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Structured Settlement Investments 101 | What are Structured Settlement Payment Rights?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

 

What are Structured Settlement Payment Rights?

According to the definition of "structured settlement payment rights" found in the Internal Revenue Code at IRC 5891(c)(2), the term “structured settlement payment rights” means rights to receive payments under a structured settlement.

 

How Are Structured Settlement Payment Rights Created?

• Structured settlement payment rights are established by contract when a lawsuit is settled and where part of the consideration for the release of the Defendant or Respondent includes an obligation to make future periodic payments.
• In a personal injury settlement, the settling parties execute a Settlement Agreement and Release and then a Qualified Assignment agreement. The latter contract provides for a consented substitution of obligors from the Defendant or its Insurer to the Qualified Assignment Company.
• The Qualified Assignment Company then purchases a qualified funding asset (typically an annuity from a life insurance company) to fund the periodic payment obligation that it has assumed via the Qualified Assignment.

Are Structured Settlement Payment Rights an Annuity?

 

No, a structured settlement is not an annuity, A structured settlement obligation may be funded with an annuity but the structured settlement itself is not an annuity. This is a fundamental and important distinction for anyone seeking to invest in structured settlement payment rights. 

 

What is a Structured Settlement Factoring Transaction?

 

According to the definition of "structured settlement payment rights" found in the Internal Revenue Code at IRC 5891(c)(3)(A), the term “structured settlement factoring transaction” means a transfer of structured settlement payment rights (including portions of structured settlement payments) made for consideration by means of sale, assignment, pledge, or other form of encumbrance or alienation for consideration.

 

Food for Thought

 

• If a structured settlement were an annuity (it isn't), why would you need to fund it with an annuity?
• If a structured settlement factoring transaction is transferring structured settlement payment rights (including portions of structured settlement payments), then whose magic wand makes it an annuity, as that term is defined under state insurance law?
• Why would an investment salesperson, including certain settlement planners call structured settlement payment rights an annuity, in advertising, or in a sworn affidavit to a court, when it's not an annuity?
• Does it make sense to entrust your money with an investment salesperson or settlement planner who "misgenders" a financial instrument?

Beware the Retirement Annuity to Secondary Market "Annuity" Tax Trap

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Holders of retirement annuities may be in for a nasty surprise if they liquidate their long term tax deferred annuities for "secondary market annuities". For some it could mean hundreds of thousands in taxes!

Selling a legitimate annuity to buy a factored structured settlement payment stream that is labeled an annuity but is not an annuity DOES NOT qualify for a 1035 exchange

1. That's because acquired structured settlement payment rights are not annuities despite the scam label that may be bestowed on them that falsely suggests they are. They are structured settlement receivables. See my February 24, 2024 blog Structured Settlement Receivables | What Financial Professional Liability Insurers Need to Know - Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and John Darer Reviews (typepad.com).
2. Investors buying  the payments usually buy them from the originator or transferee, not from an insurance company. No premium is paid.
3. Investors buying them sign a " Receivables Purchase Agreement" not an annuity application.
4. Whether through ignorance, negligence, commission hunger or fraud, salespeople who pitch the surrender of legitimate retirement annuities for receivables billed as "secondary market annuities" are not able to avail their clients of a Section 1035 Exchange that would mitigate the tax hit. 

What is a 1035 Exchange?

A Section 1035 exchange replaces one annuity contract for a new annuity contract without tax consequences. Annuity for Annuity. A structured settlement factoring transaction does not result in a change in annuity rights, only payment rights.  No new annuity contract is created. A structured settlement receivable is not an annuity or an insurance product.

Section 1035(a)(3) provides that no gain or loss shall be recognized on the exchange of an annuity contract for another annuity contract. Section 1.1035-1 of the Income Tax Regulations provides "that the exchange, without recognition of gain or loss, of an annuity contract for another annuity contract under ' 1035(a)(3) is limited to cases where the same person or persons are the obligee or obligees under the contract received in the exchange as under the original contract".  [Source  IRS.gov }

Where is a 1035 Exchange used?

• A Section 1035 exchange replaces an annuity for a new one without tax consequences.
• This is often used to replace outdated contracts with new contracts that have better terms.
• To replace an annuity for another annuity contract with identical annuitants
• To replace a life insurance policy with another life insurance policy, endowment policy, or annuity contract
• To replace one endowment policy for an identical endowment policy or an annuity contract
• The 2006 Pension Protection Act  (effective in 2010), modified the law to allow exchanges into long-term care products. All distributions from non-qualified annuities for qualified long term care expenses are tax free, regardless of cost basis whether the distributions are from your cash value component of your annuity or from your annuity's long term care extension of benefits provision.
   

Last updated July 5, 2024

3 Misleading Terms Used in Advertising By Structured Settlement Factoring Companies, Originators and Rights Sellers

by Structured Settlement Watchdog

Here are three misleading terms that one encounters when solicited by structured settlement factoring companies and intermediaries of sellers of structured settlement payment rights, including one or two glib settlement planners.

1. Selling a Settlement

Why is "selling a settlement" misleading?

