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

John Darer Reviews Broker's Claim that Structured Settlement Brokers Issue Annuity Policies

by Structured Settlement Watchdog

Who Issues Structured Settlement Annuity Policies?

Here's one answer...

"Structured settlement brokers...and are responsible for issuing the annuity policy to the plaintiff"- FAQ answer from the website of a California licensed insurance agent and structured settlement broker , retrieved April 29, 2023

 

According to the Insurance Information Institute however

 

"Annuities can be purchased through insurance agents, financial planners, banks and life insurance carriers. However, only life insurance companies issue policies".  See How are annuities sold? | III

 

Is an Annuity Policy "issued to the plaintiff" When a Structured Settlement Is Established?

 

No, an annuity policy is never issued to the plaintiff when a structured settlement is established. See How Structured Settlements Work | Structured Settlements Explained (4structures.com)

 

Structured settlement annuities can be purchased by Defendants, Insurance Companies for Defendants, or Qualfied Assignment Companies.

 

April is Financial Literacy Month – a month intended to raise awareness on planning for a secure financial future. It’s also a time to reflect on the state of your personal finances and explore opportunities to improve them one step at a time. 

 

Publishing what should be basic information directed to consumers, that is bereft of the accurate truth, would not be acceptable standard for someone who just passed a state insurance licensing exam, let only someone with decades of experience in structured settlements.

 

Let's try to do better, eh?

 

 

 

 

 

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

 

 

 

 

How Are Structured Settlements Paid Out?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

 

How are structured settlements paid out?

 

Structured settlements are most often funded with customized structured settlement annuities and can be paid out in one or more ways. See Types of Structured Settlement Payments | Your Structured Settlement Payment Options (4structures.com)

 

 

 

 

 

 

 

 

John Darer Reviews | Are Structured Settlements Tax-Free?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

 

Are Structured Settlements tax free?  That is the question.

 

One answer appearing on the Internet from a settlement planning firm states:

 

1. Income tax exemption: Structured settlement payments—including growth—are 100% income tax-free. 

 

Comment: TRUE, if the payments represent damages that qualify for an exclusion from gross income set forth in IRC 104(a)(1), IRC 104(a)(2) or IRC 139F. Generally, worker's compensation, personal physical injury or physical sickness, wrongful death and wrongful incarceration. It is not the structured settlement payments themselves that drives the tax treatment, it is what the parties agree the damages the structured settlement payments represent compensation for and how that is applied in the tax code.

 

2. While lump sum cash settlements are income tax-free for physical injury cases, if the money is placed in a traditional investment, then any growth is subject to income taxes.

 

Comment:  Not exactly. The answer fails to recognize capital investments that produce capital gains.

The term capital gain refers to the increase in the value of a capital asset when it is sold from what you paid for it.  A short term gain or loss is when the asset is disposed of in one year or less. A long term capital gain or loss occurs if an asset is sold after holding for more than one year. The asset must be disposed of (sold) in order to realize a capital gain or loss.  In other words, unrealized gains and losses that reflect an increase or decrease in the value of an investment are not considered a taxable capital gain.

So it would be inaccurate to say that "if the money is placed in a traditional investment, then any growth is subject to income taxes".

 

 

 

 

What's the Difference between Structured Settlements and Annuities? Why JG Doesn't Get Full Marks

by Structured Settlement Watchdog

What's the difference between structured settlements and annuities?

JG Wentworth gets partial credit in a recent Facebook post, but the 800 lb gorilla gets an incomplete for dropping the banana on structured settlements:

• Annuities are an insurance product designed to secure a fixed income stream,
  starting either immediately or in the future.
• Structured settlements are a type of annuity that results from a lawsuit.

Why doesn't JG Wentworth Get Full Credit?

1. A structured settlement IS NOT an annuity

2. According to IRC 5891,  the section of the Internal Revenue Code that is the "Mack Daddy" at the core of the stuctured settlement factoring business,  JG Wentworth's business:

With all due respect to Axar, who indeed is their Daddy, what does JG Wentworth's Mack Daddy  (IRC)  say?

