2002 AILA National Conference

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• 2002 AILA National Conference
• Melbourne, 17 October 2002
• Structured Settlements
• Jane Campbell
• LLB, B.Com

F E R G U S O N
A S S O C I A T E S
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Outline

• Background concept, tax, history
• Current status legislation, product
• Working with structured settlements

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What are structured settlements?

• A form of settlement agreement
• Used in the context of personal injury
• Lump sum plus periodic payments
• Periodic payments provided by an annuity or
  annuities

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A third way

• Common law lump sums
• Statutory periodic payments
• Structured settlements
• A hybrid
• Combining the best elements

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Comparing payment flows

• Common D P
• Law
• Statutory D A P
• Scheme
• Structured D L P
• Settlement

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Tax savings
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History - international

• USA and Canada
• Late 1970s tax rulings
• 1982 US tax legislation
• United Kingdom
• Late 1987 model agreement
• 1995/6 tax legislation

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History - UK Models

• D L D L
• P P
• Model Legislative
• Agreement Model

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History - Australia

• 1980s NSW LRC
• 1994 Structured Settlement Conference
• 1995 Professional Indemnity Review
• (medical negligence)
• 1998 NSW MAA Submission
• 1999 The Structured Settlement Group
• ICA, APLA, Law Council, AMA, etc.

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History - recent

• 1999-2000 Education/groundwork
• 2001 Lead up to Federal election
• 26 Sept 2001 Announcement
• 27 Mar 2002 Joint Communiqué
• 6 June 2002 Bill introduced
• 18 Sept 2002 Passed Lower House

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Legislation

• Tax exemption for annuity payments that meet
  legislative criteria
• Only in certain types of cases
• Personal injury claims
• No death claims
• No workers compensation claims

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Legislation

• Requires the agreement of both parties
• Annuity purchased using compensation money
• Defendant or its insurer must purchase the
  annuity for the claimant
• Claimant cant buy their own tax-free annuity

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Legislation

• Annuity must provide the minimum monthly level of
  support
• Lifetime annuity
• Payable monthly
• Equivalent to the current aged pension
• Indexed to the CPI
• Maximum guarantee period 10 years
• Non-commutable, non-assignable

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Legislation

• Allows additional annuities
• Must be over 10 years
• May be paid annually
• Indexation flexibility
• Allows deferred lump sums
• One-off future payment (eg. operation)
• Series of payments (eg. wheelchair)

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Legislation

• Structures are settlement agreements
• Court approval required for minors and those with
  intellectual incapacity
• State amendments confirm court powers to make
  consent orders
• Periodic payments can be paid to a trustee

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Legislation

• Encourages financial advice before settlement
• Encourages annuities a safe financial product
  with guaranteed payments
• A tax incentive to give up access to part of the
  compensation

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Product

• Lifetime annuities
• Normal life expectancy OK
• Underwriting required for impaired lives
  reinsurance support required
• Other products
• Existing products can be modified
• Demand will impact on supply

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Working with structured settlements

• Step 1 Establish whether a structure is possible
• Step 2 Encourage the claimant the recognise the
  value in structuring
• Step 3 Negotiate a settlement incorporating that
  value

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Benefits for accident victims

• Tax savings
• Wont outlive compensation
• Guaranteed payments certainty and no volatility
• Security low risk investment
• Spendthrift protection and protection from others
• Payments are easy to manage
• Control and independence
• ..Lifelong
  financial security

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Case examples

• Child concerned parents
• Elderly person nursing home costs
• Reduced/uncertain life expectancy
• Inexperience with investment

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Not suitable in all cases

• Very short life expectancy
• Investment skill
• Desire to provide for relatives
• Mistrust of all insurance companies

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Benefits for defendants and insurers

• A new tool to help settle cases
• Can offer more without costing more
• Can something that cant otherwise be obtained
• Objective determination of life expectancy
• Better problem solving
• Intangibles
• Settlement dollars will be better spent
• Good PR outcomes

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Public policy impact

• Better outcomes for accident victims
• Some savings to insurers
• Compensation dollars better spent
• No removal of rights
• Better risk allocation
• Reduce double dipping

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More information

• www.structuredsettlements.com.au