Some settlement professionals have purportedly advised attorneys and their clients to introduce a "slight of hand" variant to settlement proceedings that could end up having the marginal utility of running into a swinging sledge hammer.
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Should you follow the cookie cutter advice of settlement planning professionals who suggest that you take the defendant's or insurer's money into your law firm's escrow account in exchange for a release, followed by a petition for a Court Order to have the payee or routing number of the check changed so that those funds are characterized as being paid into a qualified settlement fund?
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The idea behind these shenaningans is purportedly to give you greater control over the settlement process, give your client "full market access", "bypass casualty insurer approved lists of annuity markets", " overcome objections to single claimant QSF's by insurers" and ultimately to give your settlement professional 100% of the commission. If you broker advertises their contributions to trial lawyer associations, perhaps you're wondering if "the escrow gambit" will result in greater contributions to your TLA. Plus the whisper in your ear is that the defendant or insurer is none the wiser. Sounds great right? And if I'm your settlement professional should I beam with pride at your loyalty, or should I walk away?
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How would you feel if you knew that you were exposing your client to potentially devastating tax consequences? And to all you judges out there how do YOU feel about exposing a plaintiff to potentially devastating tax consequences? The plaintiff attorney or law firm is an agent of the plaintiff. You sign a release of all claims against the defendant and the money goes into your escrow account. Then, for the first time you petition the Court for the change of payee? Forget about constructive receipt…how about "actual receipt"? How about the "economic benefit "theory? How about "step transaction doctrine?" Shall I go on?
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Suppose your settlement planning professional convinces you to do a structure out of this. First you will find that on a single claimant case you will have far less market selection than had you and your broker worked straight up. However your settlement professional has pumped you up about the ghoulish malfeasance
that would prevail upon your client if another strategy was employed, it pales in comparison to reputation eroding tax hell. Who is going to clean up the mess? Who is going to pay for the mess? How would they pay for the mess? Who referred this person/firm to you? Get my drift TLAs?
Purportedly some settlement planning professional claims to have a legal opinion that substantively says that "the escrow gambit" works. Remember however, that there are good and bad opinions. There are also "off the cuff opinions" and paid opinions. Generally an opinion only applies to the person or entity requesting the opinion. With all due respect to the legal profession and its esteemed scholars and with a healthy degree of skepticism, such a legal opinion ultimately is probably worth the paper its written on and the amount of Errors and Omissions coverage backing the lawyer giving the opinion. This is particularly relevant if such an opinion is used "en masse" by proponents of the "escrow gambit".
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A legal opinion is NOT binding on the United States Internal Revenue Service. If the settlement professional has been relying on the opinion over and over again chances are that a single claim might blow through what coverage the lawyer has and the coverage of the settlement planning professional has. If you want to be sure then why not obtain a Private Letter Ruling? What is worse…. spending $15,000+ for a PLR or the amount of potential exposure to penalties and interest from the IRS and worrying how its going to be paid?
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A qualified settlement fund is a settlement tool that has its place. Naturally there is a right way and a wrong way to do a qualified settlement fund. Like an olympic athlete, those "champions" of the qualified settlement fund that use "the escrow gambit" could be "stripped of their medals".
How stakeholders can protect themselves…
- Annuity issuers must do a better job of tracking where the premium money is coming from. Checks written on the escrow account of a law firm should be questioned. FOLLOW THE MONEY! Bear in mind that certain defense law firms perform a TPA (third party adminstration) function for certain foreign insurers and syndicates.
- In addition to requesting a copy of the QSF papers, as part of the underwriting process , annuity issuers should ask to see the release of the defendant that preceded the funding of the qualified settlement fund. FOLLOW THE MONEY!
- As part of their review process judges should question any QSF where the source of funds is the plaintiff law firm escrow account. FOLLOW THE MONEY! Be aware of the potential consequences of your signing Order with that knowledge.
- Trial Lawyer Associations should educate their members and be alert to "affinity partners" who suggest "the escrow gambit" strategy.
- Ask the lawyer giving "the escrow gambit" opinion how many times they have given the same opinion. Then ask for a copy of the declarations page from their insurance policy and make an assessment if you feel comfortable that you and your client are protected if it all goes pear shaped.
- If the broker proposing this option submits the opinion, read it closely to see that what is being proposed to you tracks what is being proposed. For example the opinion could deal with a qualified settlement fund, but the step concerning the "change of payee"
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