Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and John Darer Reviews

Is " Best Interest Test" Adequate in Structured Settlement Factoring? Would Suitability Rules Help?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Is The Best Interest Standard Adequate?

Is the "Best Interest Test" in state structured settlement protection acts adequate to determine the suitability of a structured settlement factoring transaction, or should a uniform suitability standard be established that that places an obligation on the settlement purchaser and/or their brokers or affiliates, on par with other segments of the financial service industry?

A Defining Moment For the Structured Settlement Secondary Market

We're observing a defining moment with the structured settlement secondary market, where just horrible business practices are rampant. Forum shopping and churning of structured settlement annuitants into multiple costly and financially devastating transactions is an unfortunate reality.  Why are state governments, letting unlicensed merchants., some of whom fraudulently pose as "financial advisors" dispense financial advice. Why is there no concern for the consumer by state legislators who could put a damper on the miscreants though a licensing standard? 

While New York judges are doing a good job, judges in some states are simply not getting it done, to the detriment of people they are supposed to protect, resulting in financial devastation in some cases. More judicial education is sorely needed.

When annuities are sold to consumers by licensed and appointed insurance producers  (agents or brokers) there is an obligation to determine suitability.  There is an obligation on the producers and the insurers as well.

There is debate over whether suitability standards should apply to structured settlements and it is my opinion that they should. But they should apply to all aspects of the structured settlement market. A recommendation to sell a structured settlement payment stream that is producing stable income to an individual or family in conjunction with an investment recommendation for mutual funds or an investment in commercial real estate, as many factoring companies try to orchestrate is an action that should be subject to regulation, including licensing and a suitability standard.  

Suitability Standard | Time to Make a Fuss?

A structured settlement Factoring Uniform Suitability Standard should include a mandatory questionnaire that gives a judge quality information reducing the opportunity for structured settlement factoring companies to manipulate judges concocting a story or manufacturing reasons to sell, or sell for second or third time, with few details.  Some petitions literally have a kitchen sink of reasons listed without regard to whether executing on them is even mathematically possible. A suitability questionnaire would be helpful

Today I received a call from an individual associated with a Florida based structured settlement factoring company who called me about "selling my annuity". They contacted both my office phone and cell phone and during the course of the conversation without knowing anything about me or who I was they talked about putting the money into investments or real estate. I asked the person how it works and if they had a license and they said no.  I got to thinking what if this sales call was received by someone without the professional qualifications that I have?   This is the kind of call that is being made to 18 years kids and other young adults in New York, CT and all over the United States by vultures trying to peck their pocket. It's time that suitability standards hold them accountable in public view.

Two Florida structured settlement buyers' reps have used unreasonable investment projections on company letterhead as part of sales pitch to wrest structured settlement payments from unsophisticated annuitants at significant discounts.  Upon information and belief none of the signatories of those letters had any investment or financial planning credentials.

State Attorney General Alert on Structured Settlement Factoring | Is This Part of Your Investigation?   4/4/2018

Was Client First Settlement Funding Show Of 8% Investment Projection to Structured Settlement Annuitant A Permissible Inducement?  7/24/2016

Are there any limitations on the obligations of insurers or producers to determine suitability pursuant to the Model Suitability Regulation?

Sec. 6D states that neither a producer nor an insurer has any obligation to a consumer under the provisions of this regulation if:

1.  No recommendation is made;
2.  the consumer provided materially inaccurate information which led to an unsuitable recommendation;
3. a consumer fails to provide relevant suitability information and the transaction is not recommended; or
4. a consumer enters into an annuity transaction that is not based on the recommendation of an insurer or a producer. However, an insurer’s issuance of an annuity is to be reasonable under all circumstances actually known to the insurer, even if the situations listed above apply.  

Who Owns a Structured Settlement Annuity?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Who Owns a Structured Settlement Annuity?

The majority of structured settlement annuities are owned by qualified assignment companies not the payees of the structured settlement.  The structured settlement annuities are purchased as a qualified funding asset subject to the terms of IRC 130(d). All structured settlement annuities used to fund taxable damages or attorney fees purchased are purchased by a non-qualified assignment company as part of a non-qualified assignment. As such they may be owned by a company specializing in non-qualified assignments.

