Structured Settlements and the “Best Interest” Standard

Should structured settlement and settlement planning professionals be required to act, or hold themselves accountable to act, in the “best interest” of a personal injury settlement recipient when making a structured settlement recommendation? And what would, or should, define “best interest” in that context?

Best Interest Applied to Secondary Market Transfers

“Best interest” is a familiar concept to most structured settlement and settlement planning professionals as that term applies to secondary market transfers.

If a secondary market transferee (factoring company) is to qualify for exemption from the excise tax imposed under IRC Section 5891, the state structured settlement protection acts (SSPAs) require a state court judge to find that a structured settlement transfer transaction is in the “best interest of the payee, taking into account the welfare and support of the payee’s dependents.”

Neither the SSPAs nor the decisional law that has developed under the SSPAs, however, provide a precise formula for applying the “best interest” test. Even under the same SSPA, judges apply differing standards in determining whether a proposed secondary market transfer satisfies the “best interest” test.

Some judges have required the showing of “an unforeseeable change in circumstances” or a “compelling and reasonably informed necessity” as a basis for “best interest” findings. Other judges have used a more flexible approach.

Still other judges have framed their “best interest” analysis under the SSPAs in a manner similar to “best interest” determinations in the context of family law, probate or guardianship proceedings, and/or proceedings concerning commutation of workers’ compensation benefits. Alternatively, some judges simply abdicate the transfer decision to the payees themselves at least when the payee is a competent adult.

In states like California where a legislative definition of “best interest” applies to its structured settlement protection act, transfer judges must consider that definition in making their determination.

Definition of a Structured Settlement

To discuss the application of a “best interest” standard to structured settlements in the primary market, a critical first question is “what type of product is a structured settlement?”

In many respects, a structured settlement is a unique product. There are several possible definitions for a structured settlement, some of which are legislative or regulatory. There are also multiple methods for funding a structured settlement.

For purposes of this discussion of “best interest,” the most basic definition of a structured settlement might be “a promise to pay future periodic payments.” This promise typically represents an intangible asset (payment rights) for the structured settlement recipient.

Most frequently, structured settlements are negotiated and “sold” as IRC Section 130 Qualified Assignments funded with annuities. The qualified assignees, not the recipients, own the annuities even though the recipients: 1) typically are the named payees; 2) may have creditor’s rights against a qualified assignee greater than a general creditor; and 3) may receive benefits from state insurance guaranty associations if and when the life insurance companies issuing the structured settlement annuities become insolvent.

Structured settlement and settlement planning professionals should already be familiar with these structured settlement definitional characteristics.

One reason they are set forth here is to suggest a more logical explanation than the National Association of Insurance Commissioners (NAIC) has itself provided to justify excluding structured settlement annuities from the “best interest” standard in its Revised Suitability in Annuity Transactions Model Regulation #275.

NAIC Revised Suitability in Annuity Transactions Model Regulation #275

In February of 2020, the NAIC approved revisions to Model Suitability in Annuity Transactions Model Regulation #275 (referred to throughout the remainder of this article as “Regulation #275”). To date, 39 states have adopted Regulation #275 which is also pending in six other states.

The NAIC began updating Regulation #275 in 2017 in response to the Securities and Exchange Commission (SEC) Regulation Best Interest. The SEC’s Regulation Best Interest attempts to differentiate fee-based investment advisors (fiduciary standard) from commission-based stockbrokers (best interest standard).

Previously, stockbrokers were only required to meet a more flexible “suitability” standard that required their recommendations to meet an investor’s goals and risk tolerance.

A fiduciary standard is considered the highest legal standard of customer care requiring both a duty of care and a duty of loyalty as well as full disclosure of all material facts plus any conflicts of interest. A fiduciary standard both exceeds and incorporates a “best interest” standard.

Attorneys, trustees, and guardians are each held to a “fiduciary standard.” Structured settlement and settlement planning professionals who sell licensed securities products regulated by the SEC must meet a “best interest” standard at least for those types of products.