All is not what it seems

• A settlement is the end of a civil action brought about by agreement between the parties. [Source: Black's Law Dictionary Free Online Legal Dictionary 2nd Ed. ]
• A structured settlement is a negotiated stream of periodic payments, paid as damages in exchange for a release of liability, that is customized to the needs of a particular plaintiff or plaintiffs.
• A settlement agreement sets forth the terms of settlement including, but not limited to the consideration for the plaintiff's release of liability. Part of that consideration could include a structured settlement and/or cash, disposition of liens, indemnification, confidentiality and so on.
• A structured settlement factoring transaction is a means to raise liquidity for someone who is receiving structured settlement payments, where there is no other viable means, via the transfer of structured settlement payment rights.  A qualified court order is necessary for the buyer of structured settlement payment rights to avoid a 40% excise tax on the factoring discount.

2. Secondary Market Annuity

The use of the term secondary market annuity by certain merchants to solicit an investor to buy structured settlement payment rights is self indulgent twaddle. The National Association of Insurance Commissioners in its Statutory Issue Paper 160 (finalized April 2019) clearly states that acquired structured settlement payment rights are not an annuity or an insurance product.  On January 11, 2020 one New York settlement planner with an active insurance license, even crowed that "these assets are life insurance products, guaranteed by the issuer, and in most states by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA).  When you invest in structured settlement payment rights you are simply not buying an insurance product. 

3. "Super Bonds"

Investing in other people's structured settlement payments leaves you neither "shaken" nor "stirred". They are not a Bond!

A deceptive sale pitch to rope in investors.  A bond "is a debt security, similar to an IOU. Borrowers issue bonds to raise money from investors willing to lend them money for a certain amount of time. When you buy a bond, you are lending to the issuer, which may be a government, municipality, or corporation. In return, the issuer promises to pay you a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it "matures," or comes due after a set period of time".  [Source: U.S. Securities and Exchange Commission]

There is no loan in a structured settlement factoring transaction. The rights to periodic payments are transferred.

You are essentially buying a derivative of a regulated product, the derivative instrument being not regulated by anyone. Investors can lose, and some have lost hundreds of thousands. May also be described as a factored receivable.

Last updated September 4, 2023

 

 

 

 

NAIC Statutory Issue Paper Confirms that Factored Structured Settlement Payment Streams Are Not Annuities or Insurance Products

by Structured Settlement Watchdog

The National Association of Insurance Commissioners (NAIC) recently published an exposure draft to Statutory Issue Paper 160 which introduces substantive revisions to SSAP No. 21—Other Admitted Assets to explicitly include accounting guidance for an insurance reporting entity that acquires (directly or indirectly) structured settlement payment rights as a result of a structured settlement factoring transaction. This item is specific for transactions that only provide a reporting entity the right to receive payments under a structured settlement and does not address situations in which the reporting entity has acquired an insurance product (e.g., life settlement, annuity, etc.

Footnote 1 states clearly  " This guidance is specific to acquired structured settlement income streams (legal right to receive future payments from a structured settlement) and does not capture accounting and reporting guidance for the acquisition of any insurance product (e.g., life settlement, annuities, etc.).

TIP: Implicit in the NAIC statutory issue paper is that acquired structured settlement income streams are neither annuities nor insurance products.

Various individuals and entities solicit money from investors  and market factored structured settlement payment streams as annuities calling them a variety of misleading names:

• Secondary Market Annuity, or SMA
• Secondary Market Annuities, or SMA
• Secondary Market income Annuities, or SMIA

Individuals and entities who market investments in factored structured settlement payment streams to investors and call them annuities may now have a reason to be up the level of concern about their heretofore intellectually dishonest scam labeled marketing efforts. 

Intellectual Dishonesty in the Solicitation and Sale of Factored Structured Settlement Payment Streams to Investors and Injury Victims

Intellectual dishonesty is the advocacy of a position known to be false.  A factored structured settlement  payment stream, by whatever label, is not an annuity. An argument which is misused to advance an agenda  or to reinforce one's deeply held beliefs in the face of overwhelming evidence contrary.  Despite many having insurance licenses, some of those merchants of factored structured settlement payment streams, including certain settlement planners , solicit money from investors using the term annuity, implying that factored structured settlement payment streams are a regulated insurance product when the opposite is true and insinuate that such investments enjoy the same risk characteristics and statutory protections as regulated insurance products.

There is already a pending FINRA complaint filed against a former purveyor of factored structured settlement payment streams. It seems to me that companies that use the term secondary market annuity, secondary market annuities, SMA, SMIA or annuity in their websites or marketing may want to give it a serious rethink.

The National Association of Insurance Commissioners is encouraged to scrutinize the activities of licensed insurance agents and entities who (1) misuse the term annuity to insinuate an insurance product and may have even used insurance company logos to proliferate the falsehood 2) who insinuate statutory insurance protections in their websites and/or marketing materials in their solicitation of investors in conflict with prohibitions on such activity contained in state insurance laws.  If the NAIC and State Attorneys General took the initiative

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