten years in such a low yield bond environment is that the rates of return building up in the structured settle- ment annuity were too low. Sophis- ticated claimants and most attorneys desire higher returns in the equity markets – and they want to employ their own nancial advisors. Yet, they do not want the added tax hit of taking cash at settlement. us, the dilemma. Until now!
Claimants and attorneys can now use the tax bene ts of structured settlements and obtain market-based returns. Importantly, they may also continue to employ their own personal nancial advisors for managing their investment portfolio within the struc- tured settlement framework.
THE CLAIMANT’S MARKET-BASED ALTERNATIVE
By o ering market-based solutions, claimants can obtain tax-free (or, in some cases, tax-deferred) future peri- odic payments with the potential for higher rates of return. However, the importance of guaranteed payments when developing a sound settlement plan cannot be overstated.
Guaranteed payments are critical in securing the future needs of an injured claimant, especially when planning for future medical and non-discretionary essential life care needs. A tradition- al xed annuity-based component should always be the foundation of a comprehensive settlement plan.
But, what about the plainti who can a ord to take some market risk, has discretionary settlement dollars or turns down the traditional structured settlement in favor of an all-cash set-
tlement? We can keep that conversa- tion going on otherwise all cash settle- ments. at conversation at mediation can o en bridge the gap between the claimant’s best settlement demand and the defendant’s best settlement o er.
Employing an open architecture platform allows the claimant to choose between passive or active investment strategies including model portfolio options through the program’s mas- ter custodian or a customized port- folio managed by the claimant’s own personal nancial advisor. e claim- ant can realize tax-free gains utilizing market-based investments inside a tax-advantaged structured settlement. e best of both worlds!
Like a traditional structure, the fu- ture periodic payments must be “ xed and determinable” to receive tax-ex- empt or, in the case of non-physical injury claims, tax-deferred status. Set- tlement dollars are therefore allocated as $10 units, and the unit value at the time payments are due is determined by the underlying investment perfor- mance chosen by the claimant. At the time of the settlement, the claimant must decide how many units are to be paid and when.
Future payments can be made quar- terly, semi-annually, annually, in fu- ture lump sums or some combination of these options. Although lifetime payments are not available, future payments can be scheduled through a claimant’s normal life expectancy.
As with traditional structured settle- ments, the defendant and/or its insur- er must agree to fund the structure at settlement closing in a separate check
ATTORNEY AT LAW MAGAZINE · NORTH CAROLINA TRIANGLE. 7 NO. 1 22