In this weeks edition of Speaking of Settlements we look at one of the more innovative programs in the non-qualified market and that is the structuring of oil and gas lease bonus payments through the use of a structured settlement annuity device.

As many people in the structured settlement profession know, Allstate Financial has been a consistent innovator in the area of structured taxable damage awards, as well as structuring the sales of appreciated real estate through their structured sales program. They continue their progressive ways with the announced ability to now structure oil and gas lease bonus payments, allowing people who are leasing their land for oil and gas drilling to defer bonus payments into future years tax returns.

Oil and Gas lease bonus payments, how to structure them for tax savings

The reason this is so important and valuable is that the bonus payment is on top of the annual or quarterly lease payments and is typically a one time bonus up front. By being able to move those dollars into future years, you are able to spread the tax hit over time, earn interest on the funds while deferring, guarantee payments on a fixed schedule and ideally receive them when you are in a lower tax bracket or have other off setting deductions. Of course, on top of the tax benefits, many people just find the idea of being able to secure future payments with the bonus funds to simply be prudent financial planning and want to take advantage of that option now.

To learn more about the Allstate Financial Oil and Gas leasing bonus program, you can go to my firms website at www.wahlstromandassociates.com.

The use of the structured sale has been on the back burner for several years now, largely as a result of the collapse of the real estate market and financing options for both buyers and sellers. It was a product originally conceived and used successfully for several years when people who own highly appreciated, low cost basis real estate, want to cash out and sell, but don’t want to write huge tax checks to the state and federal government on the capital gain. While we can all agree it makes a lot more sense to use 100% of your net sale proceeds and spread the money out over years, many people are still wondering what a structured sale is, and why it makes sense for those selling farm property.

In almost every case that has been referred to my office over the last year in which farm land is being sold or is under consideration for sale, it is a family owned farm that has almost no cost basis and close to 100% of the sale is going to be subject to capital gains tax. While the tax is a big issue, what is a larger problem is that with the sale of the farm, most farmers or their families are also losing their source of annual income, something they need to sustain through the investment income on the sale proceeds.

The structured sale allows them to design guaranteed payments, on a schedule that makes sense for their situation, paid monthly, annually and for years if not decades into the future. Combined with spreading out the tax hit, putting 100% of the net proceeds to work and creating a guaranteed cash flow and payment stream that provides income to the family, you can see why this is becoming increasingly popular during these uncertain market conditions.

If you want to learn more about structured sales and it’s use when selling farm property, contact my office through our web site at www.wahlstromandassociates.com and we will be happy to assist you.

New York Life was dropped to a AA+

Northwestern Mutual Life Insurance was dropped to a AA+

USAA was dropped to a AA+.

Knights of Columbus was dropped to a AA+.

Teachers Insurance and Annuity. TIAA, was dropped to a AA+.

So what exactly does this mean and what are the implications for the life insurance industry and structured settlements in general? I address some of the concerns in this weeks video broadcast of Speaking of Settlements but in short the impact should be minimal other than to the pride of the companies listed above.

It is a sickening process in that each of those five firms went to great lengths over the last three years to do the things needed to retain a coveted AAA rating and in some cases make it a key element of their marketing campaigns, only to suffer this immediate down grade as a result of the fact that they hold a large portion of US government obligations precisely because they are so conservative and careful.

As I have been saying for years, our industry uses these ratings at our peril as the rating firms really could care less about the impact of their down grades on companies marketing and reputations and the idea of using S&P as a rating agency for life markets has been a bad idea for decades. I have always preferred AM Best as the best source of information on insurance company standards and solvency and they are not as reactive as the other firms.

Enjoy today’s video on the S&P down grade and it’s impact on the insurance and structured settlement profession, but it would be wise to stop using rating agency rankings as some sort of validation of safety and instead do your own research on markets and firm to match the right company to the right risk.

