I don’t know what it is about structured settlements and structured settlement factoring, but for some reason blatant inaccuracies seem more prevalent than truth in reporting on these topics. Personally I don’t think the facts are all that hard to get right, but maybe I’ve just been around too long.

The latest entry in the bad reporting category to catch my eye was Tim Grant’s piece in the Pittsburgh Post-Gazette, confusingly titled “Structured Settlements Of Money Take Away Risks Of Lump-Sum Payments” (first appearing in the Post-Gazette on June 25, 2008). You can read Mr. Grant’s article here.

Lest anyone should think I am picking on Mr. Grant, you should know that I sent him a personal email on June 25, 2008, which is copied below. Hearing nothing in response, I sent a letter to the editor of the Post-Gazette on June 30, 2008. Again, nothing (and my letter was not, to my knowledge, published). Is this willful blindness or something more sinister at work here?

Although Mr. Grant’s article is replete with error, one whopper stands out:

“Unlike lump sum settlements, payments from structured settlements are income tax free and the benefits are guaranteed for life by insurance companies.”

Many ill-informed commentators get confused about the tax treatment of structured settlement payments and factoring transaction lump sums. Breaking Mr. Grant’s assertion down to a simple form, he says that payments from structured settlements are income tax free (true), while lump sum payments are not (false). Lump sum payments in settlement of personal injury damages are income tax free under Internal Revenue Code 104(a)(2). Further, lump sums received from a factoring transaction are also income tax free, as was clarified over nine years ago by IRS Private Letter Ruling 1999-36030, and more recently by IRC 5891.

Manufactured confusion about taxes has long been used to scare people away from factoring. The bottom line is that income tax is not an issue to be concerned about, whether you are taking a lump sum in settlement of a personal injury claim at settlement, accepting payments over time in a structured settlement, or selling some or all of your future structured settlement payments.

The full text of my letter to Tim Grant:

Mr. Grant:

I read with interest your story about structured settlements. I did, however, find some inaccuracies in the story of which you should be aware.

First, you state that “Unlike lump sum settlements, payments from structured settlements are income tax free and the benefits are guaranteed for life by insurance companies.” This sentence actually contains two inaccurate assertions: (1) that lump sum settlements are not tax free, and (2) the implication that all structured settlements are guaranteed for life. On the first point, under Internal Revenue Code § 104, all personal injury damage payments are excluded from income tax. This is true irrespective of whether the payment is a lump sum or received over time in a structured settlement [see IRC 104(a)(2)]. The second point, that structured settlement payments are guaranteed for life, is true in some circumstances but not all. Sometimes the payments are guaranteed for a time certain (for instance, 20 years), and then for the life of the payee thereafter, but this is not always the case. Many structured settlements are for a certain number of years only.

Finally, your story is replete with statements about the structured settlement payee’s inability to convert all or part of the future payments into either a present lump sum or to take a loan against the future payments. This is simply untrue. Forty-six states (including Pennsylvania) have structured settlement transfer laws which allow people, under some circumstances and with court approval, to sell future structured settlement payments, or to use the payments as collateral for a loan (see, e.g., the Pennsylvania Structured Settlement Protection Act, 40 P.S. 4001 et seq.).

I am general counsel to a company that provides such liquidity options to structured settlement recipients when needed. As your story accurately reports, structured settlements are a very valuable mechanism for settling personal injury lawsuits. In the vast majority of cases, the structured settlement works as planned. Occasionally, however, a life change or other unanticipated event occurs after the settlement and the payee finds that he or she needs more money than the periodic payments provide. In such circumstances, and within the rubrics of the various structured settlement transfer laws, part or all of the payee’s future payments can be sold (or pledged as security for a loan).

If you would like any further information on this topic, please feel free to visit our blog site (http://blog.setcap.com/), read the Wikipedia article on structured settlement transfers or “factoring”

(http://en.wikipedia.org/wiki/Structured_settlement_factoring_transaction), or contact me. Thank you for your attention to this matter, and for writing about this important topic.

Matt Bracy

General Counsel

Settlement Capital Corporation

14755 Preston Rd., Ste. 130

Dallas , Texas 75254 972-450-5864