Issue #38       April 1, 2007
 


ANNUITIES, STRUCTURED SETTLEMENTS AND PUBLIC BENEFIT PLANNING

By, John J. Campbell, CELA, MSCC

 

            Sections 104(a)(1) & (2) of the Internal Revenue Code (IRC) provide that proceeds of a worker’s compensation (WC) settlement or settlement of a third-party liability (TPL) claim involving physical injury or sickness (except for punitive damages) are not taxable.  However, income earned by plaintiffs on lump sum settlements of such claims is taxable.  Settling parties as far back as the 1970's reasoned that if a settlement could be paid out in periodic payments over time, the tax on settlement income could be deferred.

 

            However, there was a drawback to this idea.  When the parties to a WC or TPL claim agree to a settlement, it is the obligation of the defendant to pay the settlement monies to the plaintiff.  This is true whether the settlement is for a lump sum or for structured, periodic payments.  Until all of the settlement proceeds are paid, the defendant’s obligation continues.  A defendant would not likely be willing to agree to provide periodic payments if it required the defendant to actually make physical payments after the settlement to the plaintiff for 10 or 20 years.  When defendants settle, they want finality, not a continuing obligation.

 

            In 1983, Congress passed the Periodic Payment Act, amending the IRC to grant statutory authority for the use of periodic payments in personal injury settlements.  The Act most notably created Section 130 of the IRC, which provided a means whereby a settling defendant could fulfill his or her obligation to make periodic payments of settlement proceeds through a qualified assignment.   

 

            Under the original Section 130, the income from an annuity that made periodic payments as part of a settlement of a TPL claim for physical injury or sickness was exempt from income tax if there was a qualified assignment of the obligation to make the annuity payments.  Section 130 was amended in August, 1997, to permit the use of qualified assignments in WC settlements as well.  Since that time, the use of structured settlements has become more an more common, both in WC settlements and in settlements of TPL claims involving physical injury or sickness.

 

            The assignment of the obligation to make periodic payments constitutes a “qualified assignment” if the following requirements are met:

 

          (1) assignee must assume liability from a person who is a party to the suit or agreement, or the WC claim, and

(2) 

(A) such periodic payments are fixed and determinable as to amount and time of payment,

(B) such periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments,

(C) the assignee's obligation on account of the personal injuries or sickness is no greater than the obligation of the person who assigned the liability, and

(D) the periodic payments must be excludable from the gross income of the recipient under IRC Sections 104(a)(1) & (2).

 

IRC Section 130.

 

            Further, the periodic payments must be funded with a commercial annuity issued by a life insurance company; and the annuity payments cannot be more that the periodic payments under the qualified assignment.  Finally, the annuity must be purchased with settlement proceeds within 60 days before or after the qualified assignment and must be designated specifically to payment of the qualified assignment.

 

            Once there is a qualified assignment of an annuity funding a structured WC or physical injury settlement, the plaintiff cannot change the terms of the annuity, such as the payment amounts or the entity designated as payee.

 

            Qualified assignments under Section 130 will only be available in the settlement of WC or physical injury claims, and only with regard to settlement proceeds that are exempt from taxation under Sections 104(a)(1) & (2) of the IRC.  For settlements of TPL claims that are not related physical injury, such as claims for breach of contract, business torts, employment discrimination or civil rights violations, Section 130 will not apply. 

 

Use of Annuities in Public Benefit Planning

 

            Since both SSI and Medicaid eligibility are based partly upon the individual’s level of income, a structured annuity that makes periodic payments directly to the beneficiary could prevent the individual from qualifying for those benefits for the lifetime of the annuity.  Further, if the annuity is assigned to a third party, the individual will not be able to amend the annuity at a later time to redirect payments into a Medicaid or SSI exempt trust.