While seemingly obscure to those who do not have land upon which they lease oil or gas rights to drilling or production companies, this market has substantial potential given the wide number of privately held or closely held businesses, as well as individuals, who might be interested in spreading the bonus payments they get in some years over a several year period. The fact is in an era of rising oil and gas prices, these lease bonus payments can be substantial and many owners of the leases would prefer to spread those big bonus years where oil and gas prices spike, over several years if possible, or even defer it far into the future when the oil or gas lease might be played out or sold. This is going to be a really solid planning tool in this niche market.

This particular product has one key feature in that there is a revenue ruling, RR 68-606, which specifically addresses the tax treatment of this technique, something that has inhibited the use of structured sales and income deferral strategies in the areas such as celebrity endorsements and divorce settlements.

Learn more about this announcement by viewing this weeks edition of Speaking of Settlements, where Mark Wahlstrom discusses some of the basic issues and for whom this product or strategy might be suitable. 

Mark Wahlstrom on Allstate Oil and Gas lease Bonus, structured settlement program

You can learn more about how the new Allstate Structured Settlement product for Oil and Gas Lease Bonus payments works by contacting Mark Wahlstrom at Wahlstrom & Associates in Scottsdale, AZ

Based out of Des Moines, Iowa, Summit Settlements is Iowa's top resource for structured settlements, settlement planning and annuity products and services for trial lawyers, claims professionals, self insureds and others who wish to use structured settlements to resolve difficult personal injury claims.

Stan Harlan's back ground and expertise in investments, annuities and settlement planning is available for anyone based in Iowa, with the cutting edge experience to handle all types of settlement planning issues.

Be sure to watch this initial video and learn how you can get your questions about structured settlements answered by the leading expert in the state of Iowa, Stan Harlan.

Marvin Smith, Utah Structured Settlement Expert

One of the unique aspects of Marv's practice and service to those looking for structured settlements in the state of Utah is his willingness to meet in person with trial lawyers, injury victims or the families of those hurt or killed in an accident to review in detail their options regarding their personal injury settlement. Few areas of finance require a companion knowledge of the insurance claims process, something that Marv provides given his decades of work in and around the claim community.

Marv Smith is available for consultation on all aspects of structured settlements, structured legal fee, multi-claimant cases and taxable damage settlements, which may also be structured if designed by a professional with expertise in that area. You may find his information and contact profile here on The Structured Settlement Expert Directory.

Please watch and enjoy this video of Utah's leading structured settlement expert, Marvin Smith, who has for years worked with lawyers, insurance companies, self insureds and plaintiffs in every kind of case. If you are searching for information on what a structured settlement is, or simply looking to speak with a local expert or broker in the Utah area, Marv Smith can assist you.

For those of you who are unfamiliar with the situation, I point you to the excellent historical chronology at 4structures.com in which the sordid past of the ELNY  failure and reorganization. John does a fine job showing how this mess got started and what has brought us to this day.

Mark Wahlstrom discusses the Executive Life of New York structured settlements

The problem that annuity beneficiaries and owners of Executive Life of NY contracts face now is pretty simple in concept and stunning in scope. The assets that were being managed by the State of New York Liquidation Department for the last 20+ years are now going to be totally inadequate to make all of the remaining payments in full as has been assumed for years now. The politics, inflated investment assumptions, failure to communicate the potential of a future shortfall and a lack of will by those in charge to honestly address the problem, have created a perfect storm where some estimates indicate there could be a 25% to 45% reduction in future payments given the actuarial reality of this situation.  The result is that the State of New York may no longer have the option of keeping the rehabilitation and payment plan in place as is, but may be forced to commence a liquidation, with all of the negative elements that implies yet to be determined.

This will be the first of many on going video updates and interviews on Speaking of Settlements to provide context, resources and information to those impacted by the potential shortfall of Executive Life of New York.

A lot of financial writers and bond managers keep talking as if the trillions in debt being issued, and brought, by the US Government and the resultant low interest rates, are here to stay for awhile, when the facts are that we are likely in for a swift and rude awakening regarding interest rates, the value of the dollar and the rate of inflation once this Ponzi Scheme, (Gross’ term, not mine) comes to it’s inevitable conclusion.

