by John Darer CLU ChFC CSSC RSP CLTC
Secondary market annuities can and will unravel if the applicable federal and state laws governing the underlying structured settlement factoring transactions have not been complied with. When using an intermediary, the investor in structured settlement payment rights is relying on the intermediary to handle the compliance correctly. The investor may not be aware of the manner in which the seller of structured settlement payment rights was solicited.
Were there items of economic value, financial incentives or bribes paid to the seller? Was the structured settlement the seller's sole source of income? How would you know that simply by looking at the listings posted on several websites that solicit individual investors to buy structured settlement payment rights? You wouldn't. One noted structured settlement attorney has said online that some investors don't even understand what they are buying when buying structured settlement payment rights. In that context, how would a structured settlement investor know to ask about how the seller was solicited? What assurances and/or proof is the intermiary providing? Does the intermediary have error and omissions insurance that covers the transaction? How many transactions do they do a year? Is the limit of insurance commensurate with the activity?
For example if the seller was forum shopped into Sumter County, Florida or another jurisdiction to avoid nore stringent oversight in the sellers state of domicileand it was later de termined that forum shopping had occurred and that the transaction did not comply with the structured settlement protection act, where does that leave the investor? Pay attention to what has already happened in the Brenston case in Illinois.
Note that under federal law there is a 40% excise tax imposed on the factoring discount if the rules set forth in IRC 5891 and applicable state structured settlement payment act(s) not complied with. Who pays that? Here's looking at you kid!
Another example would be if, in a state that does not require in person hearings when structured settlement transfers come up for court approval, it is later determined that the structured settlement factoring transaction was not in the seller's best interest, or in the interest of applicable dependents, possibly after the fact.
If the structured settlement transfer laws are not complied with, the investor may get their money back, but may face additional legal expenses. The solicitation of the business from investors is unregulated unlike most other financial products. Some intermediaries simply arrange the deal and assign it to an investor. If their compliance is sloppy, look out below. You probably didn't think about that when you ogled that 4% or 5% rate did you?
When one scans the internet seeking information on structured settlement investments it's notable from misrpresentations and inaccurate content, that there are a ton of affiliate marketing websites which unwary investors could be sucked into. Some of these websites are going after mom and pop investors, not institutional investors. The failure to do your homework could have less than desirable financial consequences.