 

            Many states have enacted Medicaid regulations that are hostile to the use of annuities.  In some states, the purchase of an annuity that pays out to the individual can be treated as a transfer without fair consideration, resulting in a period of Medicaid ineligibility.  There have even been cases where the entire value of the annuity payable to an individual has been treated as an available resource.  In either case, the annuity would have an adverse effect on the plaintiff’s ability to qualify for Medicaid benefits.     

 

            Structured annuities can still be used in WC and TPL settlements involving multiple public benefit issues, but they must be used carefully.  In these cases, the annuity generally should not be set up with the individual plaintiff as payee.  Rather, the annuity should pay out to either an exempt Special Needs Trust or an exempt Medicare Set-Aside Trust. 

 

Use of Annuities to Fund Trusts--Special Funding Issues

 

Use of Annuities to Fund Medicare Set-Aside Trusts

 

            Under Section 130 of the IRC, an annuity that funds a qualified assignment must be fixed as to the amount and time of periodic payments.  However, those payments need not be made monthly or even annually. 

 

            In many WC and physical injury cases, the plaintiff may have anticipated future medical needs that will not necessarily be consistent or regular.  For example, a plaintiff may anticipate the need for surgery or replacement of certain durable medical equipment many years after the settlement.  In these instances, it is not unusual for the structured settlement to include an annuity that might pay out large payments at 5 or 10 year intervals, specifically to provide extra funds in those years when unusually large medical costs are expected.

 

            For many years, such deferred annuities were often used to fund Medicare Set-Aside Arrangements.  Usually, an immediate annuity would also be used to provide a steady stream of income to pay for regular or routine medical expenses expected to recur monthly or annually; and the Medicare Set-Aside Arrangement would also receive an immediate lump some as “seed” money for unexpected emergencies.  By deferring payment for large and infrequent costs until needed, the defendant could reduce the costs of funding the settlement while still providing the plaintiff with sufficient settlement funds to meet his or her needs for future care.

 

            On October 15, 2004, CMS issued a policy memorandum[1] that essentially ended the use of deferred annuities to fund Medicare Set-Aside Arrangements.  That memorandum, under FAQ #5, states that, while annuities may be used to fund Medicare Set-Aside Arrangements, their use will be restricted and subject to the following requirements:

 

            1.         The Medicare Set-Aside Arrangement must be funded with seed money sufficient to cover the first anticipated surgery and/or replacement, plus two years of anticipated annual payments;

 

            2.         The annuity payments of the remainder of the approved set aside amount must be divided over the plaintiff’s remaining life expectancy, or a shorter period if CMS agrees; and

 

            3.         The annuity payments have to be made on or before a set anniversary date beginning no more than 1 year after the settlement.

 

            In other words, CMS will only allow the use of immediate annuities to fund Medicare Set-Aside Arrangements and only when a significant lump sum amount is also used to seed the Medicare Set-Aside Arrangement at the outset.

 

Medicaid Annuities under the Deficit Reduction Act of 2005

 

            In many WC and physical injury cases, the plaintiff’s future medical expenses may “spike” in later years.  For example, a plaintiff may anticipate the need for surgery or replacement of certain durable medical equipment many years after the settlement.  In these instances, it is not unusual for the structured settlement to include an annuity that might pay out large payments in fixed amounts at 5 or 10 year intervals, specifically to provide extra funds in those years when unusually large medical costs are expected.  By deferring payment for large and infrequent costs until needed, the defendant can reduce the costs of funding the settlement while still providing the plaintiff with sufficient settlement funds to meet his or her needs for future care.

 

            The Deficit Reduction Act of 2005 (DRA) amended federal Medicaid law to provide that the purchase of an annuity from the assets of a Medicaid recipient (or the recipient’s spouse) is a transfer without fair consideration, unless the annuity is irrevocable and non-assignable; is actuarially sound; and provides for substantially equal payments over the life of the annuity with no deferral or balloon payments; or the annuity must name the state as death beneficiary up to the amount of Medicaid benefits paid on behalf of the annuitant.[2]  However, the DRA does not provide for any further consequence in the treatment of deferred or balloon annuities.  Thus, even a deferred or balloon annuity still should not be treated as a “resource” if it is annuitized, but rather, the payments should continue to be treated as income in the month received. 

