When Congress passed the Periodic Payment Act of 1982, the stated intent was to provide a secure and steady flow of periodic payments to claimants. At the time of settlement or judgment, the claimant foregoes immediate access to a lump sum in exchange for a secure promise of tax-free payments over time.
From society’s perspective, structured settlements are intended to avoid the dissipation of lump sums by injured persons and help them subsequently avoid poverty, unable to meet their needs without additional governmental programs.
This public purpose underscored the original tax rules in 1982 that first gave structured settlements their prominence in the United States. As subsequently stated in the 2000 Budget of the United States Government: “Congress enacted favorable tax rules intended to encourage the use of structured settlements—and conditioned such tax treatment on the injured person’s inability to accelerate, defer, increase or decrease the periodic payments.”
Historically, structured settlement documents have also added additional restrictive “anti-assignment” language stipulating that the payment recipients may not “assign, transfer, pledge or otherwise encumber” the rights acquired by settlement.
Almost forty years of experience with structured settlements has demonstrated, however, that while the vast majority of structured settlement payments continue uninterrupted to the original recipient, various types of events can occasionally occur to disrupt and/or redirect “the secure and steady flow of periodic payments” to specific individual claimants. This article identifies and discusses some of those types of events.
Factoring aka Structured Settlement Transfers
Perhaps the most common example of events which disrupt and/or redirect structured settlement payments to claimants is factoring (aka structured settlement transfers). Whether lured by aggressive advertising or faced with adverse financial circumstances or simply motivated by a desire for cash, some structured settlement recipients seek ways to transfer their payment rights for immediate cash.
The issue of structured settlement transfers raises competing questions of public policy. Following a prolonged political contest, intensified by factoring abuses, these public policy issues were eventually resolved with the enactment of IRC 5891 and the state structured settlement protection statutes.
From a public policy perspective, this more recent legislation to regulate factoring suggests that unanticipated events and needs requiring immediate cash in individual cases sometimes outweighs the original public policy justification for structured settlements – and consequently impacts some periodic payments after settlements.
Other Events Impacting Periodic Payments Post-Settlement
Because periodic payment obligations continue for many years, other events besides factoring arising after case closing can potentially interfere with completion of the original terms of a structured settlement. Examples include: the Claimant’s divorce, child support, the Claimant’s bankruptcy, and the Claimant’s death. With proper foresight and drafting, however, attorneys, settlement planning professionals and their clients generally can address and mitigate these future problems at the time a structured settlement is finalized.
When a married claimant who is receiving a structured settlement gets divorced, courts of various states have reached different decisions as to whether the payments should be considered personal property or marital property.
In such circumstances, the majority rule appears to characterize personal injury recoveries as a mixture of marital and personal property. To the extent that periodic payments are determined to compensate an injured party for the loss of past wages and medical expenses that have diminished the marital estate, some courts have characterized those recoveries as marital property. Note: these damages generally are addressed with up-front cash rather than periodic payments.
To the extent a structured settlement compensates an injured party for pain and suffering, future lost wages or medical expenses, however, courts increasingly are considering those recoveries personal to the injured party.
By analyzing a state’s marital property laws, including any structured settlement decisions, prior to settlement, a plaintiff attorney can properly advise spousal clients to help avoid future allocation disputes concerning personal vs. marital property.
Should a structured settlement be considered in determining the amount of child support owed by a divorcing parent? Resolution of this issue generally depends on the probate or family code of a particular jurisdiction. There does not appear to be a prevailing view.
Courts in several states view payments received from a structured settlement as part of the assets available to a parent for child support purposes. Other jurisdictions include only the portion of periodic payments that represents lost income and income capacity.
If a structured settlement does not specify the percentage allocated to lost income and income capacity, however, a court must either assume that all payments can be considered in determining child support or make its own allocation.
When a structured settlement recipient declares bankruptcy, he or she will not want future periodic payments to be part of the bankruptcy estate, while creditors (usually through a trustee) will want the future periodic payments to be considered as an existing asset of the debtor.
Bankruptcy court decisions since the mid-1980s have developed a two-step analysis for determining whether a bankruptcy trustee can obtain part or all of the benefits from an annuity-funded structured settlement: first, whether an exemption applies directly under a federally applicable provision of the bankruptcy statute, and second, whether one or more state law exemptions are available.
A structured settlement recipient in a bankruptcy proceeding must take steps to assert all exemptions that might apply, and may not simply assume that future payments will be exempt automatically. The burden is on a debtor to prove entitlement to an exemption. The case law is extensive with mixed results.
