by John Darer CLU ChFC CSSC RSP
A cash now pusher/factoring company with ties to a prominent plaintiff structured settlement broker uses caps on statutory protection for annuities to justify that a possible sale of a portion of your annuity or structured settlement payments to re-invest the money may be an appropriate strategy, in the glossary that appears on its website. (March 17. 2012 1:15PM EDT)
Although it is not expressly stated, the theory appears to be if the present value of the existing structured settlement exceeds the statutory cap, the factoring company opines that it may make sense to sell some of your structured settlement payments to bring the present value under the cap and reposition the money.
Caution: Selling structured settlement payment rights will ALWAYS bring with it a financial loss to seller.
If you are thinking about selling, you should picture the sale of future benefits as a loss of capital (even though technically the seller only has the right to receive the payments). In order for such deal to make economic sense the seller would have to have a guaranteed investment opportunity that can make up for the loss that the seller of the structured settlement would incur.
One such strategy that the seller may encounter in the current marketplace in combination with the above is an "opportunity" to purchase re-marketed structured settlements, sometimes labeled SMAs, Secondary Market Annuities, Used Annuities, Recycled Annuities. The tertiary market for structured settlements is something that a number of structured settlement brokers and settlement planners are involved with. The tertiary market refers to rights to structured settlement payments that others have previously sold which are then acquired by someone else from the buyer in the first sale. The cash flows often bring with them nice yields.
Let's Blackboard This Concept With a Hypothetical
Selma Nooity has been receiving payments from her structured settlement with "Sauerkraut Mutual Life" since the settlement of her medical malpractice claim in 2008. The remaining payments have a present value of $750,000 in a state where the statutory cap is only $500,000. It follows that the factoring company appears to be of the opinion that the sale of $250,000 present value, in this example, might make sense to bring the present value within the statutory cap.
Her financial planner suggests Selma replace the lost cash flow by buying a series of re-marketed structured settlements from "Bratwurst Capital".
Discussion
Structured settlement payments from Selma's original structured annuity are income tax free. To make sense, any opportunity " to re-invest" would have to provide (1) similar guarantees; (2) make up for the capital loss resulting from the sale of structured settlement payment rights; (3) assuming that an income stream is still desired by the seller, the opportunity would have to make up for the loss of income tax free cash flow that the seller is currently receiving from the structured settlement payments proposed to be sold; and (4) assurance that the consequences of the two transactions are completely understood by the seller. The two transactions are (1) the sale of a portion of existing structured settlement (the sale transaction") ; and (2) the purchase of structured settlement payment rights from someone else (the buy transaction") . For example, does the seller understand that even if only a portion of the structure is sold and the payments are being serviced, the plaintiff can no longer get information from the annuity from "Sauerkraut Mutual" and must deal with the likely much smaller servicing company?
The sale of structured settlement payment rights is regulated to the degree that to close "the sale transaction" a judge must approve the transaction. This is not automatic.
It is also not clear that statutory protection runs to re-marketed structured settlements. Buyers with concerns about statutory protections that apply to he secondary or tertiary markets should avoid purchasing re-marketed structured settlements until the ELNY liquidation proceedings (began March 15, 2012) have been concluded. A number of factoring companies who have acquired ELNY structured settlement payment rights from the annuitants, have filed objections to the ELNY restructuring plan (which would appear to leave buyers in the lurch).
Unfortunately there is absolutely no license requirement, regulatory control, or control over the solicitation methods used by buyers of structured settlement payment rights, or the promoters of re-marketed structured settlement cash flows. Some of those who have entered this arena who derive most of their business from creating structured settlements in the primary market operate this aspect of their businesses covertly, an admission of sorts.
Most states have statutory prohibitions on discussion of statutory protections related to the sale of an insurance product including an annuity. Re-marketed structured settlement payment rights are not annuities.
In Closing
The factoring company's positioning as a "helpful suggestion", belies the unequivocal message on the home page of the factoring company which barks to structured settlement and annuity holders "Don't Wait For Your Money" and asks the leading question" Why Wait 10, 20 or 30 years when you can get your money in One Lump Sum".
If one "connects the dots", how does the prominent plaintiff structured settlement broker resolve the mixed message of one business that carries the above unequivocal message tpo sell at the same time his other business is actively promoting the benefits of structured settlements and admonishing plaintiff attorneys that they could be held responsible for failing to present structured settlements to their clients in resolving their cases?
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