 

            Under IRC §130, an annuity that funds a qualified assignment must be fixed as to the amount and time of periodic payments.  However, those payments need not be made monthly or even annually.  On the other hand, the DRA restrictions on annuities require that a Medicaid-exempt annuity must be actuarially sound and provide for substantially equal payments.  The DRA specifically provides that the purchase of deferred annuities and balloon annuities by the Medicaid recipient or the recipient’s spouse will result in a transfer penalty.  Does this mean that only IRC §130 immediate annuities may be used in a structured settlement where the annuity will be used to fund a Medicaid Special Needs Trust for the plaintiff?  Not necessarily.

 

            As discussed above, a qualified annuity under IRC §130 must be purchased directly by the defendant or the defendant’s insurance carrier.  The plaintiff cannot even have the option of receiving an annuity or a lump sum payment without having constructive receipt of the settlement funds and running afoul of IRC §130.  In other words, any annuity that would be used to fund a Special Needs Trust in the context of a WC or PI settlement is purchased with assets of the defendant, and not with assets that could be considered “available” to the plaintiff/Medicaid recipient.   

 

            The DRA’s restrictions on the purchase of deferred or balloon annuities only apply to purchases of annuities with assets of the Medicaid recipient (or the recipient’s spouse).  Further, the DRA does not apply to SSI.   Therefore, the DRA annuity provisions should not affect the ability to fund Medicaid or SSI Special Needs Trusts with IRC §130, deferred or balloon annuities as part of a WC or PI settlement.  In fact, the DRA annuity provisions arguably would not be applicable to this situation at all, so that it should not be necessary for the IRC §130 annuity funding a Special Needs Trust to be actuarially sound or to name the state as remainder beneficiary. 

 

            It may be safest to fix annuity payments under a deferred IRC §130 annuity such that the payments will be substantially equal in amounts; and to have the annuity to pay out during the plaintiff’s remaining life expectancy; or else to designate the state as a death beneficiary up to the amount of Medicaid benefits paid on behalf of the plaintiff.  However, this may not strictly be necessary, since the annuity would not be purchased with assets of the plaintiff or the plaintiff’s spouse.    

 

Use of Annuities to Fund SSI and Medicaid Special Needs Trusts

 

            Unlike Medicare, SSI and Medicaid do not prohibit the use of either deferred or balloon  annuities to fund exempt Special Needs Trusts if the annuities comply with IRC §130.  If the plaintiff expects to incur future medical expenses on a fairly regular basis, an immediate annuity can be used to provide the necessary funding over time.  If large expenses are expected periodically in the future, a deferred or balloon annuity may be appropriate as well.  However, all annuity payments into an exempt Special Needs Trust must be completed before the plaintiff reaches age 65.[3]  Further, the Special Needs Trust should also be funded initially with a lump sum sufficient to provide immediate liquid funds for unexpected costs, the annuity payments should be large enough to ensure that funds in the trust will not be exhausted before the next payment date, and payments should be indexed to keep pace with inflation. 

 

Naming the Trust as the Annuitant

 

            Since both SSI and Medicaid eligibility are based partly upon the individual’s level of

income, a structured annuity that makes periodic payments directly to the beneficiary could prevent the individual from qualifying for those benefits for the lifetime of the annuity.  Further, if the annuity is the subject of a qualified assignment, the individual will not be able to amend the annuity at a later time to redirect payments into a Medicaid or SSI exempt trust.  

 

            Since there will virtually always be a qualified assignment of any annuities in any WC and PI settlement, careful planning is required to preserve the plaintiff’s ability to qualify for Medicaid or SSI.  In these cases, the annuity generally should not be set up with the individual plaintiff as payee.  Rather, the annuity should pay out to either an exempt Special Needs Trust or an exempt Medicare Set-Aside Special Needs Trust.

