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Robert C. Dortch, Jr. | Sellers Hinshaw Ayers Dortch & Lyons PA | Charlotte

Tacker LeCarpentier


Tacker LeCarpentier is the Director, Annuities & Structured Products for Lawyers Insurance. Please contact Tacker by phone at (919) 247-9070 or by email at tacker@lawyersmutualnc.com.

A Simple Retirement Income Strategy

Lawyers Mutual

We spend decades saving for retirement, but converting retirement funds into income often turns into a “seat of the pants” proposition.

The biggest challenge of retirement planning is ensuring that we will not outlive our retirement funds. Moreover, it is likely that a time comes when we can’t personally manage our funds due to the infirmities of old age.  Worse yet, we may leave a spouse who has neither the experience nor the vitality to manage retirement funds and convert them into income.

Even if we believe our retirement nest egg is large enough to avoid dissipation, it still makes sense to put a plan in place that optimizes the efficiency of our funds.

The simple strategy is to estimate the absolute least amount of income necessary for retirement.  For example, assume that amount is $5,000 a month.  Then, subtract an expected monthly Social Security payment, which we will assume to be $2,400 a month.  That leaves $2,600 a month required to meet the minimum amount of monthly income for life care and medical needs.

The most effective investment vehicle to guarantee $2,600 a month for life is a lifetime annuity often referred to as a Single Premium Immediate Annuity, or SPIA.  No bells, whistles and difficult to understand moving parts, just a guarantee of income for life.  Choose a “Joint and Survivor” payment stream in order to guarantee monthly income for the retiree and his/her spouse, thereby relieving anxiety about leaving one’s spouse the burden of ongoing retirement planning.

The old rule-of-thumb was that we could safely spend 4.5-5% of our retirement funds annually and rest assured that they would last as long we live.  With declining interest rates and bond yields, that percentage has slid down to 3-3.5%.

A typical lifetime annuity will pay the equivalent of 5.2% of the initial investment annually.  By blending the risk of thousands of lifetime income recipients, a financially strong, life insurance company can efficiently guarantee income and maximize return, given the highly secure nature of the investment.

By guaranteeing a “floor” on retirement income, we have more flexibility to try to maximize returns on our remaining retirement assets, while not worrying about covering the bills, especially as we age and our faculties inevitably decline.

Ten years ago, many people, particularly in North Carolina, took a “seat of the pants” approach believing that their gold-plated Wachovia or Bank of America dividends would provide handsomely throughout their retirement.  Many were disappointed.  Thus, it may be prudent to have a more disciplined and diversified approach to retirement planning – one that provides security and guarantees monthly income for the lives of both spouses.

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Innovation Comes to Structures: S&P Index-Linked Payment Adjustments

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Structured settlements have proven to be an effective means to conflict resolution in litigation involving physical injury and workers compensation claims.  Benefits of a structured settlement to an injured claimant include flexible and guaranteed future periodic payments that are paid free of federal, state and local income taxes and can be individually tailored to meet the future life care needs of the claimant. 

Payment options include monthly, quarterly, semi-annual or annual payments; future guaranteed lump sum payments; and annual cost-of-living (“COLA”) adjustments. Lifetime payments may be made either with or without a guaranteed period certain during which time period payments will be made to a designated beneficiary should the claimant pass away prematurely. Joint lifetime payments for spouses are also available.

However, once the future periodic payment plan is established, the future payment streams are essentially set in stone based on then-current pricing of the structured settlement annuity.  Over the past 5-6 years, following the “Great Recession,” returns generated within the structured settlement annuity have fallen.  Therefore, future benefit payments from the structure have, at times, been well below the levels seen prior to late 2008. 

Structured settlements offer injury victims strong financial security, tax advantages and guarantees. Structures are, and remain, a primary vehicle to secure the long-term needs of often catastrophically injured claimants.  With the equity markets reaching all-time highs over the past few years, it can be frustrating to many that structured settlement benefits are locked in at the time of settlement, and they do not share in those market gains.

Until now.

