Structured payments can help protect clients from themselves

Michelle Lore

This article originally appeared in Minnesota Lawyer, another Dolan Media publication.

MINNEAPOLIS - A minor settles a personal injury action for a lump- sum payment that is placed in a special account until he turns 18. Upon reaching the age of majority, he moves in with friends and uses the funds to buy a car and party down, burning through $90,000 in a year.

It sounds like a parent's worst nightmare - and it's exactly what happened in a personal injury case handled by Duluth, Minn., personal injury attorney Robert C. Falsani several years ago. That's one I wish had back, he recently told Minnesota Lawyer.

How can such a situation be avoided?

According to personal injury attorneys, use of structured settlement payments is the best way to prevent such a scenario. Under a structured settlement, parties don't receive lump-sum payments for their injuries but instead receive a stream of tax- free payments over their lifetimes that are tailored to meet future needs.

While structured payments may deny an injured party access to settlement funds in the short run, practitioners say that long- term, they are often the best way to go.

Minneapolis personal injury attorney Edward W. Gale said that particularly with larger settlements, setting up a structured payment schedule is a much better idea than letting people invest the money on their own. Most people don't have the financial sophistication to manage their own portfolio, he said.

Falsani agreed. I love structures, and the reason is that statistically, within three years, a lump sum vanishes, he said. Most Americans are horrible at saving.

Minor matters

Attorneys contend that in most cases, the advantages of setting up a structured settlement far outweigh the downside of not receiving an immediate lump-sum payment. They assert that structured payments are particularly effective when minors are involved.

Plymouth, Minn., personal injury attorney T. Joseph Kane Crumley explained that in cases involving a child under age 18, court approval of a settlement is required. In addition, some very detailed Minnesota rules require that any funds the child receives be set aside until he or she reaches the age of majority.

By using a structured settlement, payments can be set up to be disbursed at a later age, such as when the minor is more mature and able to handle receiving a potentially large sum of money, Crumley continued.

Generally that is what drives a lot of them, said St. Paul, Minn., personal injury lawyer Robert J. Leighton, explaining that parents are often concerned about an 18-year-old receiving a large monetary payment.

Falsani agreed. A structured settlement gives parents some control over how the kid is going to get payment, he said, pointing out that at 18, a large sum of money can become a negative thing.

Stream of income

Another benefit of a structured settlement is that it provides a steady stream of income to the client, which is particularly helpful in cases where the client is out of work or has ongoing medical care costs.

You are providing some financial security in the future for your client, Gale observed.

Falsani explained that many personal injury plaintiffs who settle their cases do so under pressure from family and friends -some of whom want money or loans - and having $100,000 to $300,000 sitting in a bank account burns a hole in their pocket.

Structured settlements are a way to protect clients from themselves and others, he said.

There is a hidden advantage to lawyers also, Falsani observed. As each check comes in, clients think fondly of their lawyer, he quipped.

Tax free

Tax advantages are another major benefit of setting up a structured settlement. While personal injury settlements themselves are not taxable, the interest that accrues on such an investment is taxable.

That can add up to a lot over time, said Crumley. It can be fairly substantial if it's a large settlement.

However, since 1982, when Congress began encouraging structured settlements, the Internal Revenue Code has contained a provision providing that 100 percent of every structured settlement payment, including interest payments, is exempt from state and federal income taxes.

Thus, a client can get double or triple the amount of the actual settlement, and none of it gets taxed, Crumley noted.

It's a benefit if it's a big dollar structure, Falsani added.

Don't be a pauper

Despite a generally favorable view of structured settlements, attorneys concede that there may be some circumstances in which they are not the best way to proceed.

For example, if the settlement amount is minimal, it may not be worth the administrative costs involved in setting up a structured settlement.

In smaller settlements for adults not under infirmity, clients often prefer to just have the money right away, Gale noted.

Crumley warned against setting up a structured settlement in a case where a person really does need money in the immediate future. They don't want to be in a situation where they paupered themselves in the short term in favor of long-term financial security, he said.

When the parties do decide to proceed with a structured settlement, plaintiffs' attorneys say that it's important to have the lawyer's own independent consultant review the structure before their clients agree to it.

Have contact with a structured settlement broker who does these regularly, said Gale. Do your own due diligence.

Falsani encouraged attorneys to be creative. Anticipate the needs of the client over the years, and structure the payments for those times when he or she will need the money the most, such as when a child is going to college. Companies will generally do it any way you want to do it, he noted.

Selling out

Once the structure is in place, attorneys advise against disturbing it.

Anyone who has watched late-night cable television has undoubtedly seen advertisements by companies who are willing to buy structured settlement payments. But practitioners are wary of such agreements.

I've spoken to other personal injury lawyers, and I think there is a concern, said Leighton. Structured settlement payments are set up for a reason - to protect clients over a lifetime or over a substantial period. But substantial factors may force them to into a bad deal.

According to Crumley, buy-out companies have discovered that the Minnesota market is better than they thought it was. They are touting the advantages to consumers and even contacting lawyers by e- mail to encourage their clients to sell their structured settlement payments.

Crumley, however, sees no advantage to consumers in selling their structured settlement payments and strongly advises against such transactions.

It's a financial disaster, he said. There's always going to be a better option because it's such a rip-off.

Practitioners told Minnesota Lawyer that clients generally lose 30 percent to 40 percent of the value of their settlement when they sell off their structured payments.

Companies are running away [with clients' money], and there is no risk to them, Crumley said.

Gale agreed. Those companies buy [structured payments] at substantial discounts, he said. The whole purpose for doing a structured settlement in the first place would be negated by such a sale.

According to Falsani, selling structured payments might make sense of clients are facing something drastic, like foreclosure on their home, but in all other cases, it simply doesn't make financial sense. Economically, it's a catastrophe, he said.

Because of the concerns raised by attorneys and other consumer advocates, the federal government and many states have enacted legislation regulating the sale of structured settlement payments. According to the Web site for the National Structured Settlements Trade Association, more than 35 states, including Minnesota, have enacted consumer-protection statutes that establish strict conditions for these transactions.

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