For those of us who are somewhat mathematically challenged, you arrive at the effective rate of return on an investment by taking the actual yield on a bond or structure, lets use 4%, and then measuring the actual or projected rate of inflation during the duration of the payments. By both established and colloquial measurements of inflation, we are seeing the cost of living in areas such as gas, insurance, food, commodities, utilities, etc, running well north of 4% right now. When matched against the yield on most structures of 3% to 4%, thanks to the continued plunge in interest rates toward zero, it is clear that most clients obtaining a structured settlement right now is essentially realizing a zero return on their allocation of funds.

Painful to admit, but intellectual and financial honesty require it.

That said, this situation will likely end soon, and change course quickly and dramatically, once the Federal Reserve and the US Treasury end the Quantitative Easing, i.e. QE II, and the Fed no longer buys 70% of the US Treasury Debt being issued like a flood into financial markets.

For a look at the scale and scope of this Ponzi Scheme of cycling debt click to the PIMCO site and commentary here.

The point being is that while I don’t pretend to be a market genius, I am pretty good at listening to the people in our midst who are the true geniuses, such as Bill Gross and Jim Druckenmiller, both of whom see this as the looming disaster it is about to become. Therefore, for those of us in the settlement profession who are advising people on allocating their one time settlement proceeds into structured settlement we need to be exceptionally careful about long term commitments at these rates and use designs that allow for reinvestment of funds in the near future when rates are higher.

We also need to be exceptionally careful to warn clients to NOT utilize outside managers for their funds who are buying bonds, bond funds, or any investment vehicle that would be impacted by a rise in rates. The carnage in bond funds that is about to occur, as well as asset value loss in a long bond’s market value, is going to be brutal.

The solution that we are recommending to clients who are receiving settlements and have to do SOMETHING with the money they are awarded, is to carefully structure payments monthly payments over the short and medium term to cover living costs, but then provide for lump sums to be reinvested in non-qualified accounts over 3 to 7 years at what are certain to be higher interest rates. While they will theoretically give up some of the tax advantage of a structure on the reinvestment, it is my experience that most of our clients are in a no tax or low tax rate scenario due to a very low real income and what they need more than tax free money is maximum cash flow and return from a highly secure investment. ( Ideally a non-qualified immediate annuity if suitable.)

The net result should be insuring the bills are paid today, no long term interest rate risk or exposure and large sums to reinvest when rates are higher. Not a perfect solution but one that works for the vast majority of our clients.

In summary, don’t be fooled by todays rates and the media reports of a resurgent economy. Interest rates have been cynically kept so low that people were forced to move funds into bonds and stocks, but the result over the next few years is that unless those stocks are in companies that benefit from inflation and the bonds are VERY short term in duration, those portfolios are going to be hammered. My advice is get liquid, cut debt and prepare to reinvest when the rates jump up dramatically in the next six to 12 months.

We won’t be selling zero yield structures for too much longer but in the mean time we need to prepare todays clients to reinvest when rates or risk further alienating our current and future clients through poor planning.

You didn’t realize that a man or woman sent to prison under false testimony or a mistake in the prosecution, who is deprived of liberty and subjected to the horror of prison life does not get get tax free payments if they get a settlement from the state?

Or, that civil rights cases fought and won are in many cases fully taxable to the person who fights for years or decades for justice, only to see legal fees and taxes take most of the monetary compensation?

You aren’t alone in your lack of knowledge or confusion about the tax status of these types of claims, largely because they are currently governed by unclear federal tax statues, conflicting or ambiguous revenue rulings or private letter rulings or that many lawyers simply instruct their clients to take the cash and take their chances with the IRS to come looking for it later.