 

Qualified Settlement Funds under IRC §468B

 

            IRC §130 requires that a qualified assignment be made by a party to the suit or agreement having liability to the plaintiff.[4]  If the plaintiff were to obtain actual or constructive receipt of the settlement funds, the ability to take advantage of the tax savings under §130 would be lost.  Therefore, structured settlements under §130 have traditionally been funded directly by the defendant or the defendant's insurance carrier.

 

            Increasingly, settling plaintiffs and their attorneys have expressed serious dissatisfaction with the traditional arrangement in which the defendant has complete control over the purchase of the annuity which will fund the qualified assignment.  Plaintiffs are forced to agree to a specified income stream rather than the lump sum amount with which the annuity will be funded.  Defendants' insurance carriers often use "preferred" brokers who may be under an agreement to split commissions with the carrier.  Fees, commissions and the actual commuted value of the annuity are seldom, if ever, disclosed.  Many times, the future payments the plaintiff will receive are less than what the plaintiff might have been able to obtain from another annuity issuer for the same premium payment.

 

            Plaintiffs may thus be deprived of the ability to enjoy the fullest benefit of the settlement; and may even feel that they have been duped into settling for less than the agreed-upon amount.  Further, there is at least a perceived conflict of interest involved where the plaintiff's financial settlement planning is in the hands of the opposing party. 

 

As a result, many plaintiffs who are interested in receiving their settlements in the form of a structure are insisting on a different procedure that will allow them more control.  Qualified Settlement Funds under IRC §468B and the corresponding IRS regulations provide an alternative to the traditional, defendant-directed structured settlement arrangement.

 

            In 1986, Congress enacted the Tax Reform Act[5], which added IRC §468B to allow a defendant to extinguish his or her liability by paying settlement proceeds into a "designated settlement fund."[6]  Initially, designated settlement funds (DSF's) were used in the settlement of large class action PI[7] suits, where the individual shares of the settlement to the various class members had not yet been determined.  However, §468B contains no language restricting the use of DSF's to the settlement of suits or claims involving multiple plaintiffs. 

 

            A DSF is defined as any fund:

 

                        (A) which is established pursuant to a court order and which extinguishes completely the tort liability of the defendant or the defendant's insurance carrier to the plaintiff,

(B) with respect to which no amounts may be transferred other than in the form of qualified payments,         

(C) which is administered by persons a majority of whom are independent of the defendant or the defendant's insurance carrier,

(D) which is established for the principal purpose of resolving and satisfying present and future claims against the defendant (or any related person or formerly related person) arising out of personal injury, death, or property damage,

(E) under the terms of which the defendant (or any related person) may not hold any beneficial interest in the income or corpus of the fund, and

(F) with respect to which an election is made by the defendant.[8]

 

             In 1992, the Treasury Secretary introduced regulations governing the treatment of DSF's.[9]  Under these regulations, the Secretary provided for the creation and use of "qualified settlement funds" (QSF's).[10]  Although QSF's are not specifically mentioned in IRC §468B, they are clearly intended to meet the definition of a DSF.

 

            Under 26 C.F.R. §1.468B-1, a fund, account or trust is a QSF if:

 

(1) It is established pursuant to an order of, or is approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;

(2) It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability--

(i) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended, 42 U.S.C. 9601 et seq.; or

(ii) Arising out of a tort, breach of contract, or violation of law; or

(iii) Designated by the Commissioner in a revenue ruling or revenue procedure; and

(3) The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related persons).[11]

 

Although the regulations define a QSF in broader terms than the statute's definition of a DSF, the regulations are valid.[12]   

 

            The proceeds of a PI settlement used to fund a QSF continue to receive favorable tax treatment under IRC §104(a)(2), but income earned on the proceeds are taxable to the QSF for so long as the QSF continues to hold the funds.[13]  Under 26 C.F.R. §1.468B-2, QSF's are taxed at the maximum rate applicable to trusts, but are otherwise treated as corporations under the IRC.[14]  

 

            Like the governing statute, the regulations do not contain any language restricting the use of QSF's to settlement of suits or claims involving multiple plaintiffs.  Moreover, the regulations state specifically that a QSF can be used to settle "one or more" claims.[15]  There can be little serious doubt that the regulations permit QSF's to be used in the settlement of single-plaintiff physical injury claims.