 

IRC 5891 (c)(1) states "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.

 

So no, we're NOT speaking about

1. An arrangement of flowers

2  dead gourds for the harvest arrangement (after all it is almost the season), or

3. an arrangement of music, such as the Viking chorus in JG Wetnworth's commericals

 

A structured settlement is not an annuity but it is often funded with an annuity.

 

In the context of structured settlements an annuity is one of the acceptable forms of qualified funding asset [ see IRC 130(d)]

 

 

 

 

 

 

 

 

Structured Settlement Annuities Are Not Tax-Free Insurance Contracts | Wait! What?

by Structured Settlement Watchdog

There is No Such Thing as a Tax-Free Structured Settlement Annuity

You may encounter the term "tax-free structured settlement annuity" on the Internet. Be mindful that there is no such thing. Don't worry annuitants, there is a tax exemption, but not exactly the way it's being presented in many cases by competent settlement practitioners and reputable settlement companies that should know better.

Examples:

• One settlement planner's website says "Structured settlement annuities are not taxable — they're completely tax-exempt"
• Another settlement planner's website says "Tax-free Income: 100% of structured settlement annuity is tax-free – including the settlement award, principal, ongoing payments and interest earned".
• "a tax-free structured settlement annuity to meet medical and living expenses, or other financial planning tactics".
• "A tax-free structured settlement annuity qualifies for special tax treatment under IRC §§104(a)(2) and 130(c)"
• "A claimant cannot accept a cash settlement and then purchase an income tax-free structured settlement annuity on his/her own"
• The best time to start preparing for your financial future is right now. Consider the many advantages of a Tax-Free Structured Settlement Annuity.*"
• " I work with the Tax Free Structured Settlement Annuity Product and Various Trust products"
  

The Damages That the Structured Settlement Payments Represent is The Key

While some of these statements may seem plausible, the nature of damages that the payments represent is a critical factor, not the annuity contract itself. 

Think about the applicable tax code sections cited in every settlement agreement that involves a structure.  The word "annuity" does not appear in IRC Sections 104(a)(2) or IRC 130(c). Furthermore, a structured settlement annuity is a versatile insurance contract that can be used for a variety of applications, including structured settlements being used as a funding vehicle for settlements involving periodic payment of taxable damages and structured installment sales. 

I encourage my industry colleagues to take greater responsibility, hopefully with the recognition that inaccurate statements end up getting parroted or cited by others.

See my comprehensive write up "What is a " Tax Free Structured Settlement Annuity?" on the Settlement News Network

Last updated April 8, 2023

 

NJ Personal Injury Attorney's "Negative Aspects of Structured Settlements" Falls Short

by Structured Settlement Watchdog

A Fort Lee New Jersey personal injury law firm asks, " What Are the Negative Aspects of a Structured Settlement?" Its response to its own question falls a bit short. 

Here is my response to the Fort Lee personal injury firm's 3 purported claims

What Are the Negative Aspects of a Structured Settlement?

1. These settlements may have some exceptions of the tax rule, meaning that punitive damages and some attorney’s fees may be taxed.

Response

Punitive damages are not a negative aspect of structured settlements.  Punitive damages are not a negative aspect of settlements if you're the plaintiff. Attorney fees are not a negative aspect of structured settlements. Attorney fees are payable whether or not there is a structured settlement.

A structured settlement is defined under the Internal Revenue Code. Where payments represent damages on account of physical injury or physical sickness, wrongful death, wrongful incarceration, claims for workers compensation the plaintiff/claimant receives payments income tax free.  [ See IRC Sections 104(a)(1), 104(a)(2), 130, 139F] Read about the Tax Benefits of Structured Settlements

Claims for taxable damages such as punitive damages, interest on judgment and so on, may benefit from a non-qualified structured settlement. These are tax deferred periodic payment solutions.  Where there are taxable damages such as punitive damages or judgment interest, attorney fees on certain taxable damages, a plaintiff attorney ought to engage a settlement planner and consider employing a two-pronged approach, with a Plaintiff Recovery Trust as well as a tax deferred non qualified structured settlement to help mitigate current taxes and maximize the client's net recovery. Read about Plaintiff Recovery Trust

