Structured Settlements Settlement Planning and Needs Analysis 2 — Questions and Answers
Question 1: What is a 'special needs trust' (SNT) and how does it interact with a structured settlement?
- A trust that holds the annuity contract on behalf of the claimant
- A trust that holds settlement funds for a disabled claimant without disqualifying them from needs-based government benefits like Medicaid or SSI (Correct answer)
- An IRS-approved vehicle for deferring taxes on structured settlement payments
- A trust required by law for all minor claimants
Correct answer: A trust that holds settlement funds for a disabled claimant without disqualifying them from needs-based government benefits like Medicaid or SSI
An SNT (also called a supplemental needs trust) allows a disabled claimant to receive settlement funds without losing eligibility for Medicaid, SSI, or other needs-based programs that have asset limits.
Question 2: What is a 'structured attorney fee'?
- A fee paid by the claimant to the structured settlement consultant
- An arrangement in which a plaintiff's attorney defers receipt of their contingency fee by having it paid as periodic structured payments, which may allow tax deferral (Correct answer)
- A flat fee charged by the court for approving a structured settlement
- An IRS-mandated fee schedule for structured settlement brokers
Correct answer: An arrangement in which a plaintiff's attorney defers receipt of their contingency fee by having it paid as periodic structured payments, which may allow tax deferral
A structured attorney fee allows a plaintiff's attorney to receive their contingency fee as periodic future payments rather than a lump sum, potentially deferring income tax on those amounts.
Question 3: What is a 'reversionary interest' from the defendant's perspective?
- The defendant's right to recover payments if the claimant commits fraud
- The defendant's right to receive back annuity funds not paid out because the claimant died before the end of a guaranteed period — if the settlement is structured that way (Correct answer)
- The defendant's ability to modify payment amounts after settlement
- The right to revert to a lump-sum settlement if the annuity insurer fails
Correct answer: The defendant's right to receive back annuity funds not paid out because the claimant died before the end of a guaranteed period — if the settlement is structured that way
In a reversionary structure, if the claimant dies before all guaranteed payments are made, the remaining annuity value reverts to the defendant or its insurer rather than going to the claimant's estate.
Question 4: When is a 'lump-sum advance' or 'cash-now' component appropriate in a structured settlement design?
- Never — all settlements should be fully structured
- When the claimant has immediate financial needs such as medical bills, legal fees, or debt repayment that cannot wait for periodic payments (Correct answer)
- Only when the total settlement exceeds $1 million
- Only in workers' compensation cases
Correct answer: When the claimant has immediate financial needs such as medical bills, legal fees, or debt repayment that cannot wait for periodic payments
An upfront cash payment addresses immediate financial obligations, while the structured annuity provides long-term income security, making a combination approach often optimal.
Question 5: What is 'commutation' in the context of structured settlements?
- The conversion of a taxable award into a tax-free structured payment
- The conversion of future periodic payment rights into an accelerated lump-sum payment, typically through a factoring transaction (Correct answer)
- The annual adjustment of payments for cost of living
- The transfer of annuity ownership to the claimant
Correct answer: The conversion of future periodic payment rights into an accelerated lump-sum payment, typically through a factoring transaction
Commutation refers to the process of converting (or buying out) the right to future periodic payments for an immediate lump sum, most commonly done through factoring companies with court approval.
Question 6: What is the primary risk to a claimant who sells all future structured settlement payments in a factoring transaction?
- The annuity insurer may become insolvent
- The claimant loses a guaranteed, tax-free income stream and may face financial hardship if the lump sum is spent quickly (Correct answer)
- The IRS will retroactively tax all prior payments received
- The defendant may reclaim the original settlement amount
Correct answer: The claimant loses a guaranteed, tax-free income stream and may face financial hardship if the lump sum is spent quickly
Once all future payments are sold, the claimant has no guaranteed long-term income, and if the lump sum is exhausted, the claimant loses financial security that was the settlement's primary purpose.
Structured Settlements Settlement Planning and Needs Analysis 2
What is a 'special needs trust' (SNT) and how does it interact with a structured settlement?