Can Terms of Your Structured Settlement Change? Restructured Settlements

by John Darer® CLU CFC MSSC RSP CLTC

I am responding to the aforementioned question posed on Ask.Com this afternoon. The answer is Yes and No.

While the terms of your original structured settlement cannot change,  a 2009 Private Letter Ruling 200918001 issued to Symetra Assigned Benefits Service Company  (SABSCO)  indicated that in at least one case, a "restructured settlement" was possible through a structured settlement factoring transaction, if certain conditions were met.

Briefly,

• Claimant needed funds to purchase a home and pay for education costs, contacted SABSCO about factoring the a specific lump sum payable to her.
• SABSCO and Claimant entered into a factoring transaction (“Factoring Transaction”) pursuant to which SABSCO agreed to pay to Claimant an initial lump sum payment on  a certain date; and subsequent payments beginning on two future dates;
• Claimant uses cash method of accounting;
• Each of the payments that were made or to be made under the Agreement were excludable under former IRC 104(a)(2);
• SABSCO's assumption of Defendant's obligations was a qualified assignment pursuant to IRC 130
• The Agreement was not readily saleable when claimant and SABSCO entered into the factoring transaction;
• The aggregate amount of payments made by SABSCO pursuant to the factoring transaction does not exceed the amount being factored;
• The factoring transaction is structured settlement factoring transaction described in IRC 5891(b)(1) and is valid under applicable state laws.

In its discussion, the IRS reasoned:

As a result of the factoring agreement, Claimant has received an initial lump sum payment and has and will receive two subsequent payments, on defined dates, for her right to receive the lump sum being factored, thereby closing the transaction as to that portion of SABSCO's periodic payment obligation.

Consequently the IRS concluded, if the Agreement was not readily saleable, and the Claimant uses the cash method of accounting, Claimant's receipt of SABCO's initial payment and subsequent payments " results in income of the same character as would have been received absent the factoring agreement". Cf. § 1.83-7(a).

My May 7, 2009 write up on the PLR 200918001, along with a downloadable copy of the PLR.

Please bear in mind that "restructured settlements" come at a significant cost.  One must first discount the lump sum or series of payments being factored BEFORE the restructuring of that payment takes place. You might be working with a lump sum that has been discounted to present value at a rate of  11-13% or higher.

If you don't really need the cash now, you can put off the purchase or, you can find an alternative source of capital, then do so.