Disability Law

IRC 468B Funds Revisited - 2

By Patrick Hindert

S2KM's earlier blog post (IRC 468B Funds Revisited) refocuses S2KM and S2KM's readership on 468B Funds as the single most important strategic issue for the settlement planning and structured settlement industries. S2KM's earlier blog post also recommends educational resources and provides online learning resource links for 468B Funds.

This S2KM blog post summarizes a new article by John J. Campbell titled "The Use of Qualified Settlement Funds, Qualified Assignments and Special Needs Trusts in Physical Injury Settlements" which appears in the most recent issue of the NAELA Journal . A subsequent S2KM blog post (IRC 468B Funds Revisited-3) will provide S2KM's analysis of Campbell's article.

Campbell's article is especially valuable for these reasons:

• Campbell supports Richard B. Risk Jr.'s 2004 468B analysis which
  • Appears in Risk's article titled "A Case for the Urgent Need to Clarify Tax Treatment for a Qualified Settlement Fund Created for a Single Claimant"; and
  • Is accessable on Risk's website. 
• Risk's thesis: Congress does not intend for the traditional judicial doctrine of economic benefit to apply to a Designated Settlement Fund (DSF) or a Qualified Settlement Fund (QSF) created for the benefit of a single claimant.
• Campbell's article will help educate elder law and special needs attorneys about the:
  • Strategic importance of IRC Section 468B Funds;
  • Legal controversy and business significance of single claimant 468B Funds;
  • Settlement planning business opportunities for elder law and special needs attorneys;
  • Need for Treasury and/or the IRS to issue positive legal confirmation and clarification for single claimant 468B Funds.
• Campbell's article expands traditional 468B fund analysis beyond structured settlements to include government benefits - specifically SSI, Medicaid, special needs trusts and the Deficit Reduction Act of 2005.

Campbell's Conclusions:

• Richard B. Risk, Jr. is correct. Congress, the United States Department of Treasury and the IRS have already endorsed single claimant 468B funds.
• Defendant structured settlement participants have argued for years that Qualified Settlement Funds (QSF) cannot be used in single claimant cases because of the economic benefit doctrine.
• Defendant arguments are:
  • Based upon self-interest - as opposed to the claimant's and society's best interest.; as well as
  • Technically incorrect based upon existing law.
• According to Campbell and Risk, legal analysis of IRC section 130, IRC section 468B and Revenue Procedure 93-34 supports the opposite conclusion: the traditional economic benefit doctrine is not applicable to qualified assignments in personal injury settlements.
• Also agreeing with Risk: Campbell asserts no legal basis exists to support any distinction by Treasury or the IRS between single claimant and multi-claimant 468B Funds.
• According to Campbell, 468B QSFs and 130 Qualified Assignments represent strategic and potentially cost-efficient settlement planning tools for all parties and stakeholders - including the U.S. government, state governments and taxpayers.
• With 468B, personal injury victims can and should be able to:
  • Achieve advantageous tax treatment;
  • Preserve SSI and Medicaid; and
  • Organize a special needs trust; without
  • Needlessly delaying the settlement.
• The rules defining the interplay of various 468B-related statutes and regulations (tax and government benefits), however, remain complex and require special legal knowledge.