A case in point would be American General Life Insurance Company and United States Life Insurance Company in the City of New York, subsidiaries of Corebridge Financial (formerly AIG Life & Retirement), which use AGL Assignment Company LLC for non qualified assignments. Where a qualified assignment is to be utilized, American General Annuity Services Corporation is the qualified assignment company. Another example is Independent LIfe Insurance Company which uses different assignment companies for qualfied and non-qaualified assignments,

In the case of MetLife Assignment Company, Inc, MetLife's assignment company owns structured settlement annuities funding both tax-exempt and taxable damages. 

Merchants of Factored Structured Settlement Payment Rights/Receivables Often Get It Wrong

Merchants of factored structured settlement payment rights mislabel factored structured settlement payment rights to prospective investors and to financial advisors, who may then market the mislabeled receivables to investors incorrectly as annuities.

Immediate Annuities (Dot) Com, a New Jersey broker of structured settlement payments and one of several companies that conducts such business using the debunked label  Secondary Market Annuity, which is not an annuity at all.  

Immediate Annuities (dot) com states, inaccurately, that  "A Secondary Market Annuity (also called an 'SMA') refers to a transaction in which the current owner of an income annuity sells his future income steam to a third-party in exchange for a lump-sum payment. Annuity income streams most commonly originate from lawsuit settlements, lottery winnings, or immediate annuities".

Immediate Annuities (dot ) com is not correct because it inaccurately suggests that a structured settlement payee is the owner of the income annuity funding a structured settlement. In fact, nothing could be further from the truth when it comes to structured settlement ownership.

It's hard to believe that Immediateannuities.com continues to use the debunked term "Secondary Market Annuity" or its plural "Secondary Market Annuities" when

1. The National Association of Insurance Commissioners does not recognize acquired structured settlement payment rights as annuities or insurance product.  See Statutory Issue Paper No. 160, which was finalized April 6, 2019.
2. There is no protection for investors in the event of insolvency in the 37 states that have adopted the 2017 Revisions to the Life & Health Guaranty Associations Model Act (#520). Investors should not feel comfortable in the 13 states that have yet to adopt, because the Model Act has a reach back provision that applies to such acqusitions before or after the adoption of the 2017 Revisions in a state.
3. Past and ongoing litigation that in some cases HAS resulted, and in pending cases MAY result in losses for investors in structured settlement payment rights. 

Pay Attention to the Settlement Agreement and Release!

A settlement agreement establishing the structured settlement will expressly state that the assignment company has all rights of ownership of the annuity. The structured settlement payee only owns the right to receive the periodic payments from a structured settlement as part of the consideration for a release of liability. The payee does not own the structured settlement annuity. It is the structured settlement payment rights that are transferable as long as the transaction complies with state and Federal law.

Last updated January 30, 2024

 

Structured Settlement | What is a Structured Settlement | Definition of Structured Settlement

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

What is a Structured Settlement?

A structured settlement is a negotiated financial or insurance arrangement through which a claimant or plaintiff agrees to resolve a personal injury tort or wrongful death claim by receiving all or part of a settlement in the form of periodic payments on a agreed customized schedule, rather than as a lump sum.

A structured settlement is a negotiated agreement

Definition of Structured Settlement per IRC §5891(C)(1)

The term "structured settlement" means an arrangement—

(A) which is established by—

(i)

suit or agreement for the periodic payment of damages excludable from the gross income of the recipient under section 104(a)(2), or

(ii)

agreement for the periodic payment of compensation under any workers’ compensation law excludable from the gross income of the recipient under section 104(a)(1), and

(B) under which the periodic payments are—

(i)

of the character described in subparagraphs (A) and (B) of section 130(c)(2), and

(ii)

payable by a person who is a party to the suit or agreement or to the workers’ compensation claim or by a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with section 130.

 

 

 Read What You Need to Know About Structured Settlements

 

 

Non Qualified Structured Settlements

Structured settlements can also be used for taxable damages, or for tax exempt damages that are not specifically included in IRC §130  (e.g wrongful imprisonment, wrongful conviction which are exempt under IRC §139F).

How Are Structured Settlements Funded?

Structured settlement payments are generally funded and backed by highly rated and regulated life insurance companies, a number of which have been in operation for more than 100 years.  Structured Settlements can also be funded with obligations of the United States Government (Treasury Funded Structured Settlements)

Structured settlements have received widespread bipartisan support from the U.S. Congress since the enactment of the Periodic Payment Settlement Act of 1982. 

