by John Darer CLU ChFC MSSC CeFT RSP CLTC
From time-to-time attorneys may be faced with a vendor who wishes to sell their client on the concept of a structured settlement alternative that purports to do everything that a structured settlement can but is not an insurance product.
Often, a plaintiff's requirements both guaranteed income and liquidity to address uncertain needs. This scenario necessitates a multi-vehicle approach, combining guaranteed income that cannot be outlived with liquidity and investment flexibility.
These quasi "structured settlement" trusts, which are not really structured settlements defined by Internal Revenue Code Section 5891, bundle periodic payments with investments, which in turn begs several questions:
- Is the income stream guaranteed?
- Is the income stream tax free?
- Is the income stream for life (assuming that is what is needed)
- What are the underlying assets?
- What is the tax efficiency of the underlying assets?
- What is the assumed growth rate in the projections used to "match" the structured settlement? What is the effect of rising interest rates on the fixed income component of the underlying assets?
- What are the underlying costs and fees?
- What is the impact of a large principal invasion on the illustrated income payments? (Very important as principal invasions can wreak havoc on the projections)
Consider unbundling the function of guaranteed income with the need for liquidity. By blending a true structured settlement with a true settlement preservation or other special purpose trust you may get the best of both worlds*** at a more efficient cost.
A structured settlement is perhaps the only way to contractually guarantee lifetime income with the growth and liquidity components provided by the trust.
*** a Special Needs Trust (known as a "Supplemental Needs Trust" in New York) can effectively be paired with a structured settlement
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