What I Thought I Knew
Published on Jun 22, 2021
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PRESENTATION OUTLINE
What I Thought I Knew
The Evolution of Settlement Planning
A lot has changed over the past 15 years...
Photo by matthew Feeney
Minor's Cases
While I believe my team and i do some of our best work on large minor's cases,
It is increasingly difficult to place minor's cases under 10k.
It is increasingly difficult to place minor's cases under 10k.
Photo by Clive Varley
Cases for minors under 10k
Photo by Steve Johnson
Very Few Options Left
- Structure With Independent (Call Bua)
- Pooled SNT based on case
- Court Restricted Investment Accounts
There are VERY few options left under the 10k threshold.
EXAMPLE of UTMA with court restrictions
Photo by Claire Anderson
The biggest issue with small minor's investment accounts are ownership,
and access.
If a minor is not recovering at least 100k, it is often too expensive to have an individual trust created, due to costs of the trust and trustee.
Our office creates language for court orders that restrict access by parent (and minor) and can be setup to pay the minor at 18, 19, 20 and/or 21 or any combination in between, depending on state law.
In numerous states, we have had success with bond and equity funds (up to 70% equities).
While these investments have risks, we believe they will out-perform current guaranteed rate products over the next decade.
A recent case we handled provided a 5 year old minor with
$1,750,000.00 net.
We believe in a diversified approach
- 250k into a structure to guarantee funds from 18 - 25.
- 500k in a FIA from ages 5 - 15 and then again from 15 - 25.
- 1M into investments and cash, accessible at 18, 22, 25, 30 and 100% available to beneficiary at age 33.
Lets Dive In
We structured to guarantee funds until age 25.
This would allow the first FIA to run for 10 years and be out of surrender by the minor's age 15.
Then we could write another 10 year FIA at minor's age 15 to end at 25, or invest the funds depending on client needs/wants/concerns at that time.
This would allow the first FIA to run for 10 years and be out of surrender by the minor's age 15.
Then we could write another 10 year FIA at minor's age 15 to end at 25, or invest the funds depending on client needs/wants/concerns at that time.
Photo by Sebastian Pena Lambarri
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15k semi-annually to guarantee college tuition.
We rand it for 5 years, because your presenter today did not graduate in his first 4 years...
We used $1,433.00 per month to fund living expenses from 18-25, which will provide a cushion during and after college.
Then lump sums to fund birthday and cash access in trust at 18, 20, 22 & 25.
We rand it for 5 years, because your presenter today did not graduate in his first 4 years...
We used $1,433.00 per month to fund living expenses from 18-25, which will provide a cushion during and after college.
Then lump sums to fund birthday and cash access in trust at 18, 20, 22 & 25.
This annuity provided a 2.50% IRR or a 3.47% TEY at a 28% tax bracket.
It also provided a total $371,805.00 in guaranteed future income on and investment of $250,000.00, a $121,805.00 guaranteed benefit, and,
Peace of mind for the family that if a major market correction happened at their child's 16th, 17th or 18th birthday, the investment account (via trust) should be able to rebound (with growth) by the time these structured funds and the FIA were done paying at age 25.
Fixed Index Annuities
Providing guarantees against loss and potential for gains
This will provide guaranteed funds and protect the minor from a down market at age 16 or 17. FIA to guarantee against loss and provide a higher IRR, potentially.
Photo by 401(K) 2013
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Investment options and spread, cap or participation rates greatly affect future returns.
So just like we do when we diversify a settlement recovery, we diversify the investment and index crediting options within the FIA.
So just like we do when we diversify a settlement recovery, we diversify the investment and index crediting options within the FIA.
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This page shows what the first 26 years of returns would have been....
based on the past 26 years of returns.
By age 19 this account would have doubled in value, been out of surrender and fully liquid with $1,005,260.00 to 1035 exchange of keep in this annuity.
based on the past 26 years of returns.
By age 19 this account would have doubled in value, been out of surrender and fully liquid with $1,005,260.00 to 1035 exchange of keep in this annuity.
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When you take a look at the average return based on diversifying the underlying investments and index crediting rates, this FIA has averaged 4.96%.
Based on investments and market performance this FIA could do better or worse, but never worse in any given year than 0.00%
Plus it is guaranteed against loss.
