3 Tips for Preparing a Mediation involving Structured Settlements
From a structured settlement perspective, whenever a plaintiff attorney is preparing for a mediation involving various tort and non-tort case, the attorney should address the following questions:
- Have I advised my client about structured settlements and provided my client with adequate resources to allow my client to express an informed opinion of their possible interest?
- Regardless of whether my client is interested in a structured settlement, should I consider structuring some or all of my fee once this case is resolved?
The answer to the first question does not require the case involve physical personal injuries. It is true that only such cases qualify for an exclusion from federal income tax under IRC 104(a)(2) and only those cases (and workers’ compensation cases) can be settlement with income tax-free structured settlements utilizing an IRC 130 qualified assignment. However, many other types of taxable tort cases can be settled advantageously using a “non-qualified” assignment whereby future periodic payments will defer taxes and produce and better net result than a cash settlement.
Examples of such cases include subjects as diverse as discrimination, contract disputes, non-physical injuries, punitive damage awards, sexual harassment, civil rights violations, Americans with Disabilities Act claims, environmental litigation, legal malpractice, construction defects, divorce, property disputes, and sales of companies.
As a plaintiff attorney, you may already have a trusted business relationship with a structured settlement professional or settlement planner who can explain to your client the benefits of a structured settlement and address their questions and concerns. If not, competent members of either the National Structured Settlement Trade Association (NSSTA) or the Society of Settlement Planners (SSP) should be conveniently available to assist you and your clients. Remember, however, it is your obligation to protect your client’s interest. And it is possible that your client won’t be able to decide before or during the mediation itself whether they want a structured settlement. There are two methods by which you, as their attorney, can preserve their option to elect a structured settlement following mediation but prior to the settlement documentation being fully executed.
Tip #1: Term Sheet Language
The first method to preserve your clients’ structured settlement options is to insert language similar to the following as part of a binding and admissible mediation term sheet : “The parties agree to settle this case for $_____ a portion of which may be placed in one or more structured settlements funded with either a qualified or non-qualified assignment. Plaintiff’s attorney will communicate to Defendant on or before _____ payment instructions including: the payee (the name of the QSF or the assignee), the structured settlement periodic payments, structured settlement annuity provider(s), structured settlement cost, purchase date and whether the structured settlement(s) is/are to be excluded from income tax under IRC 104(a)(2). Plaintiff’s attorney will also provide Defendant’s attorney with sample structured settlement closing documentation. Defendant agrees to cooperate in arranging the Plaintiff’s structured settlement(s).
Tip #2: Qualified Settlement Fund
The second method to preserve your clients’ structured settlement options is to settle your case using an IRC 468B Qualified Settlement Fund (QSF). QSFs provide a neutral space that benefits both sides simultaneously. Each settling defendant pays an agreed amount into the Fund in exchange for a binding, court-approved release thereby achieving an efficient dispute resolution. QSFs provide a safe harbor for plaintiffs with unlimited time to resolve their own issues before any form of distribution, including structured settlements, is decided upon and before tax and other financial results are locked in place determining “receipt” of settlement proceeds. Meanwhile, the court (or governmental authority) establishing the QSF retains supervisory control but does not need to become involved in Fund administration.
Tip #3: Attorney Fee Deferral
Regardless of whether your client is interested in a structured settlement, you should consider (before each mediation) whether you want to structure some or all of your fee once your case is resolved. Structured fees, which defer taxation until future payments are actually received, are only available to contingent fee plaintiff attorneys as opposed to attorneys who are paid hourly fees or flat rate fees. To successfully defer attorney fees, a plaintiff attorney must agree to do so by signing or amending his or her attorney-client agreement (or to at least have the option to do so) before the settlement documentation is signed. Otherwise you risk a tax challenge on account of constructive receipt.
Multiple product options are available to structure attorney fees depending upon whether or not the underlying case involves IRC 104(a)(2) physical personal injuries. Independent Life offers structured fee products for both types of cases. Structured fees are not limited to sole practitioners. And attorney fee structures can also be arranged out of QSFs.
Although the primary role for structured settlement professionals is to market and sell structured settlement products, these professionals also offer additional valuable services before, during and following the settlement mediation process. Before selecting a consultant, however, you should confirm in advance: 1) his or her qualifications; 2) what services he or she can provide; and 3) the cost of those services – if they are not included as part of his or her contingent commission