Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and Commentary

Investing in Structured Settlements | What You Need To Know

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Investing in Structured Settlements | What You Need To Know

You or your US clients may be pitched investments in other people's structured settlements using the false flag claim that they are annuities. They aren't.

These alternative investments are not without risk and such investments may neither be suitable for minors, vulnerable retirees or nor personal injury victims. A growing body of litigation suggests that  it's possible that sellers and/or servicers of these alternative investments may not have provided you with enough information, or in a form that you fully comprehend, to have a complete understanding of what you are being solicited to buy, or is being bought for your clients, sufficient to evaulate the potential risks.

Watch this 5 minute video. You will be glad you did. 

 

NJ , WA and OH Legislate Secondary Market "Annuity" Investors Have No Insolvency Protection

by John Darer CLU ChFC MSSC CeFT RSP CLTC

New Jersey, Washington and Ohio are the latest US states to adopt the 2017 revisions to the Life & Health Guaranty Association Model Act (#520). This is great for vulnerable targeted class of structured settlement annuitants in that it reduces incentives for a vulnerable class of investors to invest in factored structured settlement payment rights in New Jersey, Ohio and Washington state.  It's terrible news for the vulnerable class of investors in structured settlement payment rights. 

Structured settlement investors  (people who invest in other people's structured settlement payment rights) are often sold investments scam labeled secondary market annuities. However investing in other people's structured settlements is not the same as investing in legitimate annuities,most notably the fact that, in adopted states, there is now an exclusion for structured settlement payments to which a payee, or beneficiary if the payee is deceased, has transferred their structured settlement payment rights in a structured settlement factoring transaction. The "buzz kill" for people who are already invested in other people's structured settlement payment rights is that the exclusion is applied retroactively and they have no protection in the event of insolvency of the underlying annuity issuer or bankruptcy of the qualified assignment company.

Shouldn't any individual or company that is offering other people's structured settlement payment rights to investors include this as part of the disclaimers to any investor.  It seems to me that any indivdual or company that has sold investors other people's structured settlement payment rights in the past, should update its investors about the new developments.

37 states in all have adopted the 2017 Life & Health Guaranty Association revisions, with the retro insolvency exclusion detrimental to investors, leaving a bakers dozen of states to go.  According to a March 2022 publication by the NAIC with a few states added in the interim, these presently include AK, AR, AZ, CT, DE, FL, IA, ID, IL, IN, KY, LA, MD, ME, MN, MO, MS, MT, NC, ND, NE, NH, NJ, NV, OH, OK, PA, SC, SD, TN, TX, UT, VA, WA, WV, and WY.  

Invest wisely. The friendly faces could be your financial adviser or settlement planner. Their E&O insurance likely contains an exclusion for insolvencies.

 

Bad Lingo for Settlement Consultants 101 | "Refactored Structured Settlements"

by Structured Settlement Watchdog

Refactored Structured Settlements is the creation by some to inartfully describe investments in transferred structured settlement payment rights from other people's structured settlements. The term is used by structured settlement consultants, settlement planners and such, when used as an alternative investment vehicle to a settling plaintiff. The purpose of this post is to set the record straight and to to keep the information highway clear.

• A structured settlement factoring transaction is defined under at IRC § 5891 (c)(3)(A) as "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".
• There is no transfer of an annuity or insurance product.
• It is worth noting that I.R.C. § 5891(c)(1) separately defines the term structured settlement as "an arrangement which is established by suit or agreement for the periodic payment of damages excludable from the gross income of the recipient under section 104(a)(2), or agreement for the periodic payment of compensation under any workers' compensation law excludable from the gross income of the recipient under section104(a)(1), and under which the periodic payments are of the character described in subparagraphs (A) and (B) of section 130(c)(2), and 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".

So, to boil it down:

• A structured settlement is an arrangement 
• A structured settlement annuity is a customizable insurance product used as a qualified funded asset, which is defined at §IRC 130(d) as "any annuity contract issued by a company licensed to do business as an insurance company under the laws of any State, or any obligation of the United States, if—(1) such annuity contract or obligation is used by the assignee to fund periodic payments under any qualified assignment; (2) the periods of the payments under the annuity contract or obligation are reasonably related to the periodic payments under the qualified assignment, and the amount of any such payment under the contract or obligation does not exceed the periodic payment to which it relates; (3) such annuity contract or obligation is designated by the taxpayer (in such manner as the Secretary shall by regulations prescribe) as being taken into account under this section with respect to such qualified assignment, and
  (4) such annuity contract or obligation is purchased by the taxpayer not more than 60 days before the date of the qualified assignment and not later than 60 days after the date of such assignment.

 

When "Re-" precedes any word, it suggests something has been re-done, re-manufactured or even re-structured. Think of a retread tire. Someone patches up an unroadworthy balding tire, re- treads it and out it goes onto another car.  The end product is still a tire!

We're talking two different things in this case:

To sum up

• A transfer of structured settlement payment rights is not the transfer of an annuity or an insurance product or the creation of a new insurance product. There is no "re-tread" going on.
• An investment in structured settlement payment rights is not an investment in an annuity. It is an investment in a receivable.
• An investment in structured settlement payment rights is not an investment in a structured settlement.

For the benefit of consumers, let's keep the structured settlement information highway clear of inaccurate terms.

 

 

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

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

some it could mean hundreds of thousands in taxes!  That's because acquired structured settlement payment rights are not annuities despite the scam label that may be bestowed on them falsely suggesting they are.  Whether through ignorance, negligence, commission hunger or fraud, salespeople who pitch the surrender of legitimate retirement annuities for " 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 an annuity for a new one without tax consequences.

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.