Opportunities in Structured Settlements. Presented by: Michael Goodman, Esq., CSSC

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1 Opportunities in Structured Settlements Presented by: Michael Goodman, Esq., CSSC

2 What is a Structured Settlement? Settlement requiring payment of benefits over a period of time, rather than a single lump sum Underwritten and guaranteed* by a large insurance company The underlying investment is a fixed-interest annuity The tax code provides that these periodic payments are tax-free No local, state or federal taxes per I.R.C. section 104(a)(2) *Guarantees are subject to the claims paying ability of the issuing insurance company.

3 When is a structured settlement used? Personal or physical injury cases involving: Wrongful death Temporary or permanent disability Minor or mentally incompetent person Elderly claimants Cases with long-term financial needs including: Medical expenses required for a life care plan Tax-free, secure income Mortgage Other cases where long-term payments exempt from federal income taxes are desired

4 Substandard Annuities Injured party often has a reduced life expectancy Substandard annuities created for these cases Significantly increased benefits

5 Who are the Interested Parties? Plaintiff attorneys The conventional way to settle large cases Attorney fees structured on a tax-deferred basis Defense attorneys and insurance companies Referrals based on established relationships Hospitals and self-insured companies

6 Benefits for Injured Party (Plaintiff) Tax-free Guaranteed payments Vital due to ongoing future costs of medical care and lost income Prevents dissipation 30% of settlement recipients spend the settlement money within 2 months 60% within 2 years 90% within 5 years Protects asset-sensitive government benefits ensuring no offset of Medicaid and/or Welfare Tax-free rate of return is approximately 4% annually Taxable equivalent between 5.5-6%

7 Benefits for Insurance Company (Defendant) Helps to settle claims cost effectively Timely settlements Allows for a creative solution matching the true needs of the plaintiff In our experience we feel that courts look favorably upon the structured approach

8 Key Points to Consider Tax-free status only applies for physical injury settlements Terms and structure must be established beforehand Must be funded directly from defendant to the company issuing the annuity to ensure tax-free status Structured settlement industry is similar to real estate industry with brokers representing both plaintiff and defendant Property and casualty companies try to feed business to their own related life company

9 Structured Settlement Attorney Fees Benefits of structuring attorney fees An attorney can enjoy some of the same benefits as their clients by electing to receive their contingent fees in future periodic payments. This treatment allows for the recognition of taxable income as payments are received, as opposed to immediate taxation of the entire fee. The periodic payments are funded through the purchase of an annuity and can be customized to fit the attorney s unique financial needs. Most carriers allow structured attorney fees on a stand-alone basis providing the attorney s with the opportunity to take advantage of the valuable deferral tool, even if the client does not. Tax Advantages Receive income in a more tax-efficient manner Structuring fees may reduce an attorney s taxable income today By deferring income until later in life, the attorney may be able to take advantage of a potentially lower tax rate

10 Structured Settlement Attorney Fees (Cont.) The hypothetical example at right illustrates after-tax income from a structured attorney fee compared to income from a taxable investment account. Assumptions Attorney fee of $250k to be paid out in level annual payments starting in five years for a twenty year period certain Assumed to be in top tax bracket using 39.6% Structured fees earning 4% Internal Rate of Return (IRR) yielding $12,998 of after-tax annual income Taxable investments earning a 3%, 5% or a 6.62% Rate of Return (ROR) yielding $9,743, $11,453, and $12,998 of after-tax annual income, respectively Taxable investment earning 6.62% ROR required to achieve the same Total After-Tax Payments of a structured settlement $300, $250, $200, $150, $100, $50, $- Total After-Tax Income Comparison $194, $229, $259, $259, Taxable Investment (3% ROR) Taxable Investment (5% ROR) Taxable Investment (6.62% ROR) Structured Fees (4% IRR)

11 Why Partner with NFP Structured Settlements? One of the largest individual brokers in the industry Closed industry only available through licensed brokers Litigation experience Legal and financial expertise unique to the physical injury arena

12 Responses to Common Objections from Plaintiff Attorneys Interest rates My client is sophisticated and will be able to get a better return My client has a relative in the investment business Insurance company may go bankrupt Lack of liquidity

13 Use Beyond Personal Injury Cases Installment sales Buy-sell agreements Divorce Environmental/mass tort cases Stock broker malpractice

14 Trust Services Available in all 50 states Current services Special Needs planning Expertise in Special Needs planning and administration of Special Needs Trusts nationwide. Administration of Testamentary Trusts Nationwide network of estate planning attorneys to provide assistance in planning and document preparation. Future Products Irrevocable Life Insurance Trusts

15 Our Expertise 9/11 cases Coal mine explosion cases Airplane litigation Ortho evra litigation Paxil litigation Famous divorces.. NFL Concussion cases

16 Case Example 24 year-old female was burned over 90% of her body due to car defect resulting in an explosion $4.3 million settlement $2 million net settlement after fees and expense Structured settlement resulted in $100,000 annually Plaintiff had no insurance and no job NFP contact received $30,000 for making initial call Plaintiff attorney was a personal friend For illustrative purposes only. Individual results may vary

17 Q & A Michael Goodman NFP Structured Settlements mgoodman@nfp.com