Based on investments and market performance this FIA could do better or worse, but never worse in any given year than 0.00%
Plus it is guaranteed against loss.
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This shows that by age 35, the minor could have $2,119,213.00.
The growth potential, flexibility of investments and principal protection of the FIA could add more value than a fixed rate annuity at today's interest rates.
The growth potential, flexibility of investments and principal protection of the FIA could add more value than a fixed rate annuity at today's interest rates.
The thought behind the FIA was that interest rates may be higher in the future than they are currently. And,
the FIA would also provide
- cash to 1035 for potentially higher rate annuity in the future
- cash for emergencies
- cash to invest in the market
- via 10% free withdrawal
INVESTMENTS
To hedge against inflation and attempt to beat fixed rate returns.
We are extremely picky as to who we will take as an investment clients and who we will allow to be the trustee as we plan on working with these types of clients for decades into the future.
To that point we only take 1 or 2 clients on a year without a corporate trustee between them and decisions regarding their investment funds.
We are extremely picky as to who we will take as an investment clients and who we will allow to be the trustee as we plan on working with these types of clients for decades into the future.
To that point we only take 1 or 2 clients on a year without a corporate trustee between them and decisions regarding their investment funds.
Photo by Markus Spiske
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We send our client(s) through a risk score. In this case, we got both the Mother and Father on the call and walked them through the questionnaire. While the corporate trustee has full financial powers (on this one), The parents are setup as Co-Trustees and we do not want our parents/ clients losing sleep at night worrying about their child's investment account.
We like to handle this questionnaire up front, to see the client's risk tolerance and see what types of products could be valuable to them.
It is typical that if they score 50-70 they could be comfortable with some risk in the stock market.
This process also leads to conversations with clients about higher risk comfort levels if they have received enough funds at settlement to annuitize a portion to cover guaranteed monthly income.
If they score, 20 or below, we often see a majority of their funds being annuitized.
We like to handle this questionnaire up front, to see the client's risk tolerance and see what types of products could be valuable to them.
It is typical that if they score 50-70 they could be comfortable with some risk in the stock market.
This process also leads to conversations with clients about higher risk comfort levels if they have received enough funds at settlement to annuitize a portion to cover guaranteed monthly income.
If they score, 20 or below, we often see a majority of their funds being annuitized.
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The attached allocation has considerable equity exposure because 43% of the recovery is being annuitized and guaranteed against loss via the structured settlement annuity and FIA.
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The 5 year annualized return after an "all - in" fee of 1.50% was 9.21%
Due to being compensated for writing the annuities, I reduced my fee to 1%.
Which would have increased this 9.21% return to 9.71%
For the past 9 years the return (since inception) has been 8.79% after a full fee, or 9.29% after my reduced fee.
All returns are net after my fees, TD Ameritrade's fees and expense ratio.
We always spell this out to the client on the phone, in writing and in the order/ trust.
Due to being compensated for writing the annuities, I reduced my fee to 1%.
Which would have increased this 9.21% return to 9.71%
For the past 9 years the return (since inception) has been 8.79% after a full fee, or 9.29% after my reduced fee.
All returns are net after my fees, TD Ameritrade's fees and expense ratio.
We always spell this out to the client on the phone, in writing and in the order/ trust.
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For those of you who are not CFPs or are structured settlement brokers only, it may help you to know some of the following terminology we use when walking clients/ attorneys/ judges/ trustees through the investment proposal;
While many of them don't care to know "ALL" the details, the ones that care, find value in past performance...
Even though it is not indicative of future results.
Can you tell i have bene trained by lawyers?
Standard Deviation - This number states that 68% of the time, this is the return the client could expect to receive. In this case the client could "reasonably" or 68% of the time expect to receive a return of 10.99% when averaged for the past 9 years. This numbers is after fees.
But remember this is NOT guaranteed against loss.
The Sharpe Ratio is a financial metric that consists of taking the excess return of the portfolio, relative to the risk-free rate (The US Treasury rate), and dividing it by the standard deviation of the portfolio’s excess returns.
Sharpe Ratios above 1.00 are generally considered “good”, as this would suggest that the portfolio is offering excess returns relative to its volatility. The one year Sharpe is great, but since inception, it is lower than 1% which could be low if you did not take into account the Beta.