Last updated August 5, 2023

 

 

Secondary Market Annuity Payments Bought STILL Haven’t Been Made to Investors

by Structured Settlement Watchdog

Barry Cooper, a 64 year old Florida retiree who put in years of back breaking hard work on submarines at the Naval Submarine base in Georgia, had $149,253.83 of his Thrift Savings Plan funds placed in what was represented as an annuity paying 4.75% in November 2013 through Somerset Wealth. Now he is not receiving the payments that were supposed to start January 2018. In addition since the purchase was set up as an IRA Rollover by Somerset, with Las Vegas based Provident Trust, Cooper is being charged a $285 annual administration fee.  Cooper was supposed to begin receiving $1,600 per month with a 2% annual increase.  Now there has been no check, just crickets, after a year of worry for the Jacksonville man and his wife and added needless stress to their marriage.

In February 2017, certain investors, including the Coopers, received correspondence from INF Settlement Trust, the payment servicing company that Access Funding used, stating that "payments assigned to you have become part of a court action initiated in the state of Maryland. We have been informed by one or more of the insurance companies' legal counsel involved that they consider this a competing claim, For this reason they have decided to withhold payments until the issue is resolved in court.

INF Settlement Trust is corresponded with such payees and placing conditions "for the continuing processing and forwarding of structured settlement payments" by requiring that payees execute a Hold Harmless Agreement.

“ We had plans for that money” says Linda Cooper, 67, Barry Cooper’s wife, who together with her husband have been devastated by the state of affairs since learning in 2017 that (1) the “annuity” they purchased was not in fact an annuity but a structured settlement derivative scam labelled as an annuity; (2) payments were being suspended due to the possibility of competing claims with alleged victims of Access Funding in Maryland (3) someone was trying to get Cooper to sign a hold harmless after the fact.

Purveyors of structured settlement derivatives like SMA Hub, Annuity Straight Talk, Somerset Wealth and others have scam labelled the derivatives Secondary Market Annuities to insinuate the known term annuity. Nathaniel Pulsipher of Annuity Staight Talk (who did not do business with the Coopers) has claimed “it’s easier to say”.  But again, a Secondary Market Annuity is not an annuity.

Neither Barry Cooper, nor Linda Cooper had owned an annuity before the decision to do business with Somerset Wealth and its representative Brian Horne, according to Linda Cooper.  Linda Cooper had listened to several radio shows featuring Stan Haithwaite (a/k/a Stan The Annuity Man) discussing annuities and stumbled upon Somerset Wealth Strategies website, secondarymarketannuities(dot)com and Stan The Annuity man purportedly recommended Somerset. 

Cooper alleges that the during the sales pitch from Somerset, she was told that Somerset hired its own attorneys to thoroughly vet and approve the deals and that it was a safe investment, that there was no risk. In fact the Somerset Wealth at the time failed to disclose the transactional risk on its website until we called them out on it.

Somerset Advertising of Recycled Structured Settlements Questioned in 2015

In this July 26, 2015 post I wrote with the appropriate sprinkling of sardonic flair, that “Somerset Wealth Strategies claims to offer an annual payout rates of 75.5% and 25.17%  on a Prudential recycled structured settlement and 31.16% and 42% on an AIG recycled structured settlement.  Before you get crushed in the "stampede" to obtain structured settlement payment rights based on this misleading annual payout rate display, consider this…”

“Righteous Dude”

I’ve been told by more than one person that the chief of Somerset Wealth “is a righteous dude”. I spoke to “the righteous dude” and he did suspend sales of structured settlement derivatives in January 2017.  He does come across as sincere. Somerset has taken an active role in trying to represent the interests of the people it sold the structured settlement derivatives and they have spent thousands of dollars in legal fees in that regard. It periodically sends updates. However, for all the righteous dude’ s sincerity when Linda Cooper attempted to get an answer the other day she did not get a response.  Furthermore, having spoken with “the righteous dude” personally last year about SecondaryMarketAnnuities.com and the use of the scam label ”Secondary Market Annuity”. He remarked that there was a lot of money invested in the domain.

The term “righteous” means a personal who is good, virtuous, upright, upstanding, principled ethical, angelic, beyond reproach etc. How righteous is it to continue to scam label structured settlement derivatives and who holding an insurance license promotes something as something that it’s not even though your company, at least for the last 13 months, has suspended sales of the derivative?