 

QSF's and Qualified Assignments

 

            The question still remains whether a QSF holding funds from a PI settlement involving a single plaintiff can accomplish a qualified assignment under IRC §130.  Many defendants, liability carriers and structured settlement professionals have argued for years that it cannot, based upon the common law doctrine of "economic benefit," as defined in the landmark case of Sproull v. Commissioner.[16] 

 

            In a nutshell, the Sproull case held that when a fund is placed irrevocably with a third party for the sole benefit of the taxpayer and the taxpayer has a vested right in the fund, the taxpayer has received an economic benefit.[17] This, the argument goes, is exactly what happens when a QSF is funded with the proceeds of a single-plaintiff PI settlement, since the amount to which the plaintiff's vested interest applies is immediately determinable. 

 

            Under Sproull, if the taxpayer has received an economic benefit, the fund is immediately includable in the taxpayers gross income.[18]  Therefore, if the plaintiff has an economic benefit from PI settlement funds, the principal settlement amount is excludable under IRC §104(a)(2), but any income earned on the funds is includable in the plaintiff's gross income.  This would arguably prevent the QSF from being able to accomplish a valid §130 qualified assignment, since all of the periodic payments from the qualified funding asset, including the income portion, must be excludable from the plaintiff's gross income under §104(a)(1) or (2).[19]

 

            Proponents of this argument often cite an IRS Private Letter Ruling[20] as authority for the application of the economic benefit doctrine to single-plaintiff QSF's.  While that particular PLR did involve an analysis of a QSF under the economic benefit doctrine, the QSF discussed in PLR 0138006 was not funded with the proceeds of a PI settlement.  Therefore, the case discussed in PLR 0138006 did not involve the issue of whether a QSF holding funds from a single-plaintiff settlement could accomplish a valid §130 qualified assignment.

 

            The real issue is whether the economic benefit doctrine applies to bar a single-plaintiff QSF, funded with PI settlement proceeds, from making a qualified assignment under IRC §130.  To rely solely upon PLR 0138006 as authority for the application of the economic benefit doctrine in such cases ignores the content of IRC §130, the Congressional intent and legislative history behind IRC §130, and the IRS' Revenue Procedure 93-34.

 

            When §130 was originally enacted in 1982, the statute provided that the party making a qualified assignment could not assign payment rights "greater than those of a general creditor."[21]    The legislative history behind the original 1982 statute states Congress' intent at the time that payments of damages from PI claims be "excludable from income only if the recipient taxpayer is not in constructive receipt of or does not have the current economic benefit of the sum required to produce the periodic payments.”[22]   

 

            However, Congress amended §130(c)(2)(C) in 1988 by removing the "greater than a general creditor" language, so that  "[r]ecipients of periodic payments under structured settlement arrangements should not have their rights as creditors limited by provisions of the tax law."[23]  When Congress repealed §130(c)(2)(C), it also added the following  language to §130(c):

 

"The determination for purposes of this chapter of when the recipient is treated as having received any payment with respect to which there has been a qualified assignment shall be made without regard to any provision of such assignment which grants the recipient rights as a creditor greater than those of a general creditor."[24] 

 

            The legislative history behind the 1988 revisions to §130(c) states that "no amount is currently includable in the recipient’s income solely because the recipient is provided creditor’s rights that are greater than the rights of a general creditor."[25]   

 

            A settling plaintiff with vested rights to a settlement fund has rights "greater than those of a general creditor" and would normally be considered to have an "economic benefit" under Sproull.[26]  Thus, the effect of the 1988 amendments to §130(c) was to make the "economic benefit" doctrine inapplicable to qualified assignments in PI settlements. 

