Guardianship Techniques

Don McNay CLU, ChFC, MSFS and Judge Stanley Billingsley

The goal of a guardianship account is to securely preserve a settlement until the ward is able to handle money themselves. It must meet current and long term needs, provide a safe after-tax return and maintain an income stream that is favorable to the ward.

Two vehicles, the Court Ordered Structured Settlement and the Court Directed Settlement are being used to achieve those goals.

Court Ordered Structured Settlement

Court Ordered Structured Settlements are used in personal injury lawsuit settlements. They can only be used in cases involving physical injuries. It is common for a structured settlement annuity to be offered to a plaintiff. However, there are circumstances where traditional structured settlement isn’t possible or the terms of a proposed structured settlement are unfavorable to the plaintiff.

There are many cases where casualty insurance companies will only place a settlement annuity with a subsidiary life insurance company, whose financial rating and pricing schedule is not competitive or acceptable to the plaintiff.

With a Court Ordered Structured Settlement the full value of a settlement is paid into the Clerk of the Courts in exchange for a full release. The Court then has the discretion to set up a payment schedule best suited to the ward's needs and enters into a structured settlement funded with annuities or treasury bonds. The plaintiff and representatives can have input into the payment schedule and the selection of a secure life insurer.

Advantages of the concept are full disclosure of cost, effective utilization of the settlement dollars and safety.

Disclosure of Cost

In the 1980’s, many structured settlement brokers hid behind the premise that disclosure could cause a constructive receipt problem for the plaintiff. This gave a tremendous negotiating advantage to the insurer when a plaintiff’s attorney did not get an outside evaluation of the offer. This was particularly true in cases where a plaintiff had a reduced life expectancy and the insurance carrier offered a "rated" annuity.

Although it is more common for the defense to disclose what they are paying for an annuity, there are still cases where the cost is not disclosed or misrepresented. Rated annuities can be particularly tricky as every life insurance carrier has their own standards for discounting an annuity and it is easy for a plaintiff to think they are receiving a larger present cost than actually paid.

Non disclosure can also have malpractice consequences when a plaintiff’s attorney has a fee challenged due to an improper calculation of what a structured settlement was worth.

In the case of a Court Ordered Structured Settlement, the exact amount of premium is fully disclosed so these problems are alleviated.

Utilization of Settlement Dollars

Many property and casualty insurance companies use in-house annuities to structure their settlements. Since the annuities are not shopped on the marketplace, it is rare that a competitive annuity is purchased. Some of the in-house life carriers have lower A.M. Best ratings than the carriers that actively compete in the structured settlement market.

Split funding cases above $100,000 in premium is now commonplace. This allows for a large case to be split amongst two or more companies to offer protection in case of one company’s insolvency. However, this is not possible with in-house settlements.

Even when in-house annuities are not used, there are occasions where insurance companies try to take advantage of a plaintiff’s desire for a structured settlement. Known examples are a situation where a structure broker wanted to charge a $15,000 fee on a $300,000 annuity to implement a structured settlement. Another example is one where an insurance carrier offered an alternative of $300,000 in cash or a $250,000 structured settlement.

With a Court Ordered Structured Settlement, the exact amount of premium is known and all moneys used to benefit the plaintiff.

Safety

Like most of the insurance industry, the structured settlement business felt the shock waves of the Executive Life of California insolvency. In fact, the structured settlement industry might have felt a disproportionate impact as Executive Life was a large issuer of structured settlement annuities.

The rise of structured settlements funded by treasury bonds is a direct result of safety concerns. The use of Treasury bonds for structured settlements has had explosive growth in the past few years. Many large life insurance carriers are promoting bond settlements such as New York Life, Allstate and G.E. Capital.

Other trustees are entering the structured settlement arena and First Capital has a Treasury Bond program specifically designed for Court Ordered Structured Settlements.

Most of the bond trusts have a great emphasis on safety oriented features. Many trusts allow for the plaintiff to have a security interest in the bonds in the case of default by the trustee.

With a plethora of companies offering treasury bond structures, the competition should allow for competitive rates and features favorable to the plaintiff.

Most of the treasury bond trusts also allow for plaintiff attorneys to structure their attorney’s fees offering a way for attorney to utilize a structured settlement for their own financial planning goals.

Flexibility

The primary motivation for a structured settlement is asset protection. The reason that structured settlements have maintained their exalted tax status is that they perform a societal benefit by providing a valuable money management tool. Rate of return is a secondary, yet important, concern as to whether or not to enter into a structured settlement.

The inflexibility of a structured settlement is its biggest advantage and disadvantage as it keeps a victim from dissipating their settlement yet cannot be changed in cases of health changes or economic peril.

Having the money directed into a structured settlement minimizes the possibility of guardianship theft and the need for outside surety. A structured settlement is usually set up so that the plaintiff does not receive a large lump sum, which they can easily dissipate at the age of majority.

Procedure

A Court Ordered Structured Settlement requires precise wording in the settlement agreement and other documentation. The money must be paid directly to Clerk of the Courts. Then there must be an order by a judge directing the money into a structured settlement on a payment program developed by the court. The judge then signs the qualified assignment and the money is used to fund the structured settlement.

This procedure is primarily designed for larger dollar cases of $75,000 or more while the Court Directed Settlement concept is better suited for cases below $75,000.

Court Directed Settlements

In a number of states, statues give a Judge the right to direct a ward's money into an annuity or blocked bank account.

Directing the money into a Single Premium Deferred Annuity (SPDA) is a concept that is becoming widely used. The judge directs the money into the annuity and signs the court order and annuity application. The money can then only be accessed by court order.

This concept can be used in all guardianship situations, not just personal injury or sickness cases.

The concept provides a number of conveniences and advantages over a traditional custodial guardianship account . A well designed SPDA usually keeps pace with interest rates and provides a stable rate of return. There is not a need to set up a conservatorship, file annual reports or set a surety bond. Unlike a blocked bank account, there is usually not a reason to file and pay income taxes as the money will grow tax deferred until the annuity is accessed.

When withdraws are taken from the annuity, the ward may have to pay regular income taxes and additional assessments. However, most wards are in a low income tax bracket and can also take a deduction for medical expenses. The advantages of the SPDA more than offset the potential tax liability.

The Court Directed Settlement can be used in conjunction with the Court Ordered Structured Settlement to provide funds that can be accessed in case of emergency.

Conclusion

Both the Court Ordered Structured Settlement and Court Directed Settlement are important tools to be utilized in guardianship situations.

Don McNay, CLU, ChFC, MSFS is the owner of McNay Financial Services in Lexington, Ky. He is a nationally recognized expert in structured settlements and financial planning for injury victims.

District Judge Stanley Billingsley of Carrollton Ky. served as Chairperson of the District Judge’s Association Committee on Guardianship Theft. He is a noted author and lecturer.

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