The continued militant behavior to scam label structured settlement derivatives as annuities simply undermines the credibility of those who sell them.

Structured Settlement Tax Rules Untouched in Tax Reform Proposal

by John Darer CLU ChFC MSSC RSP CLTC

House Ways and Means Committee Chairman, Congressman Kevin Brady, released a comprehensive 429 Page tax reform proposal titled the "Tax Cuts and Jobs Act."  The House Ways and Means Tax Reform Proposal just released leaves the current law structured settlement tax rules in place and untouched!
Click here to read the Tax Reform Proposal and Tax Cuts and Jobs Act Section by Section.

Structured settlements have received bipartisan support from Congress for over 35 years, a clear testament to perceived value of structured settlements by legislators.

Thank you to members of Congress who seek out information about structured settlements and participate in the Structured Settlement Caucus with the National Structured Settlements Trade Association.

Structured settlements are status quo in proposed tax reform

 

 

 

What is the Role of Independent Professional Advice in an Structured Settlement "Cash Out"?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

My structured settlement industry brethren are providing independent professional advice to would be sellers of structured settlement payment rights. The predatory nature of the solicitation and approach by buyers of structured settlement payment rights and the lack of regulation of sale practices has lead to a number of highly publicized poor decisions and worse.

A number of states mandate that there be independent professional advice, but it is prudent to seek independent professional advice whether it is mandated or not because it is difficult to reverse a bad mistake.

Should the role of independent professional adviser begin with an apparent presumption that the act of selling structured settlement payment rights is in the best interest of the would be seller? 

Here is how one of my industry colleagues markets his services as an independent professional adviser.

"In short, there are few firms more suited to help you unwind a structure that no longer fits your needs and determining what your best options are to sell your payment program. ____________________will ONLY work on a fee basis and never takes finder fee's  (sic), referral fee's (sic)or commission's (sic) from the purchasor's (sic) of annuity cash flows. Our objective is to quickly and professionally assist you with this transaction and to insure you obtain the best possible price and that you get through the court approval process as quickly as possible". 

My approach to independent professional advice in this context is different. I approach an IPA assignment to first determine whether or not the transaction is in the payee's best interest. In a lot of cases it isn't 

I determine the reason for wanting to sell and the backstory. I determine if the payee has explored other options, how they have done so and the results of those efforts. If in fact a structured settlement factoring transaction is in their best interest, in my opinion, I will make sure that they have shopped around and that they have a clear understanding of the transaction and it's impact on them and their family as well as the finality. I ask the factoring company to provide documentation so I can see what disclosures have been made. I make it clear on our website that an IPA is not a rubber stamp, nor should it be.

One person called me to sell structured settlement payment rights to pay the balance of the cost of her mother's funeral which had occurred a  few weeks prior. The cost of doing a factoring deal was 5 times more than the amount she "needed now" from a lump sum due in only 3 months!  A vulture factoring company was drooling to do the deal. Instead of sanctioning this bad deal, I suggested contacting the funeral home and working out a financial arrangement with a nominal amount of interest if necessary. 

Years ago, before Peachtree's merger with JG Wentworth,  I was asked to do an IPA on a Peachtree case in which the discount rate was in the high teens. The annuitant had not shopped around and it was clear he could have done much much better and at the very least negotiate with Peachtree for a better deal. He said he was too far down the pike and had a court date and did not want to start over. I memorialized my findings including his comments in the IPA.

There is nobody more outspoken on the structured settlement factoring industry business practices than me over the last 12 years.

I think it is a good idea for qualified individuals in the primary market to provide such advice if they really believe in structured settlements, as I do. It's a lot better than sitting back and reading about the "drek" IPAs produced by the likes of Charles E. Smith Esq. to the Access Funding victims in Maryland as alleged in the Washington Post, the CFPB Complaint and the Maryland Attorney General Complaint.

On a technical note, my industry colleague claims to be "more suited to help you unwind a structure".  His statement about "unwinding a structure" is highly inaccurate and I doubt his ability to prove that he has actually done this.  You see, when someone receives cash now in exchange for some or all of their structured settlement payment rights, the structure actually stays in place, only the rights to the payments are transferred to someone else. What's wrong with describing what actually happens? At the very least, use a better metaphor.