 

            Whenever the parties to a PI case reach an agreement to settle for a specified amount, the plaintiff obtains a vested right to the proceeds of settlement.  When the defendant or the defendant's insurance carrier provides the funds through a qualified assignment for the purchase of a qualified annuity, the funds are irrevocably placed with a third party for the sole benefit of the plaintiff.  In spite of this, qualified assignments are routinely and successfully employed in structured PI settlements for individual plaintiffs.[27] 

 

            It seems clear that the economic benefit doctrine is no longer applicable to bar a qualified assignment under IRC §130 after the 1988 revisions to that section.  Indeed, the IRS has interpreted the 1988 revisions as allowing qualified assignments of periodic payment liabilities without regard to whether a plaintiff has the current economic benefit of the settlement proceeds or the qualified funding assets purchased with those settlement proceeds.[28]  Assuming the requirements of IRC §130 are met, the plaintiff's economic benefit does not bar a successful qualified assignment.

 

            Therefore, a party to the suit or agreement with liability to the plaintiff can accomplish a valid qualified assignment, regardless of whether the settlement proceeds are placed irrevocably with a third party in a separate fund, account or trust for the sole benefit of the plaintiff and the plaintiff has a vested right in the fund, account or trust.  So long as the plaintiff is not in constructive receipt of the settlement proceeds, a qualified assignment is still possible.

 

            It is very important to note that IRC §130 requires only that the assignment be made by a "party to the suit or agreement" having liability to the plaintiff.[29]  That section does not require that the assignment be made by the original defendant or its insurance carrier.  Thus, any party with liability to the plaintiff can make a valid qualified assignment.

 

            In 1993, the IRS enacted Revenue Procedure 93-34.  This procedure "provides rules under which a designated settlement fund described in section 468B(d)(2) of the Internal Revenue Code or a qualified settlement fund described in section 1.468B-1 of the Income Tax Regulations will be considered 'a party to the suit or agreement' for purposes of section 130."[30]     

 

            Specifically, Rev. Proc. 93-34 provides that:

 

. . .  a qualified settlement fund will be treated as "a party to the suit or agreement" within the meaning of section 130(c)(1) of the Code if each of the following requirements is satisfied:

(1) the claimant agrees in writing to the assignee's assumption of the . . . qualified settlement fund's obligation to make periodic payments to the claimant;

(2) the assignment is made with respect to a claim on account of personal injury or sickness (in a case involving physical injury or physical sickness) that is . . .:

            (b) a claim [under CERCLA ; or arising out of a tort, breach of contract, or violation of law; or designated by the Commissioner in a revenue ruling or revenue procedure];

(3) each qualified funding asset purchased by the assignee in connection with the assignment by the designated or qualified settlement fund relates to a liability to a single claimant to make periodic payments for damages;

(4) the assignee is not related to the transferor (or transferors) to the designated or qualified settlement fund within the meaning of sections 267(b) or 707(b)(1); and

(5) the assignee is neither controlled by, nor controls, directly or indirectly, the designated or qualified settlement fund. . .[31]

 

            Rev. Proc. 93-34 does not contain any provisions which would restrict its application to settlements involving multiple plaintiffs.   On the contrary, it speaks in terms of qualified assignments relating to "a claim" and "liability to a single claimant."[32]  This language, like the language of IRC §468B itself, is consistent with situations involving either a single plaintiff or multiple plaintiffs.

 

            The logical conclusion is that the provisions of IRC §§130 and 468B, and §§1.468B-1 through 1.468B-5 of the IRS regulations, as interpreted by the IRS itself, permit QSF's in single-plaintiff PI settlements to make qualified assignments under IRC §130, so long as the QSF is made a "party to the suit or agreement" in compliance with Rev. Proc. 93-34.

