One of the defining differences between the “Claim Management” and the “Settlement Planning” structured settlement business models (in general) is how they view trusts and trustees.
In the traditional Claim Management structured settlement model, trusts are viewed as competitive products and trustees are viewed as competitors. The sale is binary: structure or cash.
In the evolving Settlement Planning structured settlement model, many structured settlement payees are trustees. The sale is integrated: structured annuity plus other financial products plus government benefits managed by a trustee.
In the context of personal injury settlement planning, therefore, structured settlement professionals and settlement planners need to understand: 1) the types of settlement trusts most frequently utilized in settlement planning; and 2) the duties and laws that define a settlement trustee’s investment responsibilities.
Structured settlement professionals and settlement planners may encounter several different types of settlement trusts – any of which can be funded with a structured settlement annuity:
- Reversionary grantor trusts
- Settlement preservation trusts
- Special needs trusts
- Medicare set-aside trusts
Fiduciary Duty and UPIA
All settlement trustees are fiduciaries, which obligates them to act in the “best interest” of their trust beneficiary(s). A fiduciary duty requires a high standard of honesty and full disclosure including any potential conflicts of interests. A fiduciary must not obtain a personal benefit at the expense of his or her client.
A settlement trustee’s own fiduciary duties require a settlement trustee to evaluate specific trust products, trust product providers and their related business conduct utilizing that same fiduciary standard which requires honesty, full disclosure, and best interest. This is true regardless of who sells or provides a financial or insurance product to a settlement trust, and whatever other independent duties that product provider might have to a trust beneficiary (i.e. the injury victim).
In addition to the provision of the trust document itself and the fiduciary duty, another important legal reference defining a settlement trustee’s duty of care and investment responsibilities, in states where it has been enacted, is the Uniform Prudent Investor Act (UPIA). The UPIA, which was adopted by the National Conference of Commissioners on Uniform State Laws in 1994, has been enacted, with some state-specific modifications, by 44 states and the District of Columbia.
Prior to the UPIA, courts applied the “prudent man rule” when evaluating trustee investment performance. The UPIA, by contrast, adopts “modern portfolio theory” as a more appropriate standard for trustees. Compared with the prudent man rule, modern portfolio theory promotes a holistic view of trust assets by focusing on the total return generated by a trust as opposed to viewing a trust’s income and principal separately. Modern Portfolio Theory allows for greater investment diversification so long as the risk/reward ratio matches the purposes and terms of the trust document.
To fulfill his or her fiduciary duties, the UPIA establishes several investment duties for trustees:
- Duty to have an investment strategy
- Duty to monitor risk/return
- Duty to diversity
- Duty to pay only fair fees
- Duty to prudently delegate
- Duty to monitor an agent’s activities
In addition, the UPIA identifies eight factors a trustee should consider when making any investment. When settlement trusts play a role in a personal injury settlement, structured settlement and settlement planning professionals should be prepared to address these factors as part of their structure settlement annuity sales strategy.
- General economic conditions.
- The possible effect of inflation or deflation.
- The expected tax consequences of investment decisions or strategies.
- The role that each investment or course of action plays within the overall trust portfolio.
- The expected total return from income and appreciation of capital.
- Other resources of the beneficiaries.
- Needs for liquidity, regularity of income, and preservation or appreciation of capital.
- An asset’s relationship of special value, if any, to the purposes of the trust or to one or more of the beneficiaries.
Significantly, however, for structured settlements, the UPIA’s list of investment considerations fails to mention mental or physical disabilities of a trust beneficiary. From a settlement planning perspective, injuries or diseases that create special needs or reduce an individual’s normal life expectancy arguably should receive important consideration when a trustee makes investment decisions.
Remember, therefore, to prioritize structured settlement annuity features such as age ratings and lifetime payouts in discussions with settlement trustees when assisting a client with an impaired life expectancy.