 

 

 

 

Structured Settlement Receivables Salespeople "Lost in A Masquerade" as "Structured Settlement Broker"

by Structured Settlement Watchdog®

Straight out of a soft jazz classic (or a costume ball), members of the structured settlement secondary market shun accurate terms to describe themselves to the public behind a mask

Having already made a dent in the scam label "secondary market annuities", it is time to address misuse of the term "structured settlement broker" by investor facing salespeople.

• The Oxford Dictionary defines broker as "a person who buys and sells assets for others".
• A structured settlement is defined under the Internal Revenue Code
• Intermediaries broker the sale of structured settlement payment rights, defined at IRC 5891(c)(2), not structured settlements, which are defined at IRC 5891(c)(1).
• Intermediaries do not broker the sale of structured settlement annuities to investors either, because structured settlement payment rights are derivatives, not annuities.
• If you allege someone who is hocking structured settlement payment rights to investors of violating state insurance laws (which govern the sales and solicitation of annuities), pay attention to how quickly they are to defend themselves by claiming they are not annuities (despite their use of the "secondary market annuities" scam label), or not an insurance product. It is an admission of sorts, to false advertising. 
  
• A investor in structured settlement payment rights is not a party to the structured settlement from which the structured settlement receivable, in which they are investing, is derived.
  

 

  "Are we really happy here

    With this lonely game we play

    Looking for words to say

    Searching but not finding understanding anywhere

    We're lost in a masquerade"

 from This Masquerade, by the late Leon Russell

Lawyer's Article on "Secondary Market Annuities" On Par With Industry's Typically Deficient Explanation of Risk

by John Darer CLU ChFC MSSC RSP CLTC

The possibility that an order approving the transfer of structured settlement payments could be vacated has been reasonably foreseeable since January 2002, when a law established by an act of Congress in 2001, creating IRC §5891, imposed an excise tax if a "qualified order" is not obtained. 

What is a Qualified Order in Relation to a Transfer of Structured Settlement Payment Rights?

1.QUALIFIED ORDER:  For purposes of this section, the term “qualified order” means a final order, judgment, or decree which:

A.finds that the transfer . . .

i.does not contravene any Federal or State statute or the order of any court or responsible administrative authority, and

ii.is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents, and

B.is issued –

i.under the authority of an applicable State statute . . . .

2.APPLICABLE STATE STATUTE:   For purposes of this section, the term “applicable State statute” means a statute. . . enacted by

A.the State in which the payee of the structured settlement is domiciled, or

B.if there is no statute described in subparagraph (A), the State in which either the party to the structured settlement (including an assignee under a qualified assignment under section 130) or the person issuing the funding asset for the structured settlement is domiciled or has its principal place of business.

Transactional Risk, a Known Risk, Largely Ignored in the Marketing of Structured Settlement Receivables to Investors

Structured Settlement Factoring industry dirt that's just too hard to ignore

• A former employee of Peachtree Settlement Funding was arrested in 2010 for extortion for threatening to expose, upon information and belief, among other things, forum shopping.  Three years later a decision filed August 26, 2013 in Settlement Funding, LLC (Peachtree Settlement Funding) v Cathy Brenston, 2013 IL App (4th) 120869, the subject matter of which involved THREE prior transfer orders  (June 28,2007;  March 31,2008 and April 10, 2008) approved by the Circuit Court of Sangamon County and a petition by the seller, MORE THAN TWO YEARS AFTER these the transfer orders to vacate the Orders on the basis of fraud by the purchaser and the assertion of a legal disability of incompetence,  the Illinois Appellate Court reversed a lower court decision denying the petition to vacate
• It was known to structured settlement factoring stakeholders in October 2013 that Thomas Rubino, then a paralegal at the New York City personal injury law firm of Paris & Chaikin had falsified structured settlement transfer orders after Paris & Chaikin informed its clients JG Wentworth, Stone Street Capital and Woodbridge Structured Funding. The shenanigans were perpetrated during his employment from July 10, 2010 to October 2013.

Law Professor Advised Caution But Failed to Identify Key Risk to Investors

Yet in January 2014 National Underwriter published an article by Texas A&M law professor  Robert Bloink, that not only promoted the mislabeled secondary market annuities (which National Underwriter misfiles under Annuities, Fixed Indexed) as an asset class for financial advisors to recommend to their clients, but also failed to identify transaction risk.