If the claimant dies and periodic payments remain to be paid, who gets the remaining money and how will it be paid? The answers generally are determined by documentation on file with the annuity provider (settlement agreement, court order, beneficiary designation form depending on circumstances of case) whose employees review all documentation for consistency prior to settlement as part of their servicing requirements.
Most structured settlement annuities name the injured claimant as primary beneficiary and a related individual or the claimant’s estate as contingent beneficiary. If a contingent beneficiary dies while the claimant is living, the claimant can change the payee by notifying the annuity provider. If, however, the claimant dies without naming a new beneficiary, the default beneficiary for any remaining payments would normally be the claimant’s estate.
Some structured settlement annuity providers include commutation riders in their policies. Typically when a commutation rider is part of an annuity contract, an individual beneficiary is named. Otherwise the beneficiary would default to the claimant’s estate. The amount of the commuted lump sum is generally defined in the annuity contract by an interest rate formula.
Special Rules for WCMSAs
In its most recent Workers’ Compensation Medicare Set-Aside Arrangement (WCMSA) Reference Guide (Version 3.3 published April 19, 2021) the Centers for Medicare and Medicaid Services (CMS) sets forth specific rules in Section 19.3 for what happens to structured settlements if circumstances change after a WCMSA is funded.
Section 19.3.1 addresses funds left over and carried forward: “If funds for a structured WCMSA are not exhausted during a given period, then excess funds must be carried forward to the next period. The threshold after which Medicare would begin to pay claims related to the injury would then be increased in any subsequent period by the amount of the carry-forward.”
An example provides further clarification: “This carry-forward process continues until the accumulated carry-forward plus the payment for a given year is exhausted.”
Section 19.3.2 addresses funds used in a given period: “If a structured WCMSA proves to be under-funded for a given period because the funds are exhausted by the claimant’s medical expenses before the period ends, and if CMS receives verification of exhaustion of both the structured amount for the period and any available rollover funds, then Medicare will pay for additional medical expenses incurred during the period.”
Section 19.2 addresses how and when funds are disbursed if a claimant dies before the WCMSA is completely depleted. The Regional Office and Benefits Coordinator & Recovery Center must insure that all claims have been paid and Medicare’s interests are protected before amounts remaining in the WCMSA are disbursed pursuant to state law. Often the settlement itself will determine the appropriate disbursal of funds.
Funding Company Insolvency
A key factor for the continuing success of the structured settlement industry is the certainty that promised future periodic payments will be paid in full and on time. Total structured settlement premium written in the United States from 1976 to 2020 has been estimated to total $180 billion resulting from as many as 978,500 cases with an average per case annuity premium of approximately $184,000. During that time period, the payout performance for annuity funded structured settlements has been excellent, but not perfect.
From 1974 to 1991, First Executive Corporation (FEC) and its two life insurance affiliates, Executive Life of California (ELIC) and Executive Life of New York (ELNY) experienced a spectacular rise and fall that had a profoundly negative impact on the structured settlement industry. ELNY was liquidated in 2012, and even following contributions from state guaranty funds and voluntary life insurance company contributions, more than 1,400 ELNY structured settlement recipient suffered shortfalls many of which were substantial.
Although it was too late to protect ELNY’s victims, the National Association of Insurance Commissioners (NAIC) has taken steps since this singular structured settlement disaster to strengthen insurer regulation and consumers ability to evaluate the financial strength of life insurers generally. In 1993, the NAIC promulgated Risk-Based Capital (RBC) rules which state insurance regulators now use as a key financial evaluation and regulatory tool.
In addition, both the NAIC and the SEC now use their own category of rating agencies, called “nationally recognized statistical rating organizations” (NRSROs), to access risk. NRSROs use a variety of rating scales to provide these assessments, so the NAIC has created designations that denote a category of credit quality which allows for comparisons of credits risks. These categories range from NAIC 1 (exhibiting the highest credit quality) to NAIC 6 (in or near default).
All structured settlement annuity providers who are members of the National Structured Settlement Trade Association (NSSTA), including Independent Life Insurance Company, qualify for the NAIC 1 designation (highest credit quality).
The large majority of structured settlements achieve the public policy objective of providing a secure and steady flow of periodic payments for injured claimants. Unanticipated events, however, can and do occur in some cases that impact, interrupt and/or redirect those scheduled periodic payments. Experience as well as good settlement planning and well-crafted legal documentation can and should anticipate, address and/or mitigate most of these potential events – which is why structured settlements should be considered a strategic component for every personal injury settlement plan.
Please note: portions of this article are reprinted with the permission of the Publisher of and copyright holder from “Structured Settlements and Periodic Payment Judgments,” co-authored by Daniel Hindert, Joesph Dehner and Patrick Hindert and published by Law Journal Press.