Attorneys may benefit from structured attorney fees or attorney fee deferred compensation. An attorney may defer well in excess of the limits of qualified pension plans. In fact, there are many options for attorneys.  Read about Attorney Fee Deferrals and Structured Attorney Fees and Non-Qualified Assignments

2. Unknown changes in the economy could lead to a sudden, drastic change in payments and a plaintiff may receive less.

Response

If you invest in stocks, you can lose value in a minute. People go into structured settlements for safety and income certainty. Insurers are highly regulated, must maintain reserves that are annually audited in each state in which they do business. 5 companies that currently write structured settlement annuities have been in business since the 19th Century.  Modern index linked structured settlement annuities offer options that provide upside potential with downside protection.

The 2012 Executive Life of New York liquidation was an instance where there was a reduction in benefits. It was far from sudden. It was well known in the mid 1980s that ELNY priced very aggressively and that its qualified assignment company had at one time 40% of its assets in junk bonds. I've studied and written about it extensively.  See for example, Lessons to be Learned from Eric Yerkes v Cessna and Yerkes v Anapol Weiss

3. Insurance companies are sometimes reluctant to disclose how much they would have to pay to buy an annuity to cover the settlement, which means that an attorney can’t make a complete assessment of the benefits of the offer.

Response

All the more reason for plaintiff lawyers to work with a settlement planner. It's so easy to find out the cost. This talking point is nearly 40-year-old relic of a time of the "urban legend" that knowledge of the cost of a structured settlement would trigger a taxable event.  For a comprehensive write up, please see my February 5, 2010 blog Disclosure of Structured Annuity Cost by Defendant Is Not Constructive Receipt - Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and Commentary (typepad.com)

There is more to settlement planning than a structured settlement. A plaintiff attorney should be engaging a settlement planner to (at the very least) price out the cost of the plaintiff's needs.  Advocate from a position of knowledge. Avoid reacting from a position of the unknown. What is Settlement Planning?

 

Are Structured Settlement Annuities Taxable?

by John Darer CLU ChFC MSSC CefT RSP CLTC

“Is a structured settlement annuity taxable? And is the initial amount that I get from the settlement taxable?”, asks a settlement planning firm.

Here is their response:

"If the origin of the claim is based on a personal physical injury, Section 104[a][2] of the Internal Revenue Code states that the initial principal amount on the settlement that the client receives is not taxable. It is tax-exempt at the state, local, and federal levels. however, if the client decides to invest their settlement funds, then the interest that grows from the investment is taxable. One way to avoid this is to establish a structured settlement annuity for the client to receive their settlement funds. All of the interests (sic) that grow inside of the structured annuity will also be tax-exempt. Payments received from a structured settlement annuity do not need to be reported on any tax return form (1040) or any tax document. Both the principal amount and interests (sic) in the annuity are completely tax exempt".

Here's the thing...

1. The Internal Revenue Code is Federal tax code. While there may be state and local tax laws that are modeled after federal tax law, those are the dominion of the individual states or local governments and their respective departments of revenue. 
2. IRC Section 104 (a)(2) permits a taxpayer to exclude from gross income "the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or physical sickness" Source: Internal Revenue Service irs.gov
3. The key take away is that it is the damages that are tax exempt. With a properly established structured settlement, that starts with an obligation to make future periodic payments as damages on account of personal physical injury, where the obligation is generally assigned by way of a qualified assignment, and then funded with a structured settlement annuity or structured settlement annuities as a qualified funding asset, each of the future payments is tax exempt.

 

Do Structured Settlement Payments Get Inherited Through Your Will, or Do You Name a Beneficiary?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Once again, I'm scratching my head at the output of the settlement purchasing company that is currently believed to be the only member of the National

Name, Confirm, Repeat as Necessary

Association of Settlement Purchasers with a related entity that has agency relationships with structured settlement annuity issuers and brokers structured settlement annuities in the primary market. 