Unlike the earlier “suitability” standard in 2011 Regulation #275, the purpose of the 2020 revised version is to require producers “to act in the best interest of the consumer when making a recommendation of an annuity” (emphasis added). Section 1A. As further discussed below, however, structured settlement annuities are exempt from Regulation #275.

Both versions of Regulation #275 “require insurers to establish and maintain a system to supervise recommendations so that the insurance needs and financial objectives of consumers at the time of the transaction are effectively addressed.” Section 1A.

Regulation #275 prescribes duties and penalties for insurers and producers and provides definitions including:

  • “Consumer profile information”: defined as “information that is reasonably appropriate to determine whether a recommendation addresses a consumer’s financial situation, insurance needs, and financial objectives…” with an extensive list of minimum information requirements. Section 5C.
  • “Producer”: defined in relevant part as “a person or entity required to be licensed under the laws of this state to sell, solicit or negotiate insurance, including annuities.” Section 5L.

Section 6 (“Duties of Insurers and Producers”) of Regulation #275 supplements the “minimum information requirements” listed as part of the “Consumer profile information” definition with a comprehensive list of “best interest” duties for producers.

For purposes of thinking about a “best interest” standard, structured settlement and settlement professionals are encouraged to read Regulation #275 in its entirely paying special attention to the definition of “Consumer Profile Information” in Section 5C and the “Duties of Producers” in Section 6.

Structured Settlement Exemption

Neither version of Regulation #275 specifically mentions “structured settlements.”

Except for an education requirement (Section 7) applicable to all annuity “producers”, both versions of Regulation #275 exempt from their application, requirements and penalties: “settlements of or assumptions of liabilities associated with personal injury litigation or any dispute or claim resolution process.” Section 4C.

This broad exemption encompasses not only annuity-funded structured settlements for personal injuries (whether using buy-and-hold, IRC 130 qualified assignments and/or following a transfer to a qualified settlement fund) but also applications of annuity-funded non-qualified structured settlements using assignments.

What is the Justification for the Structured Settlement Exemption?

The original drafting history of the Regulation #275 provides the following explanation for a structured settlement exemption: “[t]he drafters considered adding an exemption for structured settlements. A regulator pointed out that this type of contract did not generally result from a recommendation by an insurer or producer but agreed that it did not hurt to have the exemption there.” 

This NAIC drafting history justification for a structured settlement exemption makes no sense. In fact, the vast majority of structured settlements do result from recommendations by producers.

A more logical reason for exempting structured settlement annuities from Regulation #275 derives from the definitional characteristics of a structured settlement, as discussed above. To summarize:

  • Structured settlement recipients, the individuals who arguably would benefit from Regulation #275’s “best interest” requirement, do not purchase or own structured settlement annuities.
  • Instead, structured settlement recipients receive and own payment rights and are, therefore, generally no more than third-party beneficiaries of the annuity contracts that fund their structured settlement payments.
  • Unlike many annuity purchasers, many structured settlement recipients are represented by legal counsel when they agree to receive their “payment rights.”

Industry Standards and Practices

The scope of IRC Section 104(a)(2) tax exclusion for periodic payments is very broad. Although industry practice has developed certain case criteria (based upon type of claimant; types of injury; amount of damages; predictability of future damages; availability and/or need to protect “means tested” government benefits) for prioritizing structured settlement candidates, these criteria are relatively subjective and irregularly self-imposed.

Some individual structured settlement and settlement planning professionals have self-endorsed and promoted the “best interest” standard. None of the three national industry associations appear to have done so.

The National Structured Settlement Trade Association (NSSTA) has adopted a Code of Ethics to provide guiding principles to its members and member organizations. Although Principle VI of NSSTA’s Code of Ethics directs NSSTA members to: “. . . comply with all material federal and state laws and regulations applicable to the structured settlement services that are provided,” NSSTA’s Code of Ethics does not mention “best interest” or directly address product suitability standards.

