Structured Settlements and the Secondary Market

Background

Structured settlements are a method of compensating plaintiffs who have won personal injury lawsuits. Allowed by the U.S. Congress since 1982, a structured settlement is an agreement between the individual plaintiff and the defendant for the plaintiff to receive certain guaranteed payments over time from an approved annuity issuer.
 
When a plaintiff is granted monetary damages as a result of a lawsuit or settlement, the payment of such damages is sometimes negotiated as a stream of periodic payments, over a number of years, rather than as a lump-sum payment. In order to guarantee such payments, the defendant purchases a guaranteed annuity from an investment grade insurance company, with the plaintiff named as the payee. Such arrangements are beneficial to personal injury plaintiffs, as the plaintiff receives a tax-free stream of payments tailored to meet future needs and expected living expenses. Because the structured settlement annuity payments are paid to annuitants on a tax-free basis, there are very strict laws and guidelines governing how the structured settlement must be set up to maintain its tax free status. One of the rules is that the payments are not freely assignable, and that is stated in both the annuity policy and the settlement and release agreement. If the structured settlement payments were freely assignable, that could create constructive receipt problems for those annuitants who did not assign their payments, as well as threaten the tax treatment of the structured settlements for the insurance companies involved in the settlement.
 
Secondary Market

Although structured settlements may be driven by the needs of the injured party at the time of the settlement, and have been tailored to the injured party’s then prevailing needs, a plaintiff’s circumstances may change. After a number of years, the payee may require a lump sum of cash, and the stream of guaranteed payments from the structured settlement is the only asset available to generate such a lump sum of cash. Such a need may arise for any number of reasons, including the payment of unexpected medical expenses, or the down payment on the purchase of a new home. In some instances, the original payee may have died and the payee’s heirs prefer a lump sum instead of periodic payments.
 
In response to the needs of these individuals, a secondary market has developed, in which the individual payee assigns the rights to structured settlement payments to an investor/purchaser in exchange for a discounted lump sum payment.
 

The federal and state governments have passed laws which provide a statutory framework for the assignment of structured settlement payments. In 2002, the federal government passed I.R.C Section 5891, which approves and governs the transfer of structured settlement payments and requires that transfers be completed in accordance with state laws. The state laws require that very strict procedures must be followed for a transfer of any structured settlement payments, including notice to interested parties and issuance of a state court order. To date, 47 states have passed statutes governing the transfer of structured settlement payments.

 
Once court approval and insurance company acknowledgement have been obtained, the payee (or the payee’s heirs) can close and fund the transaction with a purchaser of the structured settlement payments, irrevocably selling and assigning all or part of the remaining stream of payments to the purchaser/investor.
 
Process

Strategic Capital’s structured settlement transactions are processed and closed in accordance with state and federal laws. Such laws mandate appropriate procedures and documentation, provide consumer protection guidelines, and require court approval of the transaction. In addition to obtaining a court order, Strategic Capital obtains confirmation directly from the insurance companies of their agreement to abide by the court order and to make payment directly to the purchaser/investor.
 
In order to complete every structured settlement transaction, Strategic Capital conducts an extensive underwriting process in advance of closing. Transactions are closed only after all closing conditions have been satisfied. The closing conditions encompass four main areas:

  • contracts;
  • lien search clearance;
  • statutory compliance, including state court approval and
  • acknowledgement of the transaction by the insurance company making the payments.

 
Once the closing conditions have been satisfied, the transaction closes.

Published : March 15, 2011

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