 

How Does a QSF Make a Valid Qualified Assignment?

 

            It should not be difficult to comply with all of the applicable requirements of IRC §§130 and 468B, §§1.468B-1 through 1.468B-5 of the IRS regulations, and Rev. Proc. 93-34 when settling a PI claim.  The parties could first petition the court with jurisdiction over the claim to create a QSF trust and appoint an independent trustee, with the court having continuing jurisdiction over the QSF trust until it terminates.  The plaintiff would not have any rights to revoke or modify the terms of the QSF trust, or to compel any distributions from the QSF trust other than to fund a qualified assignment.

 

            The parties could then enter into a "novation," in which the plaintiff, defendant, the defendant's insurance carrier and the QSF trustee would all agree that the defendant's liabilities to the plaintiff be assigned to and fully assumed by the QSF.  As consideration, the defendant and/or the defendant's insurance carrier would agree to pay the QSF an agreed upon lump sum, to be used only to fund a qualified assignment with the plaintiff as payee.

 

            The QSF could then be substituted for the original defendant as a party to the case; the QSF could be funded by the defendant or the defendant's insurance carrier; and the defendant and/or its carrier could be granted a full release by all parties.  The QSF trustee, now a party standing in the shoes of the original defendant, could then enter into a full and final, court-approved settlement agreement with the plaintiff.  The settlement would extinguish all liabilities assumed from the original defendant and require payment of the settlement proceeds to the plaintiff through a qualified assignment.  The plaintiff would not have the option of receiving any portion of the settlement in a lump sum; and the obligation to make and fund the qualified assignment would fall solely to the QSF.

 

            The QSF, as a "party to the suit or agreement," should then be able to accomplish a §130 qualified assignment, giving the plaintiff favorable income tax treatment of all income earned on the qualified annuity.  Since the QSF would be funded with an agreed lump sum, representing the commuted value of the qualified annuity, the plaintiff would be assured of receiving the full value of the settlement. 

 

            The plaintiff would also have the ability to choose the structured settlement broker; to direct the trustee to purchase a qualified annuity that would provide the most valuable income stream; and to ensure that all fees and commissions are fully disclosed.  At the same time, the settlement would be protected from premature depletion; and the plaintiff would be assured a secure, future stream of income for life to meet his or her needs for support and medical care.  In short, the plaintiff would be able to enjoy all of the advantages of a tax-free structured settlement without the negative aspects of the traditional, defendant-directed structured settlement arrangement.

 

            Use of a QSF may be particularly useful in situations where the distribution of settlement proceeds needs to be delayed to allow planning for the plaintiff's SSI or Medicaid eligibility.  The QSF's prohibition on distributions other than to fund a qualified assignment and its restrictions on the plaintiff's authority to compel distributions of principal or income should prevent the assets in the QSF from being treated as available resources or income to the plaintiff for purposes of SSI and Medicaid.  The qualified assignment could then be drafted to name an SSI/Medicaid exempt special needs trust as the payee (so long as all payments are made before the plaintiff reaches age 65).[33]

 


END NOTES


[1] The October 15, 2004 memorandum, as well as the other CMS policy memoranda on WCMSAs, is available online at:  http://www.cms.hhs.gov/WorkersCompAgencyServices/

[2] S. 1932, §6012(b) & (c), amending 42 U.S.C. §1396p(c)(1).

[3] 42 U.S.C. §1396p(d)(4)(A).

[4] 26 U.S.C. §130(c)(1).

[5] Pub. L. 99-514.

[6] 26 U.S.C. §468B.

[7]  DSF's may be used to settle PI claims, but may not be used to settle workers' compensation claims.  26 U.S.C. §468B(e).

[8] 26 U.S.C. §468B(d)(2).

[9] 26 C.F.R. §§1.468B-1 through 1.468B-5.

[10]  A QSF, like a DSF, may be used to settle a PI claim, but not a workers' compensation claim.  26 C.F.R. §1.468B-1(g)(1).   

