Structured Settlements: See Also

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Wednesday, August 5, 2009

Life Annuity

A life annuity is a financial contract in the form of an insurance product according to which a seller (issuer)—typically a financial institution such as a life insurance company—makes a series of payments in the future to the buyer (annuitant) in exchange for the immediate payment of a lumpsum (single-payment annuity) or a series of regular payments (regular-payment annuity), prior to the onset of the annuity. The payment stream from the issuer to the annuitant has an unknown duration based principally upon the date of death of the annuitant. At this point the contract will terminate unless there are other annuitants or beneficiaries in the contract, and the remainder of the fund accumulated is forfeited. Thus a life annuity is a form of longevity insurance, where the uncertainty of an individual's lifespan is transferred from the individual to the insurer, which reduces its own uncertainty by pooling many clients. Annuities can be purchased to provide an income during retirement, or originate from a structured settlement of a personal injury lawsuit.

Disability

Disability is defined by the Americans with Disabilities Act of 1990 as "a physical or mental impairment that substantially limits one or more major life activities." An individual may also qualify as disabled if he/she has had an impairment in the past or is seen as disabled based on a personal or group standard or norm. Such impairments may include physical, sensory, and cognitive or intellectual impairments. Mental disorders (also known as psychiatric or psychosocial disability) and various types of chronic disease may also be considered qualifying disabilities.

Internal Revenue Code

The Internal Revenue Code (or IRC; more formally, the Internal Revenue Code of 1986, as amended) is the main body of domestic statutory tax law of the United States organized topically, including laws covering the income tax (see Income tax in the United States), payroll taxes, gift taxes, estate taxes and statutory excise taxes. The Internal Revenue Code is published as Title 26 of the United States Code (USC), and is also known as the internal revenue title. Its governing authority is the Internal Revenue Service.

Medicaid

Medicaid is the United States health program for eligible individuals and families with low incomes and resources. It is a means-tested program that is jointly funded by the states and federal government, and is managed by the states. Among the groups of people served by Medicaid are certain eligible U.S. citizens and resident aliens, including low-income adults and their children, and people with certain disabilities. Poverty alone does not necessarily qualify an individual for Medicaid. It is estimated that approximately 60 percent of poor Americans are not covered by Medicaid. Medicaid is the largest source of funding for medical and health-related services for people with limited income in the United States. Because of the aging population, the fastest growing aspect of Medicaid is nursing home coverage.

Special needs trust

A special needs trust is created to ensure that beneficiaries who are disabled or mentally ill can enjoy the use of property which is intended to be held for their benefit. In addition to personal planning reasons for such a trust (the person may lack the mental capacity to handle their financial affairs) there may be fiscal advantages to the use of a trust. Such trusts may also avoid beneficiaries losing access to essential government benefits.

A trust for a disabled beneficiary may be set up in any of the common law countries or other countries which recognise the concept of the trust. They have particular advantages in legislation in relation to both taxation and state benefits in for example Ireland and the United Kingdom and in relation to the provision of healthcare, long-term care and nursing home benefits under the state-sponsored Medicaid welfare system in the United States of America.

Special needs trusts can provide benefits to, and protect the assets of, the physically disabled or the mentally disabled. Special Needs Trusts are frequently used to receive an inheritance or personal injury settlement proceeds on behalf of a disabled person or are founded from the proceeds of compensation for criminal injuries, litigation or insurance settlements.

A common feature of trusts in all common law jurisdictions is that they may be run either by family members (a private trust) or by trustees appointed by the court. Especially where a trust is to be established for a disabled child or young person, great care is generally taken in the choice of appropriate trustees to manage the trust assets and to deal with future replacement appointments. The use of a private discretionary trust can not only be more efficient in terms of taxation and access to government benefits but can also allow for more efficient investment of funds held than where funds are held by a court official (such as the Official Receiver in England and Wales). However where no appropriate trustees can be found, e.g. on the death of existing trustees, the court will intervene.

Special Needs Trusts are often set up under the guidance of a Structured settlement planner in cooperation with a qualified legal and financial team to ensure the trust is set up correctly.

Special Needs Trusts are also known as Supplemental Needs Trusts in the USA and a more detailed article on the US specific characteristics of such trusts, including their interaction with the Medicaid system, is found at that page.

Structured sale

A structured sale is a special type of installment sale pursuant to the Internal Revenue Code. Installment sales permit sellers to defer recognition of gains on the sale of a business or real estate to the tax year in which the related sale proceeds are received. Structured sales allow the seller of an asset to pay taxes over time while having the payments guaranteed by a high credit quality alternate obligor, who accepts assignment of the buyers periodic payment obligation. Transactions can currently be done as small as $100,000.

In a structured sale, rather than the buyer paying the installments, the buyer pays cash, some of which is used as consideration for a third party assignment company to accept the payment obligation. The assignment company then purchases an annuity from a life insurance company with high financial ratings from A. M. Best. Case law and administrative precedents support recognition of the original contract terms after a substitution of obligors. In addition, a properly handled transaction will avoid issues with constructive receipt and economic benefit.

