Effective Discount Rate | The Only Fair Yardstick Of Value to Stuctured Settlement Payment Sellers

by John Darer CLU ChFC MSSC CeFT RSP CLTC

The Applicable Federal Rate is a useless piece of information to give to a seller, or potential seller of structured settlement payment rights because it

Effective discount rate will vary based on structured settlement buyer's cost of money, expenses and desired profit margin

artificially inflates the present value and makes the seller think that they are receiving a better deal than they are.

What is the Applicable Federal Rate(AFR)?

See IRC 7520  

Rev. Rul. 2019-14 (separate one issued each month) This revenue ruling provides various prescribed rates for federal income tax purposes for June 2019 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(1) for buildings placed in service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July 30, 2008, shall not be less than 9%. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

The Applicable Federal Rate is Not Good For Buyers Either

A structured settlement sold is always worth pennies on the dollar to the seller. The use of AFR to calculate discounted present value just makes the transaction seem like more of a rip off than it is.  No structured settlement buyer, to my knowledge, has a cost of money of 2.8%.  JG Wentworth is purported to have 4%.

What is the Effective Discount Rate?

The effective discount rate is the discount rate used in a calculation of present value that takes into account all expenses and charges of the transaction.  Some states express it as "equivalent to paying interest at a rate of X%. It is the only fair yardstick that allows someone trying to raise money to compare to alternative sources of financing.