This summer, Pacific Life Insurance Company introduced the Index-Linked Annuity Payment Adjustment Rider, offering injury victims the opportunity to participate in market gains without the downside risk of investing directly in the equity markets.  This optional rider preserves the annuitant’s benefit levels – again without the risk that those benefit levels would ever decrease – while offering the potential for annual benefit payment increases based on positive returns in the S&P 500 index. 

The “Index-Linked Annuity Payment Adjustment Rider is not a security and does not participate directly in the stock market or any index, so it is not an investment.  It is [an] insurance product designed to help a client prepare for his/her future” (emphasis added).  Therefore, this optional rider avoids the downside risks and volatility inherent in your clients’ investing in the equity and bond markets.

So, how does it work?  Simply, when the S&P 500 index rises over the course of a 12 month period (referred to as an “Index Measurement Period”), the previously-designed structure benefit payment stream will also rise, subject to an annual maximum of 5%.  If the S&P 500 index decreases or does not change during the Index Measurement Period, there is no change in the benefit payment amount. It should be noted that the Index Measurement Period is a one-year period beginning on the date of the first benefit payment, and is not based on a calendar year.

The following graph is illustrative of a hypothetical situation in which the claimant set up monthly payments of $1500.  In this hypothetical, the S&P 500 rose 3%.  Therefore, on the first anniversary date, the benefit payment rose by 3% to $1545 per month.  However, during the second year, the S&P 500 dropped by 4%, but the monthly payment remained the same:  $1545 per month.  As shown below, if in the third year, the S&P 500 rose by 8%, the monthly payments increase to the 5% maximum for a monthly payment of $1,622.25.  If during the fourth Index Measurement Period the S&P 500 rose by another 5%, the new monthly payment would increase to a monthly payment of $1,700.36.

Illustration of hypothetical payment plan

The Index-Linked Annuity Payment Adjustment Rider is available for use with the following traditional structured settlement benefit plans:  Single Life Only; Single Life with an included Period Certain; Period Certain Only payment streams; Joint Life Only; and Joint Life with an included Period Certain.  However, it cannot be used with any of the aforementioned payment plans if a COLA is likewise employed.  Importantly for many attorneys preferring better returns – but less risk – is that the rider can also be used for Attorney Fee Structures.

Remember the Index-Linked Annuity Payment Adjustment Rider is just that – a rider to a typical structured settlement annuity contract. Because it is not a security or an investment, quoting and setting up a structure plan utilizing the rider is as simple as with a traditional structured settlement plan.  There are no additional documents required, other than the standard Settlement Agreement and Release (with the required structure language); a qualified assignment and release executed by both parties; and, if required as in minor and incompetent settlements, an Order of the appropriate Court approving the settlement (including the structured settlement plan).

A further advantage of the Index-Linked Annuity Payment Adjustment Rider is that it is much cheaper for the claimant than the cost of having a 2-6% annual COLA added to the above payment plans.

However the rider is not necessarily for every claimant for one main reason:  with Pacific Life’s current rider, any S&P 500 index gains between contract issuance and the first benefit payment do not increase the first payment.  In other words, if your client has a long deferral period until their first payment – say, 5-20 years – any gains in the S&P 500 index would not increase the first payment amount.  Those payment adjustments only begin at the first anniversary date after the first benefit payment.  Therefore, the rider is more suitable for claimants who have a shorter deferral period from contract issuance to their first payment.

This last point is admittedly a weakness of the Index-Linked Annuity Payment Adjustment Rider, as it currently exists.  Because this new structure offering is receiving widespread praise in the structured settlement marketplace despite this drawback, other life companies will most likely introduce their own index-linked payment adjustment riders within the next year or two.  To effectively compete with Pacific Life’s product, those companies should strongly consider offering a product where market gains prior to the first deferred payment would positively affect that first payment.

Prior to introducing the Index-Linked Annuity Payment Adjustment Rider, Pacific Life sought and obtained a Private Letter Ruling (“PLR”) from the Internal Revenue Service approving the tax-free status of any increased future periodic payments in which the rider is utilized.  A copy of that PLR is available upon request.

For more information on this subject, please contact Tacker LeCarpentier at Lawyers Structured Settlements by phone at (919) 247-9070 or by email at tacker@lawyersmutualnc.com.