The Society of Settlement Planners (SSP) adopted a comprehensive set of Settlement Planning Practice Standards in 2017, which are available for download on the SSP website. These SSP Standards do not, however, adopt a “best interest” standard.

Practice Standard #9 (the most applicable Standard) reads in full: “The settlement planner shall recommend appropriate products and services that are consistent with the client’s goals, needs and priorities.”

The Explanation to Practice Standard #9 adds in relevant part: “The products or services selected to implement the recommendation(s) must be suitable to the client’s financial situation and consistent with the client’s goals, needs and priorities.

The American Association of Settlement Consultants (AASC) website recommends that “[p]resenting a structured settlement to a client should be the best practice for attorneys,” but does not specifically discuss “best interest.” AASC’s website also adds that consultants utilizing structured settlements help achieve settlements “that are mutually beneficial to both sides.”

At least one legal authority has suggested that plaintiff advisors owe a fiduciary duty (which incorporates a “best interest” standard) to personal injury recipients when the advisor recommends a structured settlement. That suggestion was made by Law Professor Stephen Saltzburg is an opinion letter titled “Use of Structured Settlement Experts by Plaintiffs’ Counsel,” written by Professor Saltzburg in 2006 and addressed to The Academy of Catastrophic Injury Attorneys.

Otherwise, this writer is unaware of any apparent “best interest” requirement (unless self-imposed) that currently exists for consultants who negotiate and market structured settlements funded with products that are not subject to the SEC Best Interest Regulation.

Trustees and judges, however, can be required to impose their own “best interest” standard on proposed structured settlements. In those contexts, structured settlement and settlement planning professionals must be prepared not only to understand “best interest” requirements but also to formulate structured settlement proposals to meet those “best interest” requirements.

Settlement Trusts and “Best Interest

All trustees, including settlement trustees, are fiduciaries, which obligates them to act in the “best interest” of the trust beneficiary(s). Regardless of who sells or provides a financial or insurance product to a settlement trust, and what independent duties that product provider might have to a trust beneficiary (e.g. a settlement recipient), a settlement trustee’s own fiduciary duties arguably require a settlement trustee to evaluate specific trust products, trust product providers and their related business conduct utilizing a fiduciary standard that requires honesty, full disclosure, and “best interest.”

In addition to the trust document itself, and the trustee’s fiduciary duty, the Uniform Prudent Investor Act (UPIA) serves as an important legal reference defining a settlement trustee’s duties of care and responsibilities for investments in states where it has been enacted.

Section 2(c) of 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 sales strategy.

Significant for structured settlements, the UPIA’s list of investment considerations fails to mention mental or physical disabilities of a trust beneficiary. From a “best interest” 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.

Judicial Best Interest Standard

State and federal jurisdictions in the United States uniformly mandate judicial review and court approval of all personal injury settlements that affect the interests of minors or other persons under a legal disability (i.e., a “protected person”). The prevailing standard for such court approval is whether a proposed settlement (including structured settlements) is in the “best interest” of the protected person.

Compared with lump sum settlements, structured settlements introduce a unique set of risks for the recipient. These risks are not limited to, but can include:

  • That promised future payments won’t be made in full or on time; and/or
  • That a proposed settlement plan isn’t well-tailored to the protected person’s particular circumstance, due, for examples: to lack of liquidity, or lack of projected payment suitability, or a less than optimum funding mechanism, or inadequate safeguards to protect against victimization by factoring companies.

In addition to these unique risks, structured settlements compound a more general challenge for judges in attempting to determine whether a proposed settlement plan is in the best interest of a protected person. Anecdotal evidence, based on industry experience, suggests judges typically don’t have adequate time or specialized knowledge to effectively inquire into a proposed settlement plan that affects the interest of a protected person.

State Minors Statutes

Most states have statutes addressing the settlement of personal injury cases involving minors. Some of these state statutes specifically address structured settlements. However, to this writer’s knowledge, none of these state statutes offer comprehensive guidelines for judges applying a “best interest” standard to proposed settlement plans for minors in general or for proposed structured settlements more specifically.

