Today’s story is a look at a recent case I have been working on, one that is a very large, multi-claimant settlement that took years of effort on the part of the attorney’s involved, complex negotiations, hard fought court room victories and millions of funds expended, with the final result being an outstanding settlement for a group of business people who had suffered economic loss.

As we all know, or one would think we should know by now, that if a case does NOT have elements of personal, physical injury as a basis of the claim, the settlement is not afforded tax free status under IRC section 104 and all of the proceeds are taxable. That was and is the reality in this particular situation. However, as most of us know, just because a case has taxable damages doesn’t mean you can’t structure, in fact, the ability to structure and spread out payments on a taxable case is arguably even more valuable given high marginal rates on federal and state income taxes. Therefore it is vital in my professional opinion to make that option known to the legal community and assist them in providing planning tools to their claimants.

So far so good, right?

Now, in this case, as in many other big multi-claimant cases, it was necessary to create a section 468B qualified settlement fund for the firms to receive the clients payments, communicate the planning options to the clients and then disburse funds to the claimants in a orderly and compliant fashion. We do this so that any liens, disputes, allocation issues and compliance checks can be resolved, as well as to make sure there is no constructive receipt of the money by the claimant in the event they wish to structure or plan their award. It is a time tested standard of practice in matters such as this and one that is becoming routine in multi-claimant litigation.

That said, it does take some specific expertise to draft the documents, select local and administrative trustees, select a custodial financial institution, issue 1099’s, sign off on structured settlements and disburse checks. This is not your standard IOLTA account, “lets just write the client a check”, type of situation and law firms are becoming increasingly aware that they probably should engage a firm with demonstrated experience in administration, compliance and planning to get this all to work according to plan and to make sure the clients are happy with the process.

So, back to my case and my story.

Our firm is working with several law firms to assist them in an orderly fashion to do the administration and to put them in touch with LOCAL structured settlement experts who will be meeting with the claimants to discuss planning options. We do this so that no claimant can come back at a later date and say they were not informed they could structure their claim or that a competent local planner wasn’t available to answer their questions and assist them with this decision. It is a great way to get this done as we handle administration, compliance, back office and communication while the local planner is afforded an opportunity to meet with a claimant in a professional fashion to discuss options and issues face to face.

As part of this process we also offered our services to several other law firms who were part of this litigation who informed us that they had structured settlement experts they prefer to work with. So, we of course offered to work with these settlement experts to handle the administration and to give them the ability to write the structures and handle the processing. The response, boiled down to it’s simple best, was they wanted to handle everything themselves, despite the fact, that to my knowledge, that they had never handled a case of this complexity on a taxable settlement before. Their decision to not divide responsibility but instead keep “control” was driven out of what I can only assume is some fear that my firm would “steal their client” or possibly they didn’t see the value in using an expert but instead learning on the job so they can do it themselves.

Fine with me, we have plenty to handle on our end and lots more cases yet to come and I’m the last person in the world who wants to force or coerce anyone to work with my firm.

You would think this is the end of the story, but it’s not.

The “Do it yourself” firm went out, got someone to “craft”  a qualified settlement fund so they could presumably control their client. They filed the QSF with the court and awaited the windfall that obviously was their dream. The only issue is a minor detail that cropped up which my firm discovered by looking at the court filings. Their qualified settlement fund was clearly a “boiler plate” of a personal physical injury settlement they or their “expert” had created which included language and powers that specifically prohibited structuring any claim other than a physical, personal injury.

In other words the governing document on file that was intended to allow for the structuring of taxable damage awards was instead, due to a complete lack of oversight by the settlement firm, prohibiting them from doing any structures.

Obviously I am not going to name the firm or outline the exact case, I have no desire to needlessly embarrass someone when I am sure they are sufficient humiliated by presumably having to relay that egregious error to their client. However, this extreme example does drive home what I have been trying to stress for years now and that is the necessity for each of us to realize what we do well and to stop trying to be all things to every client so as to capture every last possible commission dollar. How in the world anyone ever expects the legal community to take us seriously as problem solvers with this type of careless behavior is beyond me.

In a large case there is a need for quality administration, trust services, communication and client planning and counseling. The client is best served by a team approach where each professional is appropriately and transparently compensated for the value they provide and the client is given timely, objective planning assistance that lets them decide what if any funds they want to structure into the future. To assume any one firm in our industry can provide these services is foolishly prideful and leads to potential disasters that will continue to lower our professional standing with trial lawyers and their clients.