Alpha measures the amount that the investment has returned in comparison to the market index or other broad benchmark that it is compared against. This shows that since inception of this investment account, we have tracked within 2% of the benchmark. So if the market was up 30% we may be up 28%.
Beta measures the volatility of an investment. It is an indication of its relative risk. This Beta would show that the investments are 73% as volatile as the market.
So if the underlying benchmark lost 30%, this account would be down 21.9%. This is a number that many of my clients find valuable.
R2 = R-squared measures the degree to which the fund's performance can be attributed to the performance of the selected benchmark index. This would state that 83% of these funds performance can be linked to the underlying benchmark.
Finally, and this is one of my favorites to bring up with clients, the "Max Drawdown".
Since inception the worst peak to trough drop if you were invested would have been a loss of 20.37%.
I make sure to put this in writing to my clients and incorporate in writing. In my kids accounts, we put this into the order.
This DOES NOT MEAN that one of my investment clients could not lose more, but it means that since inception (or over the past 9 years) that more severe losses have not occurred.
Plus, since we have annuitized (or guaranteed $750,000.00 of the $1,750,000.00 or 43% of the minor's account against loss, I feel that this allows us to carry this type of risk in the investment account.
And we have guaranteed the minor's major funds needed from 18-25, which would allow for time for a rebound if a significant market crash occurred.
While many of them don't care to know "ALL" the details, the ones that care, find value in past performance...
Even though it is not indicative of future results.
Can you tell i have bene trained by lawyers?
Standard Deviation - This number states that 68% of the time, this is the return the client could expect to receive. In this case the client could "reasonably" or 68% of the time expect to receive a return of 10.99% when averaged for the past 9 years. This numbers is after fees.
But remember this is NOT guaranteed against loss.
The Sharpe Ratio is a financial metric that consists of taking the excess return of the portfolio, relative to the risk-free rate (The US Treasury rate), and dividing it by the standard deviation of the portfolio’s excess returns.
Sharpe Ratios above 1.00 are generally considered “good”, as this would suggest that the portfolio is offering excess returns relative to its volatility. The one year Sharpe is great, but since inception, it is lower than 1% which could be low if you did not take into account the Beta.
Alpha measures the amount that the investment has returned in comparison to the market index or other broad benchmark that it is compared against. This shows that since inception of this investment account, we have tracked within 2% of the benchmark. So if the market was up 30% we may be up 28%.
Beta measures the volatility of an investment. It is an indication of its relative risk. This Beta would show that the investments are 73% as volatile as the market.
So if the underlying benchmark lost 30%, this account would be down 21.9%. This is a number that many of my clients find valuable.
R2 = R-squared measures the degree to which the fund's performance can be attributed to the performance of the selected benchmark index. This would state that 83% of these funds performance can be linked to the underlying benchmark.
Finally, and this is one of my favorites to bring up with clients, the "Max Drawdown".
Since inception the worst peak to trough drop if you were invested would have been a loss of 20.37%.
I make sure to put this in writing to my clients and incorporate in writing. In my kids accounts, we put this into the order.
This DOES NOT MEAN that one of my investment clients could not lose more, but it means that since inception (or over the past 9 years) that more severe losses have not occurred.
Plus, since we have annuitized (or guaranteed $750,000.00 of the $1,750,000.00 or 43% of the minor's account against loss, I feel that this allows us to carry this type of risk in the investment account.
And we have guaranteed the minor's major funds needed from 18-25, which would allow for time for a rebound if a significant market crash occurred.
Lets talk about historical market crashes and rebounds, briefly...
Photo by Bill McIntyre
Per Morningstar, "Including the COVID-19 crash, there are a total of 18 bear markets over a period of 150 years, suggesting that on average they occur about once every eight years.
The worst one was the Crash of 1929, along with the first part of the Great Depression, which saw a 79% loss.
It took the market a little more than 4 years to recover from that trough.
The second-worst drop is the 54% decline over the Lost Decade (the period from August 2000 to February 2009).
The market index did not fully recover until May 2013, almost 12 and a half years after that decline began."
(https://www.morningstar.com/articles/1028407/in-long-history-of-market-cras...)
At Garrison Financial, we believe that given enough time, markets rebound.
And we like structures for our clients.
Structuring the first 5-15 years to guarantee payments and to hedge against market risks almost always makes sense, and it provides more time for the investments to grow.
As it allows us to be able to plan for recovery and allocate funds.
