Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1998-06-26
2001-12-18
Poinvil, Frantzy (Department: 2164)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
C705S03600T
Reexamination Certificate
active
06332132
ABSTRACT:
BACKGROUND OF THE INVENTION
This invention relates generally to automated systems for asset management, and more specifically to a system for managing capital to ensure a future payout.
A structured settlement (more appropriately referred to as the periodic payment of damages) is a critical tool in the settlement of physical injury litigation. Until the 1990's, structured settlements were predominantly funded by life insurance company annuities. Since 1991, however, there has been a rash of life insurance company failures within the ranks of carriers issuing structured settlement annuities.
This has led to an increasing usage of United States Treasury Bonds as the funding instrument. This is permitted by Section 130(d) of the Internal Revenue Code of 1986, as amended (“the Code”), titled “Qualified Funding Asset.” The first sentence of Section 130(d) makes it clear as to what type of obligation can be used in funding a Section 130 structured settlement. It states that “for purposes of this section the term ‘qualified funding asset’ means any annuity contract issued by a company licensed to do business as an insurance company under the laws of any state, or any obligation of the United States . . . ”This language provides that the only alternative to annuities is an obligation of the United States (e.g., United States Treasury Bonds).
In recent years, the structured settlement marketplace has felt a significant need for a safer alternative to life insurance company-issued annuity products. Because the safest fixed income investment may well be United States Treasury Bonds, The Halpern Group developed the first United States Treasury Bond Government Securities Periodic Payment Trust (“Structured Settlement Trust”), which was made available to the public in January of 1992. The purpose of this trust was to eliminate the two key areas of principal risk for the plaintiff: (1) the risk of commercial failure, and (2) risk of failure of the “Section 130 Qualified Assignee.” With regard to the first point, United States Treasury Bonds have no risk of commercial failure, as does an annuity from a life insurance company. With regard to the second point, in many transactions prevalent in the marketplace, the Qualified Assignee is a shell corporation specifically established by the annuity issuer to do nothing more than to serve as an Assignee. Generally, the only assets of such a shell corporation are the annuities being held to satisfy the periodic payment obligations. The problem with this arrangement is that corporations of a single purpose or shell variety have a tendency to fail, creating an additional risk factor for the profoundly injured victim. Even state Guarantee Funds provide no direct protection to the plaintiff.
Legislative changes have not fully addressed this second problem. The Technical and Miscellaneous Revenue Act of 1988 amended Section 130 of the Code to allow plaintiffs greater rights than those of a general creditor. Generally speaking, this has been interpreted to be a security interest in the underlying qualified funding asset as defined in Section 130(d).
The tax implications if that interest ever had to be activated are not clear, however. Therefore, the best way to serve this community of profoundly injured individuals would be to provide a product that was safe enough to render issues of assignee failure moot.
The Structured Settlement Trust, which received approval as in compliance with Section 130 of the Code by the Internal Revenue Service in Private Letter Ruling 9703038, removed the risk of commercial failure of an insurer by not using annuities as funding vehicles. The Trust further eliminates the risk of failure of the assignee by using a trust instead of a corporate entity.
The Structured Settlement Trust, however, does not address interest rate risk. This risk manifests as a diminishment of periodic payment purchasing power due to inflation in the future because those payments cannot adjust to prevailing interest rates in future economic situations. This is a very wide-felt need.
In response to this need, Transamerica Occidental Life introduced an annuity whose payout was tied to future increases in the Consumer Price Index (“CPI”). This product, which has been approved by the internal Revenue Service, has not been successful, is price-based on the future CPI may be, by taking into account, today, an actuarial estimate of the CPI over the next several decades. The end result is that a $1000 per month benefit of the CPI index product costs approximately three times as much as the same $1000 per month benefit of Transamerica's normal level payout.
The plaintiff/injured party is then faced with a choice of a monthly benefit that will rise in the future based on the CPI versus a level benefit that will be fixed and determinable in the future that initially costs three times as much as the variable benefit that would be provided by the CPI product. Although tort victims can be protected against risk of commercial failure, they are still subject to interest rate risk.
Section 130(c)(2)(A) of the Code states that periodic payments must be “fixed and determinable as to amount and time of payment.” This is followed by Section 130(c)(2)(B) which states that “such periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments.” It therefore becomes critical, should there be a variable future income stream, to be able to show that at no time did the payment recipient have any ability to increase, decrease, accelerate or defer any payment. The ability or right to do so would trigger the application of the constructive receipt doctrine. Therefore, any such solution should be devoid of human input.
Currently, United States Treasury Bonds are only issued for periods up to 30 years. This poses another problem because it is usually important with a structured settlement that the income stream be payable for the life of the injured party.
Another problem in the marketplace is that a structured settlement that is non-life contingent (i.e., guaranteed for up to and including 50 years) becomes a taxable asset at death in the estate of the payment recipient. Such an asset is taxed according to the present value at death of the unpaid benefits determined by government tables and such tax is due within nine months of death. For example, a profoundly injured infant receives a structured settlement paying $10,000 per month for 30 years and life thereafter. If he dies in the first year, the guaranteed portion of $10,000 per month will still be paid for the next 29 plus years, obviously yielding a very large present value. Nonetheless, the tax on that present value is due within nine months of death. This causes a situation that the IRS and the estate of the deceased find troublesome. Because the estate will probably not be able to pay the tax due within nine months in the form of a lump-sum, the IRS would have no option but to attach the future income stream until the appropriate amount of tax plus interest has been paid. The problem with this is that, at the present time, the interest on estate taxes due would be calculated at a rate between 9-10% a year, but the yield on the structured settlement would be closer to 5-6½%. The interest obligation would exceed the payment stream and the payments will never catch up to the interest.
SUMMARY OF THE INVENTION
To provide an improvement over these processes, a method, consistent with this invention, automatically manages an initial funding amount to achieve a future rate of return that will be consistent with future economic conditions without diminishing principal. The method comprises the steps, performed by a data processor, of receiving input values for the initial funding amount, a cost of a primary term investment vehicle, a cost of a secondary term investment vehicle and any front end load for the primary and secondary term investment vehicles; creating an initial investment structure by splitting the initial funding amount into a predetermined number of portions
Finnegan Henderson Farabow Garrett & Dunner L.L.P.
Poinvil Frantzy
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