Hubris: “Overbearing pride or presumption; arrogance”. Sum’s it up nicely

In this weeks edition of Speaking of Settlements we look at one of the more innovative programs in the non-qualified market and that is the structuring of oil and gas lease bonus payments through the use of a structured settlement annuity device.

As many people in the structured settlement profession know, Allstate Financial has been a consistent innovator in the area of structured taxable damage awards, as well as structuring the sales of appreciated real estate through their structured sales program. They continue their progressive ways with the announced ability to now structure oil and gas lease bonus payments, allowing people who are leasing their land for oil and gas drilling to defer bonus payments into future years tax returns.

Oil and Gas lease bonus payments, how to structure them for tax savings

The reason this is so important and valuable is that the bonus payment is on top of the annual or quarterly lease payments and is typically a one time bonus up front. By being able to move those dollars into future years, you are able to spread the tax hit over time, earn interest on the funds while deferring, guarantee payments on a fixed schedule and ideally receive them when you are in a lower tax bracket or have other off setting deductions. Of course, on top of the tax benefits, many people just find the idea of being able to secure future payments with the bonus funds to simply be prudent financial planning and want to take advantage of that option now.

To learn more about the Allstate Financial Oil and Gas leasing bonus program, you can go to my firms website at www.wahlstromandassociates.com.

The use of the structured sale has been on the back burner for several years now, largely as a result of the collapse of the real estate market and financing options for both buyers and sellers. It was a product originally conceived and used successfully for several years when people who own highly appreciated, low cost basis real estate, want to cash out and sell, but don’t want to write huge tax checks to the state and federal government on the capital gain. While we can all agree it makes a lot more sense to use 100% of your net sale proceeds and spread the money out over years, many people are still wondering what a structured sale is, and why it makes sense for those selling farm property.

In almost every case that has been referred to my office over the last year in which farm land is being sold or is under consideration for sale, it is a family owned farm that has almost no cost basis and close to 100% of the sale is going to be subject to capital gains tax. While the tax is a big issue, what is a larger problem is that with the sale of the farm, most farmers or their families are also losing their source of annual income, something they need to sustain through the investment income on the sale proceeds.

The structured sale allows them to design guaranteed payments, on a schedule that makes sense for their situation, paid monthly, annually and for years if not decades into the future. Combined with spreading out the tax hit, putting 100% of the net proceeds to work and creating a guaranteed cash flow and payment stream that provides income to the family, you can see why this is becoming increasingly popular during these uncertain market conditions.

If you want to learn more about structured sales and it’s use when selling farm property, contact my office through our web site at www.wahlstromandassociates.com and we will be happy to assist you.

While seemingly obscure to those who do not have land upon which they lease oil or gas rights to drilling or production companies, this market has substantial potential given the wide number of privately held or closely held businesses, as well as individuals, who might be interested in spreading the bonus payments they get in some years over a several year period. The fact is in an era of rising oil and gas prices, these lease bonus payments can be substantial and many owners of the leases would prefer to spread those big bonus years where oil and gas prices spike, over several years if possible, or even defer it far into the future when the oil or gas lease might be played out or sold. This is going to be a really solid planning tool in this niche market.

This particular product has one key feature in that there is a revenue ruling, RR 68-606, which specifically addresses the tax treatment of this technique, something that has inhibited the use of structured sales and income deferral strategies in the areas such as celebrity endorsements and divorce settlements.

Learn more about this announcement by viewing this weeks edition of Speaking of Settlements, where Mark Wahlstrom discusses some of the basic issues and for whom this product or strategy might be suitable. 

Mark Wahlstrom on Allstate Oil and Gas lease Bonus, structured settlement program

You can learn more about how the new Allstate Structured Settlement product for Oil and Gas Lease Bonus payments works by contacting Mark Wahlstrom at Wahlstrom & Associates in Scottsdale, AZ

As this video discusses, it is apparent that there are brokers who have succumbed to the temptation and financial incentives offered by unethical settlement factoring firms to sell the names and contact information of annuitants who have structured settlements through their firm. This first came to light when I was contact by an attorney who had a structured fee with my office and who was solicited multiple times by the same firm to sell her fee structure. As there was no possible way that the information was public knowledge as the cases were settled privately and her structured legal fee wasn’t part of the court record, the information only could have come from brokers who split the case with my office.

This is a huge breech of privacy and I believe not only violates professional ethics, but possibly privacy laws regarding the safe guarding of a clients financial information. It is a huge black eye on our profession and I fully expect that there will be more of it, not less of it as structured settlement professionals who are struggling with the recent down turn in our business look for ways to stay afloat financially by being part of these questionable deals.

