Tag Archives: U.S. Congress

A Crucial Role for Annuity ‘Structures’

Every year millions of injured Americans confront critically important financial decisions as their personal injury litigation draws to a close. In planning the path forward and beyond their injuries, the stability and security of ongoing, lifelong income from their settlement, judgment or award proceeds becomes absolutely paramount. The money simply needs to last.

Only one post-injury investment option – – structured settlement annuities or “structures” – – provides a continuing tax exemption for the growth of such benefits.  If the injured individual agrees to a lump sum settlement, the tax exemption for lifelong income disappears.

As of 1983, the Periodic Payment Settlements Act (see also IRS regulation Sec. 104(a)(2)) has made all income from a structured settlement annuity over the lifetime of that individual entirely, unequivocally and absolutely tax-free. Contrasted with a lump sum payment in which only the initial payment is tax free and all subsequent earnings are subject to all applicable forms of state and federal taxation, the structured settlement is considered an insurance policy for payments rather than asset to be taxed upon growth. This view, accepted by Congress in that 1983 Act, makes the value of a structure staggering.

For example, if the injured individual deposits the lump sum settlement proceeds in a bank account, any interest earned would be taxed accordingly. If the injured individual invests the money in taxable bonds or stocks, the interest and dividends would also be classified as taxable income. However, with structured settlement annuity payments, neither the growing COLA payments nor the lump sum scheduled payments, nor the payments beyond life expectancy are ever taxable. If the injured party were to decide on an annuity payout after receiving the funds, the tax benefit would be lost because the funds were accepted separately from the settlement. The critical element is that the structure must be accepted as the payout vehicle initially.

The Tremendous Value of Tax-Free Status

The tax-free effect is quite dramatic. Consider an injured individual in the 28% tax bracket with a 2% fee for a traditional, market-based investment portfolio. In addition to having the risk of a significant reduction or entire loss of funds, the individual’s income from the investment when they are successful will face federal taxes that can reduce actual net income by 30% before accounting for state and local taxes that could tack on another 5% reduction. None of these risks or reductions exists with income from a structured settlement.

For an individual in the 10% tax bracket, earning a 4% return would have the equivalent pre-tax return of 4.44%, and a 15% tax bracket would mean an equivalent pre-tax return of 4.7%.

While a peripheral advantage, the tax-free nature of the structure payout means the individual recipient is not required to deal with the timing and accounting issues associated with the need to pay estimated taxes on this money. With a taxable event, the taxes would be the quarterly responsibility of the recipient. An error in dealing with the estimated taxes could create recurring tax problems.

Therefore, structures not only safeguard the injured individual from the volatility of the stock market, they provide continuing income that one can count on down to the penny and to the day. No wild, market-swing surprises. No reductions in income for taxes. No tax filings and accounting homework.

The Gift That Keeps Giving (and Gives in Other Ways)

In addition to the tax-free opportunity, there are other critical reasons to value the structured settlement for the injured individual. First and foremost, the structure enables the individual to couple the tax advantages with the capacity to schedule weekly income and significant payouts for any future expenses like college tuition, wedding costs or retirement needs to the day and to the penny without any worry about market or 401(k) performance. In addition, because structures are considered a policy for payment rather than an asset, such proceeds generally do not affect eligibility for needs-based public assistance programs like AFDC or Medicaid, as lump sums do. Even if the injured individual is not on Medicaid at the time of the injury, eligibility for many programs — in-facility care, for example — often requires the absence of any significant assets.   As a policy rather than an asset, structure income would be immune from eligibility consideration. Lump sums such as an investment account or a bank account are highly likely to be considered assets that must be eliminated for Medicaid eligibility.

Quite simply, structures may very well be the best way to make sure that the money is peace-of-mind predictable, maximizes other income and benefits and lasts for a lifetime. However, with only 5% of eligible dollars placed in structured settlement annuities, billions in tax exemptions — as well as the opportunity for continuing income security — are squandered every year.

Is a Post-Injury Financial Portfolio “Balanced” Without a Structured Settlement?

While frequently considered an all-or-nothing option, the structured settlement annuity can be used for whatever portion of the settlement, judgment or award that the injured individual chooses.  As with all responsible portfolio plans, balance is a critical value.

With a structure, an injured individual can tailor and fund her entire financial future. In addition to continuing payments, what is scheduled today will be there, exactly as needed, for a lifetime of tomorrows. It is possible to establish a college fund, for example, as part of the settlement that would both schedule and quantify tuition — all tax-free.

Given its value, security and stability, is any post-injury financial plan truly “balanced” without taking advantage of structured settlements? As a highly unusual, tax-free, benefits-exempted gift from the U.S. Congress to the nation’s injured individuals, structures should be a critical feature to secure their financial futures.

Cyber Risk: Is It Worth All the Pain?

With an onslaught of bad recent cyber news, is cyber risk worth the trouble, and how should corporate directors be looking at this issue? The recent news is the high-profile breach of 4 million employee records at the U.S. Office of Personnel Management by alleged Chinese hackers and the news that even the security experts are getting hacked, with Kaspersky Labs reporting a breach supposedly committed by a nation state.

President Obama also made cyber security an emphasis of his G7 talks in Germany, commenting that the U.S. government needs to be more “nimble, aggressive and well-resourced” to combat this threat. He also urged the U.S. Congress to pass the 2015 Cybersecurity Information Sharing Act, a first step in a coordinated and systemic public/private response to cyber risks.

The attacks show no signs of slowing. PwC’s 2015 Global State of Information Security Survey indicates a compound annual growth rate of 66% for cyber incidents since 2009. The 10,000 respondents to the survey reported almost 43 million detected incidents during 2014 alone—or 117,339 incoming attacks every day of the year.

Is cyber security risk worth it? Yes, but with a caveat. Without a doubt, the many innovations currently taking place with today’s information technologies open up many new vulnerabilities. Risks are now difficult to isolate, and a protect-and-defend model is not effective against the systemic risks inherent across any corporate ecosystem.

Attacks can also come from a growing list of sources, including hacktivists, foreign and domestic nation-states, customers, employees, partners, consultants, competitors, organized crime and the bored neighbor kid living in the basement and surviving on a diet of Cheetos, Red Bull and your weak IT security infrastructure. The direct and indirect costs of mounting an effective cyber security defense are only getting more expensive, and the risks are only increasing.

Despite this, these technologies also have an upside—a significant one as they are now competitive table stakes, as new business tools always are. These tools are changing market dynamics and customer preferences, and the technologies embody distinct economic advantages such as the lowering of transaction and engagement costs. Business models and competitive advantages are changing as a result of these tools.

These tools are shaping and defining business success, but the risks are holding many companies back. Which takes us to the caveat. The upside of these technologies outweighs the downside.

Cyber is worth the risk, but boards, directors and managers need to be looking to exploit the business advantages of these tools, while at the same time mounting a “a nimble, aggressive and well-resourced” approach to mitigating these incessant risks.

This is easier said than done; 89% of companies listed on the Fortune 500 in 1955 are no longer on the list. Business cannibalizes the companies that can’t capitalize on the opportunities presented by changing market conditions, including new technologies.

Directors need to be diligent in overseeing cyber risk as part of a comprehensive IT governance and enterprise risk governance approach. But they also need to be on top of governing cyber opportunity—that’s the only way that they can make cyber security risk worth it.