By JODI SOKOLOWSKI
Buffalo Law Journal

When Paul Isaac was a practicing lawyer handling plaintiffs' personal-injury cases 20 years ago, he never encouraged his clients to consider a structured settlement.

After he became a financial planner, in 1998, and then the regional vice president of Settlement Professionals Inc.'s East Coast branch, in 2003, his perspective did a 180.

"At some point I determined that structured settlements could be one of the best tools for plaintiffs," Isaac said.

Structured settlements are primarily offered to plaintiffs in personal-injury suits. They're periodic payments, rather than a lump sum, to help them manage their money.

"It's a great method of what I call their Federal Express money," Isaac said. "It's money that absolutely, positively has to be there every month."

Spreading it out

Isaac recalls seeing clients who received a lump sum spend all their award money within a few years or just months instead of saving it for living and medical expenses.

"When they pulled into my driveway with a new Camaro, their money was gone. And they couldn't even pay the speeding tickets they got from the new Camaro," he said.

Structured settlements are ideal for infants - those injured at birth, perhaps - so their money is protected from relatives who might spend it for their own benefit or enjoyment. It's smart to start disbursements at age 21 so the child can still be eligible for college financial aid, Isaac noted.

Recognized by federal law since 1983, structured settlements are also designed to prevent award recipients from falling back on public assistance once that money is depleted.

"It's hard for anyone, whether they have a college education or never finished sixth grade, to handle a large sum of money," said Henry Strong, president of the National Structured Settlements Trade Association.

Not needed in every case

Structured settlements aren't for everyone. They're not a good fit, for example, for an adult who is not in need of income for daily living, is well-versed in financial planning or has an enormous amount of debt.

"It's not a product-fit-all-client type of thing," Isaac said. "It doesn't make sense to get tax-free growth if you're paying 18 percent interest on debt."

And because structured settlements are funded by an insurance product called a structured-settlement annuity, and are protected by New York state for up to $500,000 per contract, plaintiffs receive disbursements until they die.

"I always tell my clients that if you happen to live to 115, these payments will never stop," said Design Settlement Services Inc.'s Richard Naylon, a certified structured settlement consultant. "There's no other way you can provide a lifetime tax-free income."

The funds grow tax-deferred and aren't taxed when disbursed, under Internal Revenue Code 104(a)(1) and 104(a)(2).

Structured settlements can be a good mediation tool for lawyers, Naylon said. If a mediation is at a roadblock, structured settlements can help reach a compromise more quickly.

"The plaintiff is the one who receives the benefits, but it's really a vehicle that both the defense and plaintiff can use," he said."It offers value to both sides.

"Both parties are able to solve the case on satisfactory terms and avoid the risks and costs of going to trial."

While a court can't mandate a plaintiff to approve a structured settlement in an award win, brokers can help the parties craft and design an agreement, Strong added.

Lawyers can benefit from structured settlements by requesting that their fees be paid over a number of years to defer the taxes.

"Many attorneys have a kind of practice where income fluctuates greatly," Strong said. "This is an excellent way to smooth out income over time or supplement a retirement plan."

Up for sale

When structured-settlement holders need immediate funds in a greater amount than their disbursement allows, such as for significant medical expenses, they may turn to companies that will buy their settlement, a deal known as factoring.

However, that amount is just a percentage of the present value of future payments, such as 18 percent. Industry sources said some of the companies take advantage of plaintiffs.

"They play on the weaknesses and the frailties of the human temptation when they have an urge to buy something," Isaac said. "I think they're predatory."

A federal statute and laws in 46 states, including New York, govern the sale of structured settlements.

New York state's Structured Settlement Protection Act (General Obligations Law §§ 5-1701 through 1709) requires that the payee is notified of relevant disclosures, obtains independent professional advice from an attorney and is aware of transfer expenses before selling the fund.

"Some judges say, ‘We think you're just going to blow through the money, and we're not going to allow it.' However, some judges also feel it's a client's right to be less than prudent," Isaac said.

Some states are looking to strengthen their laws by adding more protections for plaintiffs looking to sell their structured settlements.

The West Virginia Legislature passed a bill last month that, if approved by the governor, would appoint a guardian ad litem to the structured-settlement payee.

The National Structured Settlements Trade Association supports the legislation.