For example, Texas amended the Texas Property Code in 2021 adding Sections 142.008 and 142.009 for structured settlements in lawsuits in which a minor or incapacitated person, who has no legal guardian, is represented by a next friend or an appointed guardian ad litem.

Section 142.008 allows the court, on a motion from the parties, to approve a structured settlement that: (1) provides for periodic payments and (2) is funded by either an obligation guaranteed by the United States government or an annuity contract that meets the requirements set forth in Section 142.009.

Texas Property Code Section 142.009 sets forth three requirements for structured settlement annuity providers subject to Section 142.008. Although these requirements arguably do, in fact, address a structured settlement recipient’s “best interest” (without stating so specifically), they do not provide the type of comprehensive “best interest” template offered by Revised 2020 NAIC Model Regulation #275.

“Best Interest” Judicial Methodologies for Structured Settlements

What methodology or criteria should judges use for determining “best interest” for structured settlements in specific cases involving “protected persons?”

The answer seems important not only for judges and “protected persons” but also for their attorneys and advisors including structured settlement and settlement planning professionals.

Whatever methodology or criteria judges should use for determining “best interest” for structured settlements arguably provides a “best interest” model (in addition to the Regulation #275 model) for structured settlement and settlement planners to discuss and evaluate if and when they consider developing a structured settlement “best interest” model for their own practice.

One such proposed “best interest” alternative, specifically for judges, is featured in Section 8.06 of the legal textbook Structured Settlements and Periodic Payment Judgments,” of which this writer is a co-author.  It recommends that judges:

  1. Use a checklist of questions and concerns for the proponents of any given structured settlement plan, and
  2. “Require the petitioning party or other proponent(s) of the plan to furnish a satisfactory set of answers to questions on that checklist.”

As an additional recommendation: “the answers to questions on the checklist [should] be submitted (i) in advance of the hearing, (ii) in writing, and on a form not only supplied by but required by the court, (iii) under oath, (iv) subject to penalty of perjury, and (v) … in a form that will follow the case file on a going-forward basis in the event of (a) default by the periodic payment obligor or (b) downstream litigation that may arise for any reason whatsoever.”

To assist judges, as well as attorneys, structured settlement and settlement professionals, the textbook features a suggested structured settlement “best interest” checklist with questions addressing five (5) categories of issues including the status of liens and funding proposals as well as the protected person.

Comparative Status and Industry Priority

Members of NSSTA, SSP, and AASC negotiate and sell structured settlements and develop settlement plans for personal injury recipients many of whom are beneficiaries of settlement trusts and/or qualify by law as “protected persons” whose settlements are subject to judicial approval. In those applications, structured settlement and settlement planning professionals already encounter “best interest” standards.

Although some structured settlement and settlement planning professionals currently endorse and promote “best interest” as an individual and/or company business or ethical value, none of the three national industry associations appear to endorse, promote or even debate and educate their members about a “best interest” standard applicable to structured settlements in the primary market.

By comparison, almost every other legal and financial professional endorses, or is held accountable to, a “best interest” standard applicable to their clients or customers – including lawyers, guardians, trustees, CPAs, CFPs, investment advisors, stockbrokers and insurance professionals who sell annuities to persons other than personal injury recipients.

Doesn’t it also seem counterintuitive that a “best interest” standard should apply when a payee attempts to sell structured settlement payment rights in an SSPA transfer, but does not apply to the professionals involved in the original negotiation and sale of that same structured settlement?

For these reasons, it is time for the leaders of our industry’s three national associations to prioritize the “best interest” standard – and to do so thru education by encouraging their associations’ members to study, discuss and evaluate the potential application of the “best interest” standard to consultants who recommend structured settlements to personal injury settlement recipients.


Independent Life and its affiliates do not provide tax, legal, or accounting advice. This article and any accompanying materials have been prepared for informational purposes only and is not intended to provide and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisers before engaging in any transaction.