[11] 26 C.F.R. §1.468B-1(c) (emphasis added).

[12] United States v. Brown, 334 F.3d 1197 (10th Cir. 2003).

[13] 26 U.S.C. §468B(b).

[14] 26 C.F.R. §1.468B-2.

[15] 26 C.F.R. §1.468B-1(c)(2).

[16] Sproull v. Commissioner, 16 T.C. 244 (1950), aff'd, 194 F.2d 541 (6th Cir. 1952). 

[17] Id.

[18] Id.

[19] 26 U.S.C. §130(c)(2)(D).

[20] PLR 0138006.

[21] 26 U.S.C. §130(c)(2)(C) (1982).

[22] S. Rep. No. 97-646; H.R. Rep. No. 97-832, 97th Cong., 2d Sess. 4 (1982) (emphasis added).

[23] H.R. Rep. No. 100-795, at 541 (1988).

            [24] IRC §130(c) (emphasis added).

[25] H.R. Conf. Rep. No. 1104, 100th Cong., 2d Sess. at II-171(1988).

[26] 16 T.C. 244 (1950), aff'd, 194 F.2d 541 (6th Cir. 1952).

[27] To prevent constructive receipt, the settlement terms will not permit the plaintiff the option to receive the settlement in a lump sum; and will provide that the assignment will be made directly by the defendant or the defendant's insurance carrier.

[28] PLR 9703038.

[29] 26 U.S.C. §130(c).

[30] Rev. Proc. 93-34, Section 1.

[31] Rev. Proc. 93-34, Section 4 (emphasis added).

[32] Id.

[33] 42 U.S.C. §1396p(d)(4)(A); 42 U.S.C. §1382b(e)(5).

 

  

 

         John J. Campbell, the founder and principal attorney of the Law Offices of John J. Campbell, P.C., has practiced law for over 20 years and has practiced in the area of Medicare Set-Asides since 1996.  Mr. Campbell is certified as an Elder Law Attorney by the National Elder Law Foundation;* and is a Medicare Set-Aside Consultant Certified (national certification through the Commission on Health Care Certification).*  Mr. Campbell is licensed to practice law in Colorado and is also licensed and on inactive status in Missouri.  He is a member of the Colorado Bar Association (Trust & Estate Section and Elder Law Section), the Arapahoe County Bar Association, the Missouri Bar Association, the National Academy of Elder Law Attorneys and the National Alliance of Medicare Set-Aside Professionals.  His areas of concentration include elder law; estate, disability and long term care planning; probate; guardianship and conservatorship; Medicare, Medicaid, Medicare Set-Aside Arrangements, and the preservation of public benefits in catastrophic third party liability and worker’s compensation settlements.  Mr. Campbell has published numerous articles and has presented numerous seminars on issues relating to Medicare Set-Aside Arrangements across the country.

 

*The State of Colorado does not certify attorneys as experts in any field.

 

 

 


 

 

The Law Offices of John J. Campbell, P.C. is pleased to introduce THE COMPLETE MSA TRAINING COURSE!  This comprehensive study course provides thorough core training on Medicare Set-Asides and related issues.  "The Complete MSA Training Course Book" is also available separately in hard copy or on CD Rom.  For more information, CLICK HERE.

 

 


 

The National Alliance of Medicare Set-Aside Professionals (NAMSAP) is dedicated to ensuring the highest quality of services and standards of practice for the Medicare Set-Aside industry. NAMSAP is the first non-profit organization in the country serving professionals in Medicare Set-Aside practice.  For complete information about NAMSAP, visit their web site:   www.namsap.org

 


 

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Law Offices of John J. Campbell, P.C.

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Denver, CO 80222

(303) 290-7497

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jcampbell@jjcelderlaw.com                                                            www.medicaresetasidejjc.com

 

 

© 2005-2007 The Law Offices of John J. Campbell, P.C.