While negotiating the installment payments, the seller is free to design payment streams with a great deal of flexibility. Each installment payment to the seller has three components: deferred return of basis, deferred capital gain, and ordinary income earned on the money in the annuity. Under the doctrine of constructive receipt, with a properly documented structured sale, no taxable event is recognized unless a payment is actually received. Taxation is the same as if the buyer were making installment payments directly.

Structured sales are an alternative to a section 1031 exchange, which defers recognition of capital gain, but forces the seller to continue holding some form of property. Structured sales work well for sellers who want to create a continuing stream of income without management worries. Retiring business owners and downsizing homeowners are examples of sellers who can benefit.

The structured sale must be documented, and money must be handled in such a way that the ultimate recipient is not treated as having constructive received the payment prior to the time it is actually paid. For the buyer, there is no difference from a traditional cash-and-title-now deal, except for additional paperwork. Because of tax advantages to the seller, structuring the sale might, however, make the buyer's offer more attractive. Because the buyer has paid in full, the buyer gets full title at time of closing.

There are no direct fees to the buyer or seller to employ the structured sale strategy. The structured settlement specialist who implements the transaction is paid directly by the life insurance company that writes the annuity.

The internal rate of return is comparable to long term high quality debt instruments.

Allstate Life was the originator of the structured sale concept and is the only structured settlement annuity company whose product was available for the structured sale transaction.

Internal Revenue Service Private Letter Ruling 150850-07 dated June 2, 2008 confirmed that the taxpayer does not constructively receive payment for tax purposes until the actual cash payment is made pursuant to a properly drafted non-qualified assignment.

Structured settlement factoring transaction

A structured settlement factoring transaction describes the selling of future structured settlement payments (or, more accurately, rights to receive the future structured settlement payments). People who receive structured settlement payments (for example, the payment of personal injury damages over time instead of in a lump sum at settlement) may decide at some point that they need more money in the short term than the periodic payment provides over time. People's reasons are varied but can include unforeseen medical expenses for oneself or a dependent, the need for improved housing or transportation, education expenses and the like. To meet this need, the structured settlement recipient can sell (or, less commonly, encumber) all or part of their future periodic payments for a present lump sum.

Tort

Tort law is a body of law that addresses, and provides remedies for, civil wrongs not arising out of contractual obligations.A person who suffers legal damages may be able to use tort law to receive compensation from someone who is legally responsible, or liable, for those injuries. Generally speaking, tort law defines what constitutes a legal injury and establishes the circumstances under which one person may be held liable for another's injury. Torts cover intentional acts and accidents. In contrast to criminal law (in which the offense is against the State and the State is the plaintiff), in tort law, the offense is against a person and that person is the plaintiff.

For instance, Alice throws a ball and accidentally hits Brenda in the eye. Brenda may sue Alice for losses occasioned by the accident (e.g., costs of medical treatment, lost income during time off work, and pain and suffering). Whether or not Brenda wins her suit depends on if she can prove Alice engaged in tortious conduct. Here, Brenda would attempt to prove Alice had a duty and failed to exercise the standard of care which a reasonable person would render in throwing the ball.

One of the main topics of the substance of tort law is determining the standard of care—a legal phrase that means distinguishing between when conduct is or is not tortious. Put another way, the big issue is whether a person suffers the loss from his own injury, or whether it gets transferred to someone else.

Returning to the example above, if Alice threw the ball at Brenda purposely, Brenda could sue for the intentional tort of battery (and the action might also, separately, be a crime against the State). If it was an accident, Brenda must prove negligence. To do this, Brenda must show that her injury was reasonably foreseeable, that Alice owed Brenda a duty of care not to hit her with the ball, and that Alice failed to meet the standard of care required.

In much of the western world, the touchstone of tort liability is negligence. If the injured party cannot prove that the person believed to have caused the injury acted with negligence, at the very least, tort law will not compensate them. Tort law also recognizes intentional torts and strict liability, which apply to defendants who engage in certain actions.

In tort law, injury is defined broadly. Injury does not just mean a physical injury, such as where Brenda was struck by a ball. Injuries in tort law reflect any invasion of any number of individual interests. This includes interests recognized in other areas of law, such as property rights. Actions for nuisance and trespass to land can arise from interfering with rights in real property. Conversion and trespass to chattels can protect interference with movable property. Interests in prospective economic advantages from contracts can also be injured and become the subject of tort actions. A number of situations caused by parties in a contractual relationship may nevertheless be tort rather than contract claims, such as breach of fiduciary duty.

Tort law may also be used to compensate for injuries to a number of other individual interests that are not recognized in property or contract law, and are intangible. This includes an interest in freedom from emotional distress, privacy interests, and reputation. These are protected by a number of torts such as infliction, privacy torts, and defamation. Defamation and privacy torts may, for example, allow a celebrity to sue a newspaper for publishing an untrue and harmful statement about him. Other protected interests include freedom of movement, protected by the intentional tort of false imprisonment.

The equivalent of tort in civil law jurisdictions is delict. The law of torts can be categorised as part of the law of obligations, but unlike voluntarily assumed obligations (such as those of contract, or trust), the duties imposed by the law of torts apply to all those subject to the relevant jurisdiction. To behave in 'tortious' manner is to harm another's body, property, or legal rights, or possibly, to breach a duty owed under statute. One who commits a tortious act is called a tortfeasor. Torts is one of the American Bar Association mandatory first year law school courses.