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The History of Structured Settlement Factoring Transactions
August 23rd, 2010Structured settlements for personal injury cases became popular in the 1980’s, after the U.S. Tax code was modified to provide favorable tax treatment to insurance companies offering periodic payments rather than a lump sum payment. The tax modification also benefited people receiving structured settlements in 2 ways: 1) It provided a guaranteed source of periodic income and 2) provided that the interest earned on a structured settlement was tax free. If an individual took a lump sum on a settlement, taxes are incurred on interest earned.
In a structured settlement, the recipient receives periodic payments over a number of years, often 10 years or more. To fund these payments, the insurer purchases an annuity at a highly discounted rate. This is because the annuity will earn interest over the repayment period. Therefore, the insurer ended up paying less for the settlement, received tax advantages, and the recipient wasn’t taxed on the payments made.
The advantages and popularity of the structured settlement was offset by problems the same victims suffered. Often, structured settlement payments were the only source of income for the recipients. If the recipient subsequently suffered an illness requiring extensive medical treatment, for instance, there were no funds to pay for the treatment other than the periodic income payments. Payees could not receive any more than the agreed payments.
Financial companies purchasing structured settlements
As more and more recipients of structured settlements needed immediate cash, companies began to purchase these settlements on a cash basis. Like annuities purchased by insurers, the financial companies would place a discount factor on the amount of the settlement payments. In other words, the cash payment to the recipient would not simply be the sum of all remaining payments.
Unfortunately, some companies took advantage of people, usually by providing too deep of a discount factor, or charging unnecessarily high fees. In response to these companies, many states adopted the Model State Structured Settlement Protection Act, created in 2000. The act provides for full disclosure among factoring companies to recipients, prior judicial approval of a sale of a structured settlement, and disclosure of all fees to be charged in the event of breach.
In addition, Congress passed Internal Revenue Code Section 5891 in 2002. The section places a punitive excise tax on those companies who purchase structured settlements without court approval, or those deemed on in the best interest of the seller.
These consumer protection statutes have greatly decreased the number of unscrupulous transactions, and have made it much safer for an individual, when in need, to sell their structured settlement.
The History of Structured Settlements
August 23rd, 2010In today’s world, there are many individuals who have received structured settlements. These often come as the result of a lawsuit victory in a court case against a company or person who has done the recipient physical and personal harm. Structured settlements have an interesting history going back almost forty years.
The definition of a structured settlement is an agreement that is negotiated through a tort action in order to yield payments over a given amount of time. These structured settlements commonly result from a court case process in which the one person was injured and the other party was mandated to pay them. These could result from worker’s compensation because of on the job injuries, personal injury, wrongful employee termination, property loss, or a wrongful death claim in which spouses and minor children are looking to obtain lost wage compensation and intangible support.
Structured settlements have not in the past encompassed such arrangements as lottery payments. These have always been considered to be periodic payments that are made over a given period of time. These types of awards feature less restrictions on how they may be cashed out, making it easier to convert such revenue streams to a single, lump sum payment amount.
The history of these structured settlements spans back to the 1970′s. In the United States, this is when a structured annuity settlement first happened. It was originally conceived of as a method for allowing recipients of lawsuits to receive their settlements in the form of lesser income per year. This proved to be helpful for such victims, since they would still qualify to get Medicaid and Medicare forms of aid. If instead, these recipients were given their cash all at once, then the individuals would have been required to pay all of their medical expenses using the money that they received. On top of this, they would not have been capable of getting other insurance subsequently. In the end, it was feared that the awarded monies would be consumed in medical bills as a result. This would then leave the victims back where they started, in having to apply once again to Medicaid or Medicare for help. Because of this, in such scenarios, the settlement requirements often entailed specially set up rules for trusts.
One of the problems with structured settlements is that although they are intended to provide income to the victims of injuries for their entire lives, in practice this does not prove to be the case. The reason for this is because of an important consideration that was left out of the calculations of those that conceived of structured settlements originally in the 1970′s. This is that inflation is a real and persistent enemy of such structured settlements. Over the years, and in particular over the decades, the recipients have discovered that inflation has ravaged their annual payment awards to the point that they are no longer sufficient to cover the costs of all of their many necessities. This is especially the case for award recipients who are younger, and who have many long years to receive their structured settlements.
Disadvantages of Structured Settlements
June 9th, 2010Structured settlements are often praised because the individual receiving them is guaranteed an amount of money for an extended period of time from top rated insurance companies. With a lump sum, an individual is more likely to spend the money at an accelerated pace spending the money sooner than they would if they were given a structured settlement. Structured settlements have many other advantages but there are some serious disadvantages of structured settlements as well.
Emergency Money
With structured settlements, an individual is only guaranteed a certain amount of money per month or year depending on how the settlement was structured. This would be comparable to a paycheck or disability benefits. They can count on it arriving in time, but if there is an emergency, the individual will not have access to more than what they’re guaranteed during that particular pay period. This is where selling structured settlement payments can help an individual come up with cash in a tight pinch. An annuitant should only cash out a structured settlement if it is the last resort.
At this time discount rates are at an all time low and an annuitant can receive a great deal but it would be in their best interest to keep their future structured settlement payments instead of cashing them out. There are times when there are no other options and you may need liquidity now, this is when a structured settlement transfer is needed. Please feel free to complete the form to the left to get a free quote now for your future structured settlement payment rights.
Tips on Selling Structured Settlement Payments
June 9th, 2010It can be nice knowing that you have money coming each month from a structured settlement, but when you’re faced with large bills (medical or other), you need the money now, and not divided. One way to solve this problem is to sell your structured settlement. While you won’t get the entire amount that you’d get if you waited, sometimes the convenience of having money now is worth missing out on the extra money. Below are some tips for selling structured settlements that should help you as you begin the process of selling your own.
Search Around
The worst mistake you can make is jumping on the first offer made to you. You might feel pretty great selling your structured settlement worth $100,000 for $50,000 up front, but when you find out that another company would have offered $75,000 – you’re going to feel pretty terrible. Shop around and find out what other companies are offering before going with one. Speak with your financial advisor to determine which companies to interview regarding the sale of your structured settlement.
Decide Whether to Sell Partial or Whole
Some companies will purchase a part of your structured settlement, and you will still have the remainder to receive over the allotted period of time. Consider your financial needs and determine whether it would be best to sell the whole settlement or just a part of it. The benefits of selling only part is that there is still money to fall back on, whereas if you sell the whole thing, once that up-front money is gone, it’s gone.
Is an Attorney Needed?
Before selling your structured settlement to any company, seek the advice of an attorney. It’s important to make sure all the correct paperwork is done and the necessary steps are being followed by the company. An attorney can look over the paperwork and monitor the process to be sure that everything is being done correctly.
Tax Ramifications
When selling the rights to your future structured settlement payments. The lump sum that is received from the transfer receives the same tax status as your structured settlement payments did. In other words, if your structured settlement annuity payments were tax free then your lump sum payment will be tax free as well.