However, we do believe that over time the current rate environment provides inflationary risks that will further reduce low fixed rate returns.
Photo by mtstradling
We had a case where we had sold a client a structured settlement annuity, and she was excited about future guaranteed income.
Photo by aag_photos
"Jane" was 51, Female and needed half of her recovery to buy a house.
We asked our referring plaintiff attorney for realtors, and advised our client to get an inspection on the home.
We used the remaining $500k to purchase a
15-year period certain structured settlement annuity, to get her to Social Security retirement age (Age 65).
This is a monthly amount that Jane said would allow to continue close to her quality of life, before the accident.
Plus by purchasing the the house outright, she was no longer stressed to make rent payments.
Plus by purchasing the the house outright, she was no longer stressed to make rent payments.
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The structure provided $3,152.62 per month for 15 years only at a cost of $500,000.00.
This structure provided a total guarantee of $567,472.00.
This structure provided a total guarantee of $567,472.00.
After locking the quote, the plaintiff attorneys advised that funds were on the way to their IOLTA.
We advised that the structured funds would need to come directly from the defendant, a large P&C carrier.
Due to my clients' previous issues with defense counsel, plaintiffs counsel asked me to find a solution that could be funded from their IOLTA. They did not want to deal with defense, again.
Photo by Zohar Manor-Abel
We now had to find a SPIA that could come close to matching benefits...
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Equitrust had the best monthly benefit for SPIAs, but they were only rated B++.
Symetra had an A rating so we decided to forego the best monthly benefit and go with an "A" rated carrier.
Symetra's quote was $3,245.72, which still beat the structured settlement annuity quote, but this Symetra quote would be taxable...
Lets compare the actual taxation and benefit as it related to my client.
Symetra had an A rating so we decided to forego the best monthly benefit and go with an "A" rated carrier.
Symetra's quote was $3,245.72, which still beat the structured settlement annuity quote, but this Symetra quote would be taxable...
Lets compare the actual taxation and benefit as it related to my client.
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The monthly taxable portion of the Symetra quote (on line 2) was only $467.38. So of the $3,245.72, only $467.38 was interest gained and would be the ONLY taxable portion.
Since my client has zero dollars in earned income, and is most likely at a 0% tax bracket we were not concerned about taxation.
However, for grins, lets use a 12% tax bracket on the $467.38. This would mean that $56.09 per month would be lost to taxes.
If you were to deduct the taxes from the $3,245.72 this would leave you with $3,189.63 per month in net income.
Or an increase of...
Since my client has zero dollars in earned income, and is most likely at a 0% tax bracket we were not concerned about taxation.
However, for grins, lets use a 12% tax bracket on the $467.38. This would mean that $56.09 per month would be lost to taxes.
If you were to deduct the taxes from the $3,245.72 this would leave you with $3,189.63 per month in net income.
Or an increase of...
$37.01
More a month in benefit from the SPIA.
$37.01 PER MONTH MORE FROM THE SPIA THAN THE STRUCTURE.
Don't forget this was assuming a higher tax bracket for my client and using the second best benefit on the current SPIA market.
The total guarantee of this SPIA (after taxes) was $574,133.40 a guarantee of $6,616.40 more than the structure.
Realistically, we could have beat the structured figure by $100.00 per month if we did not care about life company credit quality, and wanted to consult a CPA to guarantee our considerations on taxation.
We still believe that the 12% tax bracket is higher than what "Jane" will be paying, as she should not have any earned income for the next few years.
While structures certainly have their place, suffice to say that TAX-FREE Does not always mean BEST INTEREST.
Don't forget this was assuming a higher tax bracket for my client and using the second best benefit on the current SPIA market.
The total guarantee of this SPIA (after taxes) was $574,133.40 a guarantee of $6,616.40 more than the structure.
Realistically, we could have beat the structured figure by $100.00 per month if we did not care about life company credit quality, and wanted to consult a CPA to guarantee our considerations on taxation.
We still believe that the 12% tax bracket is higher than what "Jane" will be paying, as she should not have any earned income for the next few years.
While structures certainly have their place, suffice to say that TAX-FREE Does not always mean BEST INTEREST.
Ryan J. Garrison
PRESIDENT - GARRISON FINANCIAL, LLC / EVP - JCR SETTLEMENTS, LLC
QUESTIONS?