The fact is that Congress, the courts and the US Treasury have left these areas either untouched, partially explained or so ambiguous that it is hard if not impossible to provide definitive tax or settlement planning advice to those who have been molested, abused, wrongfully imprisoned or had their civil rights violated. I understand Congress not getting around to this as this is a small and powerless group of people who receive these types of cases and they aren’t a big lobbying arm in DC. Small children, emotionally damaged teen agers or young adults, prisoners and those whose civil rights have been violated don’t write big checks or deliver a lot of votes so I understand Congress letting this slide to the bottom of their radar screen.

What I don’t understand is the lack of action and attention to this issue by the settlement trade associations, NSSTA and SSP, when this is so clearly a fight worth picking with Congress and the courts to correct an obvious wrong.

It is not because there has been a failure by some of our brightest minds to bring the issue up and even ask for hearings in front of Treasury to discuss the issue and see what avenues we have to correct these wrongs. No, the reason we have not taken this on is largely due to distraction on other matters and a general fear of bringing up the issue of tax free benefits; terrified that we might get noticed by Congress and lose that which we already have.

In my conversations with various members and leaders of our industry and trade association it has become painfully clear that we are afflicted with the same mentality of trench warfare where you don’t advance, you don’t retreat, instead you sit in the mud, keeping your head down and happy your not being shot. Instead of taking advantage of our strong lobbying group, the 30 year track record of our product to deliver safe, predictable, tax free returns and its ability to improve the quality of life of the vast majority of annuitants, we choose instead to sit in our trench, scared to death that if we talk to Congress about expanding section 104 and 130 treatment to these deserving areas, that they might take away our existing tax treatment.

Ladies and Gentleman of the settlement profession, if we are so unsure of the value of our product and our ability to explain why molested children, wrongfully imprisoned and those who have suffered civil rights abuses need to be covered by the same tax free benefit afforded physical injury victims, then we need to retire or consider representing another product. The fact is we should be arguing to correct something that should have been fixed when the code was amended back in the 1990s and to provide similar benefits to some of the most traumatized, victimized and abused people in our society. That’s a noble and intellectually honest stance to take and one that we should be proud to take to Congress as an association and as individuals.

It is a fight we can win and one that we should make a priority of the association going forward.

However in closing, I fear that the looming freight train of Executive Life of New York is only going to make us more timid than we have been on this issue, afraid again to lift our heads out of the trench and attacking the problem. I would argue we need to go on the offensive and start promoting what is good and obvious about our core product instead of sitting under cover hoping we don’t get noticed by the bad guys. What we offer protects the financially and socially vulnerable and provides a secure, tax free income to those who are least able to afford the loss of their funds to market swings and riskier investments. We can’t be afraid of a debating our critics or educating our Congress for if we are and we fail to act, that which we seek to protect will eventually be taken from us with out a fight from us at all.

Tomorrows position statement: The looming issue of the Executive Life of New York structured settlement contracts. If liquidation is inevitable, how can the settlement profession best handle the fall out.

Carolla Davis, San Antonio structured settlement expert

SETTLEMENT PARTNERS offers comprehensive services in structuring settlements for all types of tort litigation, taxable or non-taxable. With extensive backgrounds in insurance, personal injury litigation, and financial services, SETTLEMENT PARTNERS works with attorneys in determining the benefits of and allocations to cash, Special Needs Trusts, Minor's Trusts, and structured settlement annuities with consideration to estate tax planning and individual tax consequences using traditional structured settlement annuities and the variable annuity for tax-free distributions.

Ms. Davis is an experienced financial professional, specializing in designing and structuring settlements for personal injury cases, clients with special needs, and taxable payouts to avoid higher tax brackets. She has more than 25 years of diversified insurance experience and 16 years specializing in annuity business. Her broad background in structured settlements, investment counseling, litigation support, and estate tax issues brings an invaluable asset to the settlement table.

Later this summer we will be bringing Carolla and John Davis back on Speaking of Settlements to provide further detail on their unique specialization in special needs trusts and how to apply the use of structured settlements in catastrophic loss cases. Until then, if you are located in the San Antonio, TX area and are looking for the top experts or agents in structured settlements, please go to the contact page for Carolla Davis here on the expert directory to learn how to contact her.