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Settlement Planning & Risk Management: The Grillo Case: Are You Employing Pre-Resolution Planning and a “Client Acknowledgement Letter?”

Lawyers Mutual

As a personal injury or worker’s compensation attorney, you have finally been able to resolve an important – perhaps, large – settlement for an injured claimant with the defendant(s).  You know your work has only just begun in order to quickly get to full and final resolution of the settlement, and execution of the Settlement Agreement and Release.  You’ve calculated your attorneys’ fees, the costs and expenses of the litigation, made appropriate arrangements to reimburse any required past Medicare, Medicaid, ERISA or other health care provider liens.  You now have a final disbursement figure for your client’s benefit, and are ready to meet with your client to discuss options for use of those funds.

But, what if your client is a minor; an incompetent; eligible for continued Medicare and/or SSDI payments; or may need to remain income-eligible for future Medicaid, SSI payments or other governmental benefits, like food stamps or Section 8 housing?  What if you believe that your client may need a structured settlement, a Special Needs Trust, a Settlement Preservation (or other appropriate) Trust, or even a Medicare Set-Aside Account?  What if you believe your client needs a combination of the above?

Therefore, you promptly contact a structured settlement broker, a settlement planner, or an Estates and Trusts attorney with expertise in special needs cases.  One or more of the above consultants meet with you and your client, and make recommendations necessary (1) to secure your client’s financial future, especially for long-term medical and other life care needs; (2) preserve your client’s eligibility for Medicaid, SSI and other governmental benefits; and/or (3) protect Medicare’s future interests pursuant to the Medicare Secondary Payer Act of 1980, 42 U.S.C. Section 1395y(b)(2).  Hours may be spent working with these consultants, and meeting with your client to protect and preserve some or all of the above.  You fully agree with the recommendations of these consultants as being in your client’s best interests and necessary to protect the client from the ramifications of the above and the risks associated with failing to employ some or all of these settlement planning techniques.  And, you’ve spent hours explaining the importance of these issues to your client.  You do not want your client to prematurely dissipate the settlement funds or, potentially, outlive needed benefits thereof.

Then, after all that work, and despite the recommendations that are obviously in your client’s best interests, your client tells you that he wants the cash now . . . and all of it.  You may be flabbergasted, but you know that ultimately it is your client’s decision, regardless of the potentially-adverse ramifications to the client and the strong recommendations made by you and the consultants you brought in to advise the client.  We have all been there.  Then, months or maybe a few short years later, you get the call you always dread:  your client calls to say he or she has none of the settlement proceeds left, and what can you do to help?  Most likely, the answer is absolutely nothing.

More frightening, what if – at the time of settlement – you never considered the adverse ramifications to your client noted above prior to having him or her execute the Settlement Agreement and Release?  What if you never brought in the structured settlement broker, settlement planner or E&T attorney?  What if you simply cut the check to your client for the full cash proceeds of the settlement without consideration of these important issues?

More importantly, what if you get that call a few months or several years later, and your client informs you that (1) he or she has none of the funds left; or (2) the government cut off Medicaid benefits, SSI payments and other governmental benefits; or (3) Medicare has contacted the client and wants immediate reimbursement for their conditional payments; or (4) a combination of the above?  And, why should you be concerned?  You effected a great settlement for your client and did everything possible and appropriate prior to, and during, the litigation in order to maximize the recovery.  Well, unfortunately, you should be concerned.

The reason is the seminal and oft-cited Texas case of Grillo v. Pettiette et. al. (Docket No. 96-45090-92, 96th District Court, Tarrant County, Texas).  The facts of Grillo are, as follows:  in 1982, Christina Grillo suffered a birth injury in a Texas hospital, resulting in quadriplegia, seizures and blindness.  Plaintiff’s complaint alleged medical negligence against the attending physician.  Life care plans prepared on plaintiff’s behalf opined that the costs for future lifetime medical care for young Christina were in excess of $20 million.  During litigation, defendants offered plaintiff a structured settlement plan costing $1.2 million that, over the child’s lifetime, would have netted over $100 million.  Plaintiff’s counsel and her Guardian ad Litem declined the offer.  In 1990, the case was settled for $2.5 million in a cash only settlement.  The cash settlement was recommended by both the plaintiff’s attorney and GAL. 