Be sure of one thing, this is being noticed by the life markets and structured settlement brokers and the people who are involved in this will be exposed and I would not be shocked if they lose life company selling agreements as a result.

In short this is serious business and those involved need to stop immediately or risk the loss of their professional viability going forward.

When I speak about someone being a “great man”, it isn’t a result of large professional achievements and a resume of board positions and industry honors. No, in Bill’s case it is a result of the accumulated years and decades of putting others first and handling his position in our some times contentious profession with grace, charm and humanity.

Bill and I  have known each other professionally for much longer than either of us probably care to admit at this point. As I like to say, when we were starting in the structured settlement profession we both had a full head of dark hair and were both young and handsome, at least Bill was. I was a plaintiff expert, something that was exceedingly rare in the 1980’s and typically faced intense opposition and hostility from defense brokers, in particular from those who I claimed worked for the “evil empire” aka Ringler. However, on the cases where Bill was on the other side he never cared that I was a plaintiff guy, his singular focus was representing his clients honestly and effectively, but also recognizing the vital importance of getting the right plan in place for the injured party as well.

His concern for the sick, injured and vulnerable was a constant in every case he handled in which I was involved, as was his good humor, charm and professionalism. After I moved from Massachusetts to Arizona back in 1990, I saw less of Bill professionally, but we would usually have a case every now and then where we would get a chance to catch up and work together to insure the financial security of some client. Of course 90% of the time was spent talking about the Red Sox, but being the pro’s that we are, we could get the job done and still debate what why Dan Duquette had given up on Clemens, or other major matters of the day.

Now that Bill is facing what he himself describes as the ultimate irony, being afflicted with a medical condition named after a NY Yankee’s legend, with his typical good cheer, optimism and sense of perspective, it is a worthy reminder for everyone in our profession that it is possible to do a great job and be a great man, with out building walls and disagreeing on the direction of our profession, just for the sake of exercising power. You can be a top professional, a great guy and work to improve the lives of our most vulnerable citizens, all at the same time, something Bill proves every day. This award and the great affection we in the profession have for him is evidence of a life well led and that in the sum of his career, Bill Tocchi got way more right than he ever did wrong.

Congratulation Bill, now lets talk about the Red Sox.

A lot of financial writers and bond managers keep talking as if the trillions in debt being issued, and brought, by the US Government and the resultant low interest rates, are here to stay for awhile, when the facts are that we are likely in for a swift and rude awakening regarding interest rates, the value of the dollar and the rate of inflation once this Ponzi Scheme, (Gross’ term, not mine) comes to it’s inevitable conclusion.

For those of us who are somewhat mathematically challenged, you arrive at the effective rate of return on an investment by taking the actual yield on a bond or structure, lets use 4%, and then measuring the actual or projected rate of inflation during the duration of the payments. By both established and colloquial measurements of inflation, we are seeing the cost of living in areas such as gas, insurance, food, commodities, utilities, etc, running well north of 4% right now. When matched against the yield on most structures of 3% to 4%, thanks to the continued plunge in interest rates toward zero, it is clear that most clients obtaining a structured settlement right now is essentially realizing a zero return on their allocation of funds.

Painful to admit, but intellectual and financial honesty require it.

That said, this situation will likely end soon, and change course quickly and dramatically, once the Federal Reserve and the US Treasury end the Quantitative Easing, i.e. QE II, and the Fed no longer buys 70% of the US Treasury Debt being issued like a flood into financial markets.

For a look at the scale and scope of this Ponzi Scheme of cycling debt click to the PIMCO site and commentary here.

The point being is that while I don’t pretend to be a market genius, I am pretty good at listening to the people in our midst who are the true geniuses, such as Bill Gross and Jim Druckenmiller, both of whom see this as the looming disaster it is about to become. Therefore, for those of us in the settlement profession who are advising people on allocating their one time settlement proceeds into structured settlement we need to be exceptionally careful about long term commitments at these rates and use designs that allow for reinvestment of funds in the near future when rates are higher.

We also need to be exceptionally careful to warn clients to NOT utilize outside managers for their funds who are buying bonds, bond funds, or any investment vehicle that would be impacted by a rise in rates. The carnage in bond funds that is about to occur, as well as asset value loss in a long bond’s market value, is going to be brutal.

The solution that we are recommending to clients who are receiving settlements and have to do SOMETHING with the money they are awarded, is to carefully structure payments monthly payments over the short and medium term to cover living costs, but then provide for lump sums to be reinvested in non-qualified accounts over 3 to 7 years at what are certain to be higher interest rates. While they will theoretically give up some of the tax advantage of a structure on the reinvestment, it is my experience that most of our clients are in a no tax or low tax rate scenario due to a very low real income and what they need more than tax free money is maximum cash flow and return from a highly secure investment. ( Ideally a non-qualified immediate annuity if suitable.)

