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SINGLE-CLAIMANT 468(B) TRUSTS Presented by: Robert Peahl - AIG Domestic Claims, Inc. Michael Miller - Drinker Biddle & Reath LLP Webcast Seminar __, 2007 Structured Settlement Principles Usually a voluntary arrangement to pay a lump sum and periodic payments Full value of payments tax-free to physical injury plaintiff Bridges gap in negotiating by offering tax-free benefits to fund life care plans, economist reports Defense controls funding and form of offer, negotiation Background on 468(B) Settlement Funds Designed to permit defendants and their insurers in mass tort actions and other multiple plaintiff cases to fund (and take tax deductions for contributions to) “designated settlement funds” and “qualified settlement funds” (hereinafter collectively “468B Funds”) while the actions continue against other defendants or while the claimants determine an appropriate allocation method. The guiding principles Internal Revenue Code Sec. 468(B) - 1986 Associated Treasury Regulations - 1993 Revenue Procedure Ruling 93-94 (which had the effect of making structured settlements available to claimants to a 468B Fund) The issue is whether the advantages of 468B Funds apply in a single-claimant case, or whether application is confined to the mass tort scenarios intended to be addressed. Recent Developments Certain brokers or attorneys request to fund a 468B settlement for a single claimant without a mass tort scenario or genuine multiple claimant scenario Perceived advantages for a single claimant primarily include the transfer of control of settlement to the plaintiff and access to markets See Revenue Procedure Ruling (requiring that the assignee not be related to transferor (i.e. defendant or casualty insurer)) Ramifications for Plaintiff, Liability Insurer and even the Assignee Problems Relating to Constructive Receipt and Economic Benefit: Because the claimant controls the fund, the tax free status of earnings from the annuity might be lost. This is a potential problem for the claimant. The value of this tax liability to the claimant can run into the tens or even hundreds of thousands of dollars. This is also a potential problem for the annuity owner (i.e., the assignee). Section 130 provides significant benefits for the annuity owner. Section 130 requires that the payments at issue be tax free to the claimant. If the payments are not tax free, then the annuity owner may lose the benefit of Section 130. Plaintiffs Arguments Where there is one claimant Plaintiffs might argue that a Treasury Regulation allows a QSF to be “established to resolve one or more contested or uncontested claims . . . .” See Treasury Regulation 1.468B -1(c) (emphasis added). But Treasury Regulations are not statutes. They are intended to offer guidance. The statute, Section 468B (which relates to designated settlement funds which are another type of 468B Fund) does not contain a similar phrase and indeed refers only to “claims,” which is plural. See Section 468B(d)(2). Derivative Claims Often a 468B Fund is being advocated in a context that involves derivative claims, such as a consortium claim, or when there is a workers’ compensation or medical expense lien. Of course, the argument in favor of the 468B Fund in these situations is that the settlement does not involve a single claimant. However, the practical reality of the situation is that the claims are not divisible (like in a mass tort situation), particularly when the claimants are represented by the same lawyer or have already decided how the 468B Fund will be divided between them. Indeed, if the 468B Fund in such a situation is distributed soon after its commencement, that may constitute strong evidence that there was no real adversity among the claimants. Under these circumstances, the claimants will have constructive receipt and economic benefit issues similar to those that would befall a single claimant. Realities of 468(B) Illusory benefits The majority of life markets agree there was no intent to suspend constructive receipt and economic benefit doctrines for single-claimant 468B Funds Trustee and administration fees, as well as legal, accounting and other administrative expenses, reduce funds available to allocate to benefits. Some brokers will attempt to reduce these costs by: serving as trustee Receiving compensation from the placement of financial products from the 468B Fund Conflict of interest questions may be raised IRS Response (or lack thereof) Neither the IRS nor the Department of Treasury (“Treasury”) have issued any rulings or regulations on the issue of single claimant 468B Funds, nor are there any on-point cases. However, this issue is currently on Treasury’s 2006-2007 business plan, and should be addressed at some point in the future. Case Example A 468B for two minor siblings proposed in response to identification of approved list of life markets Approved by court after defense waived hearing anticipating traditional structured settlement Plaintiff’s counsel voluntarily included broad indemnity language to suspend grounds for objection Problems – potential loss of tax benefits to claimants; defense waived right to object; indemnities might not be enforceable. Case Example B 468B proposed in order to expedite payment of the cash value of settlement and assist in leverage against lienholder Procedural complexities and unusual nature created a lengthy series of motions and sets of documents required to achieve the stated goals Problem – expedited hearing deprives defense of opportunity to inform court about risks. Case Example C Lien holder concerns took center stage in expediting cash funding for settlement on behalf of a single claimant and common law spouse Plaintiff broker served as Trustee, compensated from the selection and placement of various financial products Problems – Broker might have conflict of interest; expedited hearing deprives defense of opportunity to inform court about risks. Case Example D Single-claimant 468B resists language intended to ensure that the liability insurer was indemnified and held harmless by the Trust and the Trustee with respect to the questionable tax ramifications of the settlement allocations requested by plaintiffs. Problem – although the enforceability of indemnity and hold harmless is a risk, absence of any protections leaves defense fully at risk of adverse tax consequences. Avoiding Problems – Best Practices Contain application to mass torts or other genuine multiple claimant scenarios only; Decline (or resist) negotiation of a “backed in” structure; Coordinate terms of settlement with AIG approved structured settlement consultant; Mediation agreements / Rule 11 Make clear that settlement payments will only be to plaintiff or plaintiff’s counsel (or issued through AIG approved structured settlement consultant for the purchase of a qualified structured settlement annuity) Coordinate documents with regard to settlement with AIG approved structured settlement consultant; Settlement Agreements Motions for approval – Sistrunk Contact counsel if single claimant 468B or QSF is proposed Utilize standardized hold harmless and indemnity language, including with respect to tax ramifications Attorneys Likely To Request A Single Claimant 468(B) Lawrence Grassini - Woodland Hills, CA Joseph W. Steele, Steele, Riffinengo & Biggs – Salt Lake City, UT William R. Edwards, III, The Edwards law Firm, LLP – Corpus Christi, TX Broker/Broker Firms/Organizations Likely To Request A Single-Claimant 468(B) Settlement Professionals Inc. Dick Risk Matt Garrettson Elizabeth Vish Forge Consulting, LLC Bradford Settlement Company Millennium Settlements Summit Settlement Services Broker/Broker Firms/Organizations Likely To Request A Single-Claimant 468(B) John Staunton,P.A. Ferlisi-Jolley Associates, Inc. Society of Settlement Planners American Association for Justice (formerly ATLA) Approved List Of Life Carriers For AIG American General Life Insurance Company American International Life Assurance Company of NY Allstate Life Insurance Company Hartford Life insurance Company New York Life Insurance Company Pacific Life and Annuity Company Affirmative Statement Regarding 468(B) Trusts (For Use When Settlement Negotiations Commence) “AIG supports structured settlements and is willing to discuss a structure. Plaintiff, plaintiff’s counsel, and their tax advisors should understand that AIG will not agree to a Single-Claimant Qualified Settlement Fund which AIG believes could create tax problems for plaintiffs and property and casualty companies.” Affirmative Statement Regarding 468(B) Trusts (For Use When Settlement Is Agreed Upon) “The parties agree that the proceeds shall not be payable into a qualified settlement fund (‘QSF’), as defined by 26 U.S.C. § 468B or 26 C.F.R. § 1.468B1(c)(1). No party shall either agree to or seek to obtain a consent or other court order to have any portion of the proceeds placed into a QSF at any time.”