Not unexpectedly, in several years, the disbursement for Christina was completely dissipated, leaving the family with nothing to cover her lifetime medical and life care expenses.  The family (and, yes, the taxpayers) were left to pay tens of millions for those same medical and life care expenses.  The child’s family subsequently sued plaintiff’s attorney and the GAL for negligence and legal malpractice, arguing that the defendant attorney and GAL should never have recommended a cash settlement, and that defendant should have insisted on a life contingent, structured settlement plan for Christina.  Defendants in the legal malpractice claim ultimately settled the claim for an amount in excess of $4 million, much of which was ultimately structured.

Since Grillo, numerous cases across the country have been brought against counsel and representatives of minors and incompetent adults where a lump sum settlement was recommended by plaintiff’s counsel as opposed to a structured settlement plan.  Likewise, and again throughout the country, most legal advisors have concluded that in certain personal injury and workers compensation cases, a 100% lump sum settlement, especially without the benefits of a structured settlement plan, are simply inappropriate.  The key risk in doing otherwise is the premature dissipation of the much-needed settlement funds throughout the life of the injured party.

More importantly, such cases illustrate the risk management problems and liability exposure of attorneys, guardians and legal representatives of the injured party, especially where the lump sum settlement funds are expended well before the full needs of the injury victim have been met.  Settlements of this sort should, and are often are, intended to meet those future medical and life care needs, yet dissipation of those lump sum settlement proceeds remains the number one risk to the injured party.  While not every case is appropriate for a structured settlement, employing other available settlement planning techniques is imperative, especially in circumstances where Medicaid and other governmental benefits are often lost immediately upon receipt of the lump sum settlement.  Moreover, as workers compensation claimants have had to do for more than 15 years now, failure to employ Medicare Set-Aside Accounts in order to protect Medicare’s future interests in liability cases is of growing concern to plaintiffs, plaintiff’s counsel, defendants and their insurers.

Therefore, employing appropriate settlement planning consultants, whether they be structured settlement brokers or not, is – in this author’s opinion — a valuable and, indeed, necessary resource for proper risk management of certain personal injury and workers compensation cases.

But, let’s return to the initial scenario above, where you as the claimant’s attorney have taken all of the necessary steps to obtain such settlement planning consultation, and you have then made those recommendations to your client, but your clients and/or their legal representatives have nevertheless insisted on taking their settlement proceeds in an all-cash lump sum settlement.  How can you best protect yourself from a potential future claim that you, as the claimant’s attorney, were implicated in the decision to accept such settlement funds in a lump sum only? 

Obviously, the first recommendation would be that you put everything concerning your efforts and recommendations in writing and ensure that the plaintiff and their legal guardians and representatives are provided with a detailed report of those efforts.  Alternatively, and as many of my clients have opted to employ, I have recommended the use of a “Client Acknowledgement Letter,” often referred to as a “Grillo Waiver.”  The Client Acknowledgement Letter is generally used by my clients in situations where, despite advice and recommendations to the contrary, the claimant has insisted on taking an all-cash lump sum settlement.  The Letter requires the client’s signature and his/her initials at various points indicating that he/she understands certain ramifications of that decision, especially as it relates to the risk of premature dissipation of needed settlement funds and the possibility of jeopardizing certain critical governmental benefits, including and especially medical care provided by Medicaid and Medicare.  Obviously, “one size does not fit” all cases we handle. Feel free to edit this Client Acknowledgement Letter as you see fit and as necessary to the circumstances of your individual cases. 

Edward C. (“Tacker”) LeCarpentier, III, a licensed North Carolina attorney of 18 years, is the current Director of Annuities and Structured Products for Lawyers Insurance Agency/Lawyers Structured Settlements, a subsidiary of Lawyers Mutual Liability Company of North Carolina. Contact Tacker at Tacker@LawyersMutualNC.com or (919) 247-9070.

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