Bloink said  "Secondary market annuities are not without risk—interest rates could rise during the annuity’s term and the insurance carrier’s financial health, as always, is critical to the success of the transaction. Because of these risks, and the fact that the market has been an unknown to many until recently, it is important that advisors are fully informed before recommending the strategy to any client".

Transaction Risk in Structured Settlement Investing Is Greater Than Insolvency Risk

Arguably transaction risk is a greater risk than insolvency risk and in some cases it's out of your control. Failure to identify reasonably foreseeable transaction risk  has been typical of many peddlers of the mislabeled "secondary market annuities" which are derivatives,  not annuities. What is both surprising and disappointing to me is that a law professor at a premier educational institution and an insurance industry publication would actually attempt to validate an illegitimate terminology.

"The buyer is depending on the validity of the court order approving the sale of the annuity. The court approving the transaction must have jurisdiction over the assignment of the annuity and the parties involved in the transaction"  -Pacific Structured Assets

A Pittsburgh couple invested retirement money in a structured settlement derivative mislabeled as a "secondary market annuity" in 2012. In 2014, the same year that the Bloink article was written they discovered that the  court order was procured by fraud and vacated leaving them with nothing to show for their investment, a loss of almost $153,000 plus legal fees incurred since then trying to get money from those who advised or participated in selling them the ill-fated investment. The recent Wall case, is a cautionary tale. The intermediary Altium Group obtained a legal opinion that the transaction was sound but the investor and Altium were both burned by a forgery that was uncovered later.

A December 15, 2014 article published at WealthManagement(dot)com  Stan Haithcock (a/k/a "Stan the Annuity Man") is quoted “It’s kind of messy,” he says, noting the market is largely unregulated. “Most (insurance) agents are not qualified to sell them"

Tom Hamlin, of Somerset Wealth Strategies said in the January 2014 National Underwriter article, "Secondary annuities are a safe money strategy that's not too good to be true, just too good to last."  Yet less than 3 years later Somerset suspended sales of the structured settlement derivatives, believed to be due to one or more deals acquired for clients from Access Funding.  One of those clients who contacted me is a senior from Florida, who recently received notice that payments were suspended due to competing claims.  Her deal was consummated about the time the National Underwriter article citing Hamlin was published.

 

IRS § 5891 Memo on Structured Settlement Factoring Excise Tax | Forum Shoppers in Cross Hairs

by Structured Settlement Watchdog®

The IRS has issued a response to three scenarios that may have a chilling effect on the structured settlement factoring companies and investors in structured settlement receivables falsely marketed as annuities (including seniors, retirees and even certain injury victims).

Forum shopping has been the scourge of the structured settlement secondary market.  It is common knowledge that some sleazy structured settlement factoring companies (settlement purchasers), including certain members of the National Association of Settlement Purchasers (NASP) have solicited residents of one state and move them to another state, creating a fiction, in order to do the structured settlement factoring deal in which they inveigle unsophisticated structured settlement annuitants to be complicit in a fraud on the courts.

Forum Shopping fraud may impact structured settlement sellers and investors in structured settlement receivables

 There has been litigation and there is now pending litigation alleging such frauds and now there will likely be future litigation seeking to overturn orders procured on the basis of the frauds.

Forum shopping frauds have the potential to impact both structured settlement annuitants and investors in structured settlement receivables (that have been deceptively and falsely marketed as annuities by certain actors), including seniors and retirees and injury victims directly, or through their trusts.

The Office of General Counsel of the IRS issued a memorandum on November 28, 2016 in response to three scenarios and the imposition of the 40% Federal Excise Tax under IRC 5891.

Scenario 1:
Payee, an individual, is domiciled in State A. Payee receives a stream of payments from a structured settlement, as defined in § 5891(c)(1) below. After several years of receiving the payments under the structured settlement, Payee decides to sell the future payment rights to Factor, a factoring company. Factor and Payee enter into an agreement pursuant to which Factor will acquire Payee’s structured settlement payment rights in exchange for a lump sum.
State A has a Structured Settlement Protection Act (SSPA), which requires that transfers of structured settlement payment rights must receive advance court (or administrative authority) approval in order to be valid. The SSPA meets the requirements for an “applicable state statute” within the meaning of § 5891(b)(3). Factor does not file a petition to acquire Payee’s payment rights in a court in State A, but files the petition in State B. In its petition, Factor represents that Payee is domiciled in State B, despite Payee having been domiciled in State A when the petition was filed, and at all times during the approval process

