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

Fact Check | Can Structured Settlement Annuities Be Sold?

by Structured Settlement Watchdog

 

One of the leading structured settlement brokers of all time claims that structured settlement annuities can be sold to factoring
companies.  Now that would be a neat party trick, since not a shred of it is true.

 

Here's what the mistaken broker  (as of March 15, 2023)

 

Can structured settlement annuities be sold?

 

"Yes.  Factoring companies, which also buy lottery winnings, casino jackpots and other annuity-based payouts, use television and print advertising to reach individuals with structured settlements, offering to buy the settlement annuities at deeply discounted rates and paying the individuals a lump sum. (These lump sums are fully taxable, unlike annuity payments.)"

 

FACT CHECK

 

Structured settlement annuities cannot be sold.  Individuals with structured settlements do not own the annuities that fund their structured settlements. They cannot sell what they do not own. Structured settlement annuities are generally owned by qualified asssignment companies or non qualified assignment. In the less common so-called buy and hold cases, the buying and the holding is by the Defendant or insurance company.

 

It would be a neat party trick

 

 

Says the broker, "Settlement buyouts require court approval. If the buyout is in the "best interest" of the injured party, the court approves the sale. California SB510, signed into law in 2009, gives the courts explicit guidelines to decide whether a buyout is appropriate. Some of these guidelines include a review of the injured party's current and future financial needs, whether the party has received independent legal and financial advice concerning the buyout and if the "discount rate" proposed by the factoring company is in keeping with current market rates". 

 

What California SB510 actually says

 

"SB 510, Corbett. Structured settlements: payment transfers.
   Existing law provides that no direct or indirect transfer of
structured settlement payment rights is effective unless the transfer
has been approved in advance in a final court order based on certain
written court findings".  Source: Legislative Counsel's Digest

What IRC §5891 actually says

I.R.C. §5891(a) Imposition Of Tax — 

There is hereby imposed on any person who acquires directly or indirectly structured settlement payment rights in a structured settlement factoring transaction a tax equal to 40 percent of the factoring discount as determined under subsection (c)(4) with respect to such factoring transaction.

 

I.R.C. § 5891(c)(3)(A) In General — 

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.  Source: Internal Revenue Code of 1986, as amended

 

 

 

 

David Klasing | "Any Disadvantages to a Structured Settlement Agreement?"

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Irvine California tax attorney David Klasing made an attempt to answer the above question in 2014.  There are a number of errors in the still live posting on the Orange County law/accounting firm's website that still comes up in search results. I offer some commentary on that post in a effort to correct those errors.

1. Klasing places much emphasis is placed on the fact that the plaintiff cannot own the (structured) annuity. While true, the reality is that no structured settlement annuity issuer would even issue a structured settlement annuity with an individual annuitant listed as annuity owner. Even if paperwork were submitted with the annuitant as owner, it would be rejected, and no policy would be issued. This is nothing new. That's the way it has been for almost 40 years. 
2. Klasing alleges, in part incorrectly, that the plaintiff typically cannot alter the amount of annuity payments (he, she, or it-in the case of a trust, receives), when there has been a process in place in California to do just that, since October 11, 2009.  Sale or transfer of structured settlement payment rights in exchange for a lump sum of cash is permitted provided the structured settlement transfer complies with state law.  Provided the law is complied with the annuitant effectively reduces the payments he, she or it receives.
3. Klasing errs in stating the plaintiff typically has no rights to the annuity greater than that of an unsecured general creditor when, since 1988 (26 years prior to Klasing's still published posting), the footnote to IRC 130(c) reads "The determination for purposes of this chapter of when the recipient is treated as having received any payment with respect to which there has been a qualified assignment shall be made without regard to any provision of such assignment which grants the recipient rights as a creditor greater than those of a general creditor".  
   

Structured settlements provide a customized stable source of income that is income tax free for damages on account of personal physical injury, physical sickness, wrongful death [subject to IRC 104(a)(2)], workers compensation [subject to IRC 104(a)(1)] and wrongful conviction/imprisonment [ subject to IRC 139F]. I like to use the metaphor of a "job you can never be fired from". The stable income can be helpful to rebuild financial lives, replace income from a former job, or the income contribution of a deceased spouse. It can help a college graduate get started in life without having to share a place with 3 people or work 3 jobs by necessity and have the stability to afford to take a lower paying internship or training program with good potential.

 

Last updated November 5, 2022