The net result should be insuring the bills are paid today, no long term interest rate risk or exposure and large sums to reinvest when rates are higher. Not a perfect solution but one that works for the vast majority of our clients.

In summary, don’t be fooled by todays rates and the media reports of a resurgent economy. Interest rates have been cynically kept so low that people were forced to move funds into bonds and stocks, but the result over the next few years is that unless those stocks are in companies that benefit from inflation and the bonds are VERY short term in duration, those portfolios are going to be hammered. My advice is get liquid, cut debt and prepare to reinvest when the rates jump up dramatically in the next six to 12 months.

We won’t be selling zero yield structures for too much longer but in the mean time we need to prepare todays clients to reinvest when rates or risk further alienating our current and future clients through poor planning.

You didn’t realize that a man or woman sent to prison under false testimony or a mistake in the prosecution, who is deprived of liberty and subjected to the horror of prison life does not get get tax free payments if they get a settlement from the state?

Or, that civil rights cases fought and won are in many cases fully taxable to the person who fights for years or decades for justice, only to see legal fees and taxes take most of the monetary compensation?

You aren’t alone in your lack of knowledge or confusion about the tax status of these types of claims, largely because they are currently governed by unclear federal tax statues, conflicting or ambiguous revenue rulings or private letter rulings or that many lawyers simply instruct their clients to take the cash and take their chances with the IRS to come looking for it later.

The fact is that Congress, the courts and the US Treasury have left these areas either untouched, partially explained or so ambiguous that it is hard if not impossible to provide definitive tax or settlement planning advice to those who have been molested, abused, wrongfully imprisoned or had their civil rights violated. I understand Congress not getting around to this as this is a small and powerless group of people who receive these types of cases and they aren’t a big lobbying arm in DC. Small children, emotionally damaged teen agers or young adults, prisoners and those whose civil rights have been violated don’t write big checks or deliver a lot of votes so I understand Congress letting this slide to the bottom of their radar screen.

What I don’t understand is the lack of action and attention to this issue by the settlement trade associations, NSSTA and SSP, when this is so clearly a fight worth picking with Congress and the courts to correct an obvious wrong.

It is not because there has been a failure by some of our brightest minds to bring the issue up and even ask for hearings in front of Treasury to discuss the issue and see what avenues we have to correct these wrongs. No, the reason we have not taken this on is largely due to distraction on other matters and a general fear of bringing up the issue of tax free benefits; terrified that we might get noticed by Congress and lose that which we already have.

In my conversations with various members and leaders of our industry and trade association it has become painfully clear that we are afflicted with the same mentality of trench warfare where you don’t advance, you don’t retreat, instead you sit in the mud, keeping your head down and happy your not being shot. Instead of taking advantage of our strong lobbying group, the 30 year track record of our product to deliver safe, predictable, tax free returns and its ability to improve the quality of life of the vast majority of annuitants, we choose instead to sit in our trench, scared to death that if we talk to Congress about expanding section 104 and 130 treatment to these deserving areas, that they might take away our existing tax treatment.

Ladies and Gentleman of the settlement profession, if we are so unsure of the value of our product and our ability to explain why molested children, wrongfully imprisoned and those who have suffered civil rights abuses need to be covered by the same tax free benefit afforded physical injury victims, then we need to retire or consider representing another product. The fact is we should be arguing to correct something that should have been fixed when the code was amended back in the 1990s and to provide similar benefits to some of the most traumatized, victimized and abused people in our society. That’s a noble and intellectually honest stance to take and one that we should be proud to take to Congress as an association and as individuals.

It is a fight we can win and one that we should make a priority of the association going forward.

However in closing, I fear that the looming freight train of Executive Life of New York is only going to make us more timid than we have been on this issue, afraid again to lift our heads out of the trench and attacking the problem. I would argue we need to go on the offensive and start promoting what is good and obvious about our core product instead of sitting under cover hoping we don’t get noticed by the bad guys. What we offer protects the financially and socially vulnerable and provides a secure, tax free income to those who are least able to afford the loss of their funds to market swings and riskier investments. We can’t be afraid of a debating our critics or educating our Congress for if we are and we fail to act, that which we seek to protect will eventually be taken from us with out a fight from us at all.

Tomorrows position statement: The looming issue of the Executive Life of New York structured settlement contracts. If liquidation is inevitable, how can the settlement profession best handle the fall out.