In addition, Factor represents to the court that the transfer meets all the conditions found in § 5891(b)(2)(A)(i) and (ii). The State B court approves the transfer of Payee’s structured settlement payment rights to Factor, and orders the person funding the structured settlement to redirect the payments to Factor, as transferee. Factor begins to receive payments pursuant to the State B court’s order

IRS Concludes that In Scenario 1, because Factor obtained a court order from a state other than the state of Payee’s domicile and the state of Payee’s domicile has a Structured Settlement Protection Act, Factor did not obtain a “qualified order” within the meaning of § 5891(b)(2) approving the transfer of the structured settlement payment rights, and therefore the tax imposed by § 5891(a) may be asserted against Factor.

Scenario 2:

The facts are the same as the facts in Scenario 1, except that subsequent to the order issued by the court in State B, the Service initiates an examination of Factor’s company records to determine any tax liability under § 5891. The Service proposes asserting the tax on the transaction described in Scenario 1 arguing that the structured settlement factoring transaction does not meet the exception to the tax in § 5891(b) because Factor did not obtain a “qualified order” under § 5891(b)(2). In an attempt to remedy the situation, Factor files a petition in a court in State A to approve the transfer pursuant to the original State B court order. The court in State A approves the original transfer. Factor provides the State A court’s order to the Service, and argues that the transfer has been approved in a “qualified order” and thus no tax is due. [ think as an example Camacho and Rubino forgeries of structured settlement transfer documents]

IRS Concludes in Scenario 2, Factor did not obtain a “qualified order” in advance of the transfer of the structured settlement payment rights but subsequently did obtain a court order from the state of the Payee’s domicile after the transfer of the structured settlement payment rights. However, the latter court order did not approve the transfer of such rights “in advance in a qualified order” as required by § 5891(b)(1). The tax imposed by § 5891(a) can be asserted against Factor.

Scenario 3:

The facts are the same as the facts in Scenario 1, except that Payee decides to sell the future payment rights to Parent, a factoring company. In addition, in its petition to the court in State B, Parent requests that the court approve and order the assignment of the payments to Subsidiary, which is wholly-owned by Parent and finances Parent’s factoring transactions. The State B court approves the transfer, and per the request of Parent, orders the person funding the structured settlement to redirect the payments to Subsidiary. Subsidiary begins to receive payments under the structured settlement pursuant to the State B court order.

The IRS concluded in Scenario 3, Parent did not obtain a “qualified order” within the meaning of § 5891(b)(2) approving the transfer of the structured settlement payment rights, and therefore the tax imposed by § 5891(a) may be asserted against Parent. If, for example, upon examination, your office determines that Subsidiary indirectly acquired the structured settlement payment rights or Parent is a shell company, a conduit for the payments to Subsidiary, or is acting as a straw man, then there is support in § 5891(a) for asserting the tax against Subsidiary.

It will be interesting to see what bubbles up to the surface in the near future.  Stay tuned.

Relevant Reading

Download IRS Memorandum 11-28-16 re IRC 5891

 

 

Is A Commutation Rider the Fries To The Structured Settlement Burger?

by John Darer CLU ChFC MSSC RSP CLTC  

Is a commutation rider the fries to the structured settlement burger? 

Do Structured Settlement Commutation Riders Taste Better With Ketchup or Mayonnaise?

In the catchpenny "Secrets Structured Settlement Brokers Wish You Didn’t Know" one settlement planner opines that plaintiffs "should almost ALWAYS consider a commutation rider with their structured settlement".  Like fries to a burger.

A commutation rider provides liquidity to the contingent payee(s) of a structured settlement in the event of death of the measuring life.  An irrevocable election to commute and the percentage to be commuted must be made at the time of the structured settlement is established in order for the commutation to be income tax free.

The Original Purpose of Structured Settlement Commutation Riders

Commutation riders triggered by the death of the measuring life were originally established  in 1995. to provide liquidity for structured settlement beneficiaries to pay estate taxes on large settlements at a time when estate tax filing thresholds were much lower than they are in 2017.

While properly designed life insurance was a potential solution to providing estate liquidity, the insurability of the annuitant comes into play. Not all annuitants are insurable for life insurance.