In the process of soliciting people to sell their structured settlement payments the New York company states in a blog:

"A loved one left you their future structured settlement payments in their will, and you’re wondering what you can do with it. Maybe you have a business opportunity, or you are interested in purchasing a house. You might be facing an emergency and looking at your options to cover that sudden expense. So, can you sell this asset? The short answer is yes. If you inherited a structured settlement, that means you now have the rights to it, and to the future payments. And in situations where you have a financial need, you most likely qualify to sell some or all of the future payments from the inheritance for a lump sum in cash" Source: CrowFly website

While it's certainly possible that someone could name a beneficiary of structured settlement payments in their will, it is certainly not the norm and probably not advantageous to do so:

1. Naming a beneficiary with the structured settlement annuity issuer is easy and simple. You fill out a beneficiary designation form and you file it with the insurer, checking to confirm that your wishes have been recorded. Your signature may need to be notarized.
2. You can name and change primary and contingent beneficiaries and their respective shares/percentages at any time, as long as such changes are in writing and in the proper format accepted by the insurance company that issues the structured settlement annuity.
3. Naming a beneficiary with the structured settlement annuity issuer means that the proceeds will begin to flow directly to your beneficiaries without delays and costs associated with probating an estate. It's the matter of completing a claim form and providing a copy of the death certificate. 
4. Death proceeds that pass through the probate estate are subject to executor/executrix fees (if there is a will), administrator/administratrix fees (if there is no will)
5. Death proceeds that pass through the probate are subject to claims of creditors of the Estate. 

Where might you find future structured settlement payments going into an Estate?

• If you fail to name a beneficiary for your structured settlement, or the beneficiary you name is not living at the time of your death, and you have not named a contingent beneficiary, payments will default to your Estate.
• If the payments are going to a trust, such as Special Needs Trust or Supplemental Needs Trust, your structured settlement has a full commutation provision at death and there is an abundance of cash that exceeds the Medicaid payoff, payment will be distributed subject to terms of the trust. 
• A number of structured settlement annuity issuers, including Berkshire Hathaway Life Insurnace Company of Nebraska, First Berkshire Hathaway Life Insurance Company and Independent Life Insurance Company will allow a beneficiary designation that allows a partial commutation based on a notice of shortfall in the trust assets to satisfy amounts owed to Medicaid and/or Estate taxes. The balance would go to named beneficiary or beneficiaries, or the Estate (if no beneficiary has been named, or if a beneficiary has named, but no contingent beneficiary has been named at the time of the annuitant's death).
• If you are selling (or have sold) part of a lump sum structured settlement payment to a settlement purchaser such as CrowFly, and the annuity issuer will not split annuity payments, payments will be subject to a payment servicing arrangement. It's really important that anyone entering into a structured settlement factoring transaction where payments are being serviced and where the seller is only doing a partial sale, to name and confirm in writing both a primary and contingent beneficiary.

4structures.com LLC has a number of resources about the wisdom of naming beneficiaries on structured settlements

Why It's Important to Name a Beneficiary on a Structured Settlement Annuity

Structured Settlement Beneficiary Designations| The Beneficiary Mantra

 

Can You Inherit a Structured Settlement Annuity?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Thinking about what happens to structured settlement payments after the death of the Measuring Life, which of these four statements is correct when used to fill in the blank?

You can______________

1. inherit a structured settlement annuity
2. inherit the right to receive future periodic payments
3. inherit structured settlement payments
4. inherit a structured settlement

A.    1

B     2

C     3

D   2, 3 and 4

E.  all of the above

The correct answer is D, because nobody can actually inherit a structured settlement annuity. 

A structured settlement is established by contract between settling parties to a claim or lawsuit. When a structured settlement is established part of the consideration for the release of the Defendant is an obligation to make future periodic payments  (structured settlement payments). Generally this future periodic payment obligation is assigned by way of what is known as a qualified assignment to a qualified assignment company

In general, a structured settlement annuity is a qualified funding asset (defined at IRC 130(d) and owned by a qualified assignment company.  Neither a Payee, nor a Contingent Payee, actually owns the annuity contract funding the periodic payment obligation to them.

 

Structured settlement payments can be inherited by beneficiaries

 

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