Treasury Bond Structured Settlements Overview NSSTA 2012 Annual Meeting Structured Settlement Overview Creative Capital Inc. Chris Shumate, EPS Settlements John McCulloch, IFS Marty Jacobson, Esq., Creative Capital, Inc. Mike Miller., Esq. Drinker, Biddle & Reath
Cash Settlement Plaintiff Cash Release Defendant Structured Settlement Overview Creative Capital Inc.
Structured Settlement Plaintiff Cash + Promise of Future Periodic Payments Settlement Agreement and Release Defendant Structured Settlement Overview Creative Capital Inc.
Structured Settlement Using Annuity Plaintiff Future Periodic Payments Cash + Promise of Future Periodic Payments Settlement Agreement and Release Life Insurance Company Annuity Contract Defendant Cash Structured Settlement Overview Creative Capital Inc.
Structured Settlement with a Section 130 Qualified Assignment Plaintiff Future Periodic Payments Life Insurance Company Cash + Promise of Future Periodic Payments Settlement Agreement and Release Annuity Contract Cash Cash Defendant (Assignor) Liability to Make Future Periodic Payments Qualified Assignee IRC Sect. 130 Structured Settlement Overview Creative Capital Inc. Financial Security for Plain1ffs Irrevocable guarantee of assignee s obligation to plaintiff Secured creditor status
U.S. Treasury Bond Structured Settlement Trust as Assignee Bank as Trustee Plaintiff Future Periodic Payments U.S. Treasury Cash + Promise of Future Periodic Payments Settlement Agreement and Release Cash U.S Treasury Obligations (T-Bonds) Cash Defendant Future Periodic Payment Obligation Trust (Assignee) Bank is Trustee Structured Settlement Overview Creative Capital Inc. Security: Full faith and credit of the U.S.A stands behind 100% of Future Periodic Payment Obligation Security interest in U.S T-Bonds Key Features: Trust itself is the Assignee of Defendant s Future Periodic Payment Obligation. Nationally chartered bank is trustee. Trust Assets (Treasury Obligations) are not assets of bank & not available to bank s creditors. In event of bank failure, FDIC appoints another bank as successor trustee. Approved by IRS via PLR. Approved by SEC via No Action Letter.
Treasury Funded Structured Settlements NSSTA ANNUAL MEETING Washington DC April 26, 2012
U.S. Treasury Securities U.S. Treasury Securities are direct debt obligations issued by the U.S. Government. Since Treasury securities are backed by the full faith and credit of the U.S. Government, they are generally considered to be free of credit risk. The rates on Treasury securities have traditionally been used as the benchmark for interest rates throughout the U.S. economy and international capital markets. 2
Treasury Terms and Definitions Types of U.S. Government Obligations/ Securities U.S. Treasury Bills U.S. Treasury Notes U.S. Treasury Bonds Treasury Inflation Protected Securities (TIPS) U.S. Treasury Zero-Coupon Bonds U.S. Treasury STRIPS 3
Average Daily Trading Volume in US Bond Markets 4
Average Daily Trading Volume in U.S. Bond Markets 5
Section 130 Qualified Funding Asset Section 130(d) defines the term "qualified funding asset" as any annuity contract or any obligation of the United States. U.S. Treasury Securities are direct debt obligations issued by the U.S. government. The government uses the revenue from the bonds to raise capital and/or make payments on outstanding debt. Treasury securities are backed by the full faith and credit of the U.S. government and are generally classified by rating agencies as free of credit risk. 6
Trust as Qualified Assignee PLR 9703038 held that an assignment to a master trust could be a qualified assignment under Section 130(c), and amounts received by the trust would not be includible in income by the trust. Periodic payments are fixed and determinable as to amount and time of payment; periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments; assignee s obligation on account of the personal injuries or sickness is no greater than the obligation of the person who assigned the liability; periodic payments are excludable from the gross income of the recipient under Section 104(a)(2) or Section 104(a)(1) for workers' compensation claims filed on or after August 5, 1997. 7
Regulation & Insurance Trust companies are highly regulated entities, with oversight and audits by the OTS, FDIC and applicable state banking commissions. Institutional trustees typically carry E&O and Fidelity coverage. Trustee banks are required by law to segregate trust assets. Generally accepted common law principal that trust assets which are identifiable as trust assets retain their fiduciary status in the case of bank insolvency. 8
Secured Creditor TAMRA of 1988 provided for greater than general creditor status under Section 130. Every payee within a Treasury funded structured settlement would be eligible for secured creditor status if they elected it prior to settlement. With secured creditor, should anything ever happen to the trust company, the payee would get possession of the Treasuries funding their structured settlement. 9
Timing of Income Doctrines A taxpayer is in constructive receipt of income if it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it if notice of intention to withdrawal had been given. The economic benefit doctrine applies where a taxpayer receives a nonforfeitable right to receive income in the future and funds are currently set aside to pay that future amount. The doctrine of cash equivalence applies when a taxpayer receives a right to income in the future that is readily convertible into cash. 10
Do Treasury Funded Structured Settlements Constitute Securities? Howey Test : Securities & Exch. Commn. v. W.J. Howey Co., 328 U.S. 293 (1946) An investment contract is "a contract, transaction or scheme whereby a person (1) invests his money (2) in a common enterprise and (3) is led to expect profits solely from the efforts of the promoter or third party. SEC No Action Letters have found that similar transactions do not require registration under the Securities Act of 1933: Allstate Life Ins. Co. (Jan. 4, 1993) GE Capital Corp. (July 1, 1993) New York Life Settlement Corp. (Dec. 22, 1995) First Capital Surety Corp. (Sept. 5, 1996) 1
Can Treasury Funded Structured Settlements Be Factored? Structured settlement payment rights under 5891 and the SSPAs: 5891 defines as right to receive payments under a structured settlement (not expressly limited to a structured settlement funded by an annuity). NSSTA Model SSPA and most State SSPAs define as right to receive payments under a structured settlement, whether from the structured settlement obligor or the annuity issuer. Any transfer requires court approval under 5891 and the SSPAs: Defined to include any sale, assignment, pledge, hypothecation, or other alienation or encumbrance made by a payee for consideration. Common law prohibitions on assignment still apply. Additional protections against assignment include restrictions on transfer contained in the Trust Agreement. 2