Summary of Campbell's Analysis

• Periodic Payment Act of 1982
  • Campbell begins his analysis by summarizing the Periodic Payment Act of 1982 which created IRC section 130 and added "periodic payments" to IRC section 104(a)(2).
  • IRC section 130 allows a qualified assignment to be made by a "party to the suit or agreement" having liability to the plaintiff;
  • According to Campbell, plaintiffs and their advisors are increasingly upset with traditional defense-controlled structured settlements;
• Campbell confirms SSI and Medicaid as injury victim settlement planning priorities (as earlier espoused and explained by David Lillesand), the need to link structured settlements to SSI and Medicaid and the importance of special needs trusts for accomplishing that link.
• Campbell's article analyzes the role of 468B QSFs as an alternative to traditional defense-controlled structured settlements.
  • Qualified Settlement Funds under IRC 468B
    • Campbell summarizes the requirements for:
      • A "designated settlement fund" (DSF) as defined in IRC 468B which was enacted in 1986;
      • A "qualified settlement fund" (QSF) as defined in regulations issued by the Treasury in 1992;
      • Federal income taxation of 468B Funds.
    • Campbell notes:
      • IRC section 468B "contains no language that restricts the use of DSFs to the settlement of suits or claims involving multiple plaintiffs"; and
      • "The [468B] regulations state specifically that a QSF can be used to settle 'one or more' claims".
    • Qualified Assignments and Qualified Funding Assets under IRC 130
      • Campbell lists the requirements for a "qualified assignment" in IRC 130(a);
      • Summarizes the requirements for annuities as "qualified funding assets" in IRC 130(d);
      • Introduces and summarizes the concept of constructive receipt.
    • QSFs and Qualified Assignments in Single-Plaintiff PI Settlements
      • Campbell restates his primary issue: "whether a QSF holding funds from a PI settlement involving a single plaintiff can accomplish a qualified assignment under IRC 130"?
      • Introduces the concept of "economic benefit" citing and summarizing Sproull v. Commissioner.
      • Summarizes the economic benefit argument against allowing single claimant 468B funds
      • Argues that by amending IRC (c)(2)(C) in 1988 and dropping the "greater than a general creditor" language, Congress made the economic benefit doctrine inapplicable to qualified assignments in PI settlements.
      • Further argues that, so long as a plaintiff is not in constructive receipt of settlement proceeds, any party to a 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; or
        • The plaintiff has an unconditional vested right in the fund.
      • Lists the requirements under Revenue Procedure 93-34, issued by the IRS in 1993, for a qualified settlement fund to be treated as "a party to the suit or agreement" within the meaning of IRC 130(c)(1);
      • Concludes that IRC 130 and 468B and related regulations, as interpreted by the IRS, permit QSFs 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 Revenue Procedure 93-34.
  • Strategies for Using Qualified Settlement Funds
    • How does a QSF make a valid Qualified Assignment?
      • Campbell recommends a "novation" in which the plaintiff, defendant, insurance carriers and the QSF trustee agree to assign defendant's liabilities to the plaintiff to the QSF.
      • As consideration, the defendant or its insurance carrier would pay the QSF an agreed upon lump sum to be used only to fund a qualified assignment.
      • Prior to the novation, the parties could petition the court to create the QSF, appoint an independent trustee and maintain jurisdiction until the QSF terminates.
      • The plaintiff would not have any rights to revoke, modify or compel distributions except to fund the qualified assignment.
      • The QSF could be substituted for the original defendant as a party to the case and ultimately enter into a final, court approved settlement with the plaintiff
      • The settlement would extinguish all liabilities assumed from the original defendant and require payment of all QSF proceeds into the QSF.
    • QFSs and Special Needs Trusts
      • Campbell recommends QSFs as "particularly useful" to allow planning for plaintiff's SSI or Medicaid eligibility.
      • Campbell reviews the requirements for self-settled special needs trusts provided in OBRA 93, FCIA, and the SSA POMS.
      • Campbell cites Ramey v. Rizzuto, a 1999 US District Court case in Colorado, as holding that, in SSI states, Medicaid agencies cannot employ methodologies or criteria more restrictive than SSI when evaluating trusts because an SSI recipient automatically qualifies for Medicaid.
  • Special Funding Issues
    • Medicaid Annuities under the Deficit Reduction Act of 2005
      • Campbell summarizes the DRA transfer requirements for annuities as an "either/or" proposition. According to Campbell, the annuity must be either:
        • "Irrevocable, non-assignable, actuarially sound and provides for substantially equal payments over the life of the annuity with no deferral or balloon payments; or
        • Name the state as death beneficiary up to the amount of Medicaid payments paid on behalf of the annuitant;
      • Campbell argues that the DRA should not apply for an IRC section 130 annuity funding a special needs trust because a PI settlement is purchased with assets of the party with liability to the plaintiff and not with assets that could be considered "available" to the plaintiff/Medicaid recipient.
    • Use of Annuities to Fund SSI and Medicaid Special Needs Trusts
      • Campbell states that "SSI and Medicaid do not prohibit the use of either deferred or balloon payments to fund exempt Special Needs Trusts if the annuities comply with IRC 130".
      • He further states "the Special Needs Trust should also be funded initially with a lump sum sufficient to provide immediate liquid funds for unexpected costs".
    • Naming the Trust as the Annuitant
      • Campbell recommends, for purposes of special needs trusts, that the annuity payee should be the trust and not the plaintiff/beneficiary.
      • According to Campbell, if the annuity is funded using a qualified assignment, the annuitant will not be able to amend the annuity at a later time to redirect payments into a Medicaid or SSI exempt trust.

Full post as published by Beyond Structured Settlements on June 09, 2008 (boomark / email).