Between 1987 and 1997, the filing threshold in effect for IRS Form 706 was only $600,000 The tax applied to qualifying estates is based on the  decedent’s  gross estate  less  allowable  deductions.  For tax purposes, gross estate includes “all property in which the decedent had an interest at the time of his or her death and certain property transferred during the lifetime of the decedent without adequate consideration; certain property held jointly by the decedent with others; property over which the

A unified credit is allowed, and, between 1987 and 1997, the credit was $192,800, the credit equivalent of $600,000 in total taxable transfers.  The unified tax rate schedule on taxable estate and gift transfers is graduated from the initial rate of 18 percent to the top tax rate of 55 percent on transfers of $3 million or more. 

To put things in even more perspective, the Economic Recovery Tax Act (ERTA) of1981 (Public Law 97-34) significantly altered Federal estate tax law. The Act gradually increased the unified credit from $47,000 to $192,800 over a 6-year period. This effectively raised the exemption and, thus, the filing requirement, from $175,000 to $600,000. Such a low estate tax exemption potentially affected a large number of claims.  By contrast, In 2017 the lifetime exclusion amount against the estate tax for 2017 is $5.49 million, up $40,000 from 2016. That is the maximum size of taxable estate that can escape tax for those who die in 2017.  So from a purely federal estate tax standpoint, in 2017 a commutation rider only benefits a very small population of plaintiffs**. Note that state inheritance taxes may apply with lower exempt amounts.

"Liquefies the remaining value of the annuity"

The settlement planner opines in a memo circulated to trial lawyers, that "the benefit to using this rider is that it liquefies the remaining value in the annuity so that the estate can be probated and distributed without waiting perhaps years for all the remaining guaranteed payments to trickle in". 

Fact: All structured settlement commutation riders pay a percentage  (generally between 90-95%) of the present value. Hence the statement " liquefies the remaining value" is false and misleading.

Fact: Naming a beneficiary, means that payments bypass probate at the death of the measuring life, with or without a commutation rider.

Does Structured Settlement Commutation Rider Have Anti-Factoring Sex Appeal?

• Showcased in a way that would make Peachtree Settlement Funding proud, the settlement planner sells the benefit "Without waiting perhaps years for all the remaining guaranteed payments to trickle in" 

The settlement planner then reasons that "the discount available from the annuity company should be a whole lot less than the double digit discounts that most factoring companies offer".  Such a blanket statement is misleading as most discount rates have come way down.

Furthermore the unresolved conflict facing "plaintiff loyal" settlement planners who push structured settlement derivatives (as is highlighted in a prior post), holding themselves out as "fiduciaries",  in resolving to get the best rate for an investor client, knowing that the same class of annuitant that the settlement planner often deals with, is being screwed (or has already been screwed) on the other side of the deal. The settlement planner has recommended that personal injury clients as investors purchase of structured settlement payment rights from the very same class of annuitants that he claims to protect.

• Another dubious selling point from the settlement planner "commutation rider don’t require a court hearing like factoring does". 

The need for a qualified order is a requirement of the Internal Revenue Code Section 5891 and Structured Settlement Protection Acts in effect in the majority of states.  Given what I and others have documented, the court approval process is not a panacea.  But in many cases it works well.   Setting aside the high stink factor and the need for improvements to regulation, factoring of structured settlements is, in its purest sense, a response to real time changing needs.  A structured settlement commutation rider is an irrevocable election made at the time of settlement whose operation may not come into play for many years, or not at all. 

Relevant Reading

Structured Settlement Commutation Riders FAQ | What You Need to Know About Commutations

Why Name a Beneficiary on a Large Structured Settlement For a Minor?

Federal Estate Tax Returns 1995-1997 an IRS publication by by Barry W. Johnson and Jacob M. Miko

**one example would be where the marital deduction does not apply when the spouse who inherits isn’t a U.S. citizen, even if the spouse is a permanent U.S. resident. The federal government doesn’t want someone who isn’t a citizen to inherit a large amount of money, pay no estate tax, and then leave the country to return to his or her native land.

Still, keep in mind you can leave assets worth up to the exempt amount ($5.49 million in 2017) to anyone, including your non-citizen spouse, without owing any federal estate tax. And if the non-citizen spouse dies first, assets left to the spouse who is a U.S. citizen do qualify for the unlimited marital deduction.

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