In another example of how outdated or inaccurate information manages to stick around on the internet, I recently found an on-line article called, “Selling Your Structured Settlement.” This article is part of “ExpertLaw”, which purports to be an on-line expert witness source and also contains a sort of general “legal encyclopedia” of articles on various subjects.

Like the article I wrote about in my last post, unfortunately the author of this piece, Aaron Larsen, Esq. of Michigan, has not bothered to keep it up to date. Unlike the last article however, “Selling Your Structured Settlement” does contain a publication date (April, 2005). As much as I would like to give Mr. Larsen the benefit of the doubt, I’m afraid much of the misinformation contained in the article was as incorrect in 2005 as it is today.

I wrote to Mr. Larsen last month, pointing out that his article was “out of date” (at least) and offered to help him correct it. He has not taken me up on the offer, and as of today the article is still posted. In another attempt to clear the record, here are the points Mr. Larsen’s article has wrong:

1. “The best time to decide that a structured settlement is not right for you is before you consent to such a settlement.”

This is actually sound advice. However, it ignores the reality of structured settlements and factoring. In my experience and opinion, most structured settlements are entered into for good, well-thought out reasons. The structured settlement brokers and legal professionals who advise the personal injury plaintiff typically do a fine job of explaining the advantages and mechanics of a structured settlement. What most often prompts a person to seek to sell future payments, however, is not poor planning at the outset, but rather the occurrence of an unforeseen event. Most structured settlement factoring customers have experienced an unanticipated change in circumstances after the settlement is finalized. Structured settlement factoring provides flexibility when something unexpected comes up, like an illness in the family, the need for different housing or transportation, or the chance to buy a house or business. (See my earlier article entitled "The Need for Liquidity Options" for more on this).

2. “There are laws in approximately two thirds of the states which restrict the sale of structured settlements…”

Actually, there are currently structured settlement transfer laws in 46 states (92 percent) – far more than 2/3 (click here for a chart of all the states' transfer laws).  Most of the laws (36) are based in whole or in substantial part on the model state law developed and approved by the National Conference of Insurance Legislators (NCOIL). Another 3 state laws pre-date the NCOIL model act, but are substantially the same as it.

3. “…and additional federal regulations apply to the sale of structured settlements.”

Almost got it right here. It’s actually a federal law (as in statute), not a regulation, found at 26 USC § 5891. Passed by Congress in 2001 and signed into law in 2002, the federal structured settlement protection act effectively governs all structured settlement factoring transactions. On its face it appears as simply a federal excise tax provision. You may choose to engage in a factoring transaction according to its terms or not, but if you do not, then an excise tax will be assessed. However, the innocuous wording of the statute belies the global effect it has, based on the severity of the excise tax itself. The excise tax under IRC 5891 is extremely punitive, rendering its provisions effectively mandatory.

IRC 5891 imposes a straightforward requirement on each factoring transaction: That it is approved under a “qualified order” by an “applicable state court” under an “applicable state statute”. Each of these terms has a specific meaning under the statute.

“Qualified Order” means an order or judgment from an “applicable state court” under the authority of an “applicable state statute” finding that the (1) transfer does not contravene any federal or state statute or order of any court or responsible administrative authority, and (2) the transfer is in the best interest of the annuitant/seller, taking into account the welfare and support of the payee’s dependents.

“Applicable State Court” means a state court in the state where the “applicable state statute has been enacted, or under some circumstances, the state where the annuitant/seller is domiciled.

“Applicable State Statute” means a state statute that governs the structured settlement transfer process in the state where the annuitant/seller is domiciled or, if none, then the state where either a party to the structured settlement or the insurance company that issues the annuity is domiciled.

4. “The insurance company that issued the annuities for the structured settlement may refuse to cooperate with the sale of a settlement, citing policy language and asserting that payments cannot be assigned.”

First, not to be too nit-picky, but it is not the sale of a “settlement” that occurs in a structured settlement factoring transaction. Rather, it is a “transfer of structured settlement payment rights” (see IRC 5891(c)(3)). While it is true that some insurance companies object to transfers, for a variety of reasons, it is not true as implied that such an objection somehow affects a veto of the transfer (except in Maine, which unfortunately does provide for such a veto). In the rest of the states, the judge will decide whether the transfer should be approved. For more information on antiassignment clauses in structured settlements, see my earlier post "Why You Can Assign Even When It Says You Can't".

5. “…there can be significant tax consequences associated with selling part or all of a settlement. It may be that, while payments made under the settlement were not taxed, the lump sum received through the sale of the settlement will be taxed.”

This is a whopper, and probably deserves its own article (which I hope to entitle “Don’t Mess with Taxes”). The purchase price paid to an annuitant/seller in a structured settlement factoring transaction is not taxable. As I mention in my last post, Old News:

It has been clear since at least 2002 with the passage of the federal Structured Settlement Factoring law that factoring purchase price payments to personal injury annuitants are not taxable. (IRC 5891(d)(1); see also Private Letter Ruling 1999-36030).

There seems to be an overabundance of incorrect information out there on structured settlements and factoring.  Consumers and advisors need to be very cautious about where they educate themselves on these issues, and, as always, question the source.  Since drafting this post I have already found more examples of misinformation posted by purported "experts".  It looks like this will be a continuing blog theme, sadly. 

For more information about structured settlement factoring and related issues, please contact me at mbracy@setcap.com or by phone at 800-959-0006.