Law Times

Law Times • November 28, 2011 BRIEF: STRUCTURED SETTLEMENTS PAGE 15 Technology among trends in structured settlements S BY MICHAEL McKIERNAN Law Times ince their beginnings in the late 1970s, structured settlements have estab- lished themselves as an alterna- tive to lump-sum payments in Ontario, particularly in cases involving catastrophic injury. Key players in the justice system have helped make structures, which divide large payouts into regular tax-free instalments, a more promi- nent option for recipients who might otherwise struggle to manage their own affairs, says Ralph Fenik, president of McKellar Structured Settle- ments Inc. "The Canada Revenue Agency continues to be sup- portive of the concept and the courts and judges have been exceptionally supportive and recognize their value," he says. While brokerage firms duke it out with one another for business, they each face the same chief competitor. "It's fair to say the biggest competitor seems to be cash, where peo- ple, for whatever reason, are mesmerized by this very large number and think it will last them a very long time," says Fenik. "Having been hit by a bus, they think they've become financial wizards." As 2011 nears its end, Fenik and other leaders in the area ex- plained some of the key trends in the year ahead for structured settlements: LOW INTEREST RATES POSE A PROBLEM One of the biggest challenges facing structured settlement brokers is interest rates. With rates at record lows, plaintiffs are far from anxious to tie up their money for a long period of time at a fixed rate that they feel certain will rise at some point. "There is no question that the current relatively low in- terest rate environment has deterred interest in structured settlements among injured persons deemed to be capable or competent," says Bob Nigol, managing partner of Hender- son Structured Settlements LP. The problem with that ap- proach, he says, is that it doesn't reflect the reality of the world of structures. While long-term government bonds sit well be- low three per cent, Nigol says structured settlement annuity rates are in fact higher. "The perception of low interest rates is deceiving," he says. "We are still able to produce rates of return that often approximate four per cent, net of tax and guaran- teed, with no loads or fees. If we are permitted to illustrate this to clientele, structured settlements continue to be popular." Getting that opportunity to trumpet a structure is the major impediment "given the interest rate assumption," says Nigol. Untitled-2 1 According to Fenik, even when lawyers raise the possibil- ity of a structure, their clients are likely to dismiss it out of hand because of the feeling that interest rates aren't favour- able. "They're relating to bank rates and what GICs may be paying, all of which are taxable in any case," he says. The tax status of structured settlements is another area where potential recipients are often uninformed, according to Fenik. When plaintiffs take a lump sum in the expectation that they can improve on the available rates, they fail to ac- count for the tax they have to pay on their gains. He points out that a 3.5-per- cent tax-free annuity under a structure equates to a taxable investment with a 4.5-per-cent return for somebody paying an average 25-per-cent income tax rate. When the size of the award pushes them into the top tax bracket at around 40 per cent, investors need close to a six-per-cent return in or- der to match the structure rate. "People do not think in af- ter-tax terms," says Fenik. "If a financial adviser is saying they can get you five or six per cent, in many cases, the structure is in effect providing that and it's guaranteed." Kyla Baxter of Baxter Struc- tures puts the security of a structure at the heart of her pitch, especially when the award is intended to cover fu- ture medical needs. "Are there riskier invest- ments out there where you can make more money? Yes, you possibly could make more, but at the same time you have to be willing to accept a loss, and the majority of our clients can't have that level of risk. They need that money and to know that it's there for them. This is not necessarily wealth accumu- lation. This is their daily care." Baxter says she has seen cas- es where plaintiffs receive large payouts but run out of money within a couple of years. In her view, regular monthly pay- ments from a structure remove the uncertainty and help pro- tect clients from themselves and others. "That worry factor is huge, especially with the in- juries some of our clients have suffered. You know the money is going to be there when you need it." Ironically, Fenik says bro- kers face many of the same dif- ficulties when interest rates are on the rise. When rates soared above 10 per cent in the late 1980s, for example, clients were just as unwilling to freeze their investment at that rate. "I've been hearing that for 20 years now," he says. "People keep anticipating they're go- ing to increase. Even when you could get 10 per cent, they were waiting for 12 per cent. There's an eternal optimism with them, but I don't think it's going to happen any time soon." When clients are adamant, Fenik encourages them to go short term with a structure in order to reap the tax-free re- wards and then pull their mon- ey out when they think rates will rise. He says it's a common misconception that structures have to stretch over a very long term. "If you think in five or 10 years interest rates will be sev- en per cent, then invest now at the best rate you can get, which is the structure, and then take your money to in- vest it at that time. Virtually anything can be accommo- dated in a structure. There's infinite flexibility initially but none afterwards. Once it's set, it's locked in." EMBRACING TECHNOLOGY Many of Ontario's struc- tured settlement brokers have jumped on the technol- ogy bandwagon over the last See Smartphone, page 17 www.lawtimesnews.com 11-10-11 8:44 AM

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