by John Darer® CLU ChFC MSSC RSP CLTC
A structured settlement commutation rider is a custom option for structured settlements that permits all or a portion of the present value of future structured settlement payments to be paid in a lump sum. Typically the commutation is tied to the death of the annuitant, with the proceeds to be used, for example, to provide liquidity for the annuitant's estate, or to pay off liens with a Special Needs Trust. There are also similar riders to cover contractual contingencies such as remarriage or cessation of liability.
One of the limitations of structured settlement commutation riders is the requirement that they must be elected when the structured settlement is created on order to follow the spirit of a 1995 Private Letter Ruling that was issued to the structured settlement annuity issuer, Allstate Life Insurance Company. The secondary market for structured settlements may be able to provide relief in those situations where there is no commutation provision in the structured settlement and there is a valid liquidity need. Such so-called "structured settlement factoring transactions" require approval of a judge "to protect the innocent".
Allstate Life Insurance Company pioneered the use of another form of commutation, for hardship, through its Advanced Funding Exchange Notice (AFEN). AFEN was issued with every structured settlement annuity issued by Allstate Life Insurance Company, or its New York subsidiary, Allstate Life Insurance Company of New York where there was a qualified assignment. Essentially Allstate offered its structured settlement annuitants a liquidity option that is designed to comply with IRC 5891 and state structured settlement protection acts, at a discount rate that is less than typically offered by the "low hanging fruit grabbers" in the secondary market. If you must seek this form of liquidity, then shopping around is the message of the day. At the very least an annuitant can use the AFEN rate to negotiate a better deal. Bear in mind that if you are an Allstate annuitant and call a cash now pusher with a funny TV ad, they may not inform you of your rights under the Allstate contract.
Following Allstate's AFEN introduction, a number of companies quietly offered hardship commutations to their annuitants. In 2006, Symetra, went to so far as to establish an entire subsidiary, Clearscape, to purchase structured settlement payment rights from its annuitants and ostensibly others.
Both Allstate and Symetra sent notices to their annuitants that were hugely unpopular with many structured settlement brokers who had a sour taste in their mouth from a saturation of misleading and in some cases fraudulent advertising by some secondary market companies at the time. One factoring company blogger even got into the act, although such posts were eventually withdrawn.
In December 2006, San Francisco tax attorney Robert Wood wrote a piece which questioned whether commutations could jeopardize the tax status of IRC 130 assignments that spooked a number of the quiet "commuters". Neither Symetra, which has the dedicated factoring subsidiary, nor Allstate, which does commutations, decided to withdraw their offerings. Allstate however, bowed to pressure of its brokers and stopped sending AFEN notices to its structured settlement annuitants. Since then the structured settlement watchdog has received a number of phone calls from Allstate annuitants who contacted other factoring companies, were not told of their rights under AFEN and received low bids with discount rates that exceeded the AFEN rate.
I was pleased to learn last week that other structured settlement annuity issuers are exploring the introduction of hardship commutation similar to AFEN. Here! Here!
Commutation Riders Are a Way to Help Keep Factoring Companies More Honest
The best way to compete with structured settlement secondary market's "low hanging fruit grabbers", in my opinion, is to "lower the bar" and thereby "raise the fruit". I don't mean lower standards. I mean force the aforementioned into offering discount rates below a yardstick rate. This won't completely eliminate the problem (because (1) there is still low hanging fruit from non shopping sellers who possess structured settlement payment rights from companies who no longer write structured settlements (2) Factoring companies have shown the ability to deceive consuemrs by ignoring commuttaion discount rates and charging even higher rates) but I believe it will help. Each and every company currently writing structured settlements is encouraged to come up with its own version of a hardship commutation.