Entries in Financial Advisors (34)
Let's Be Careful Out There
Friday, September 26, 2008 at 03:41PM One of my favorite TV shows from the 80s, or ever really, was “Hill Street Blues.” If you're old enough to remember it, you may recall Sgt. Esterhaus at the end of each day’s briefing sternly but grandfatherly telling all the cops "let's be careful out there." As we all try to figure out how the current “Wall Street Blues” will shake out, I think this is sound advice, particularly for people who have structured settlements or are contemplating entering into structured settlements.
Hysteria and panic are generally bad bases for making financial decisions. All indications are that the backbone of the American insurance industry remains strong and stable. Effective state insurance laws that closely regulate the type and diversity of assets that insurers can hold (that back-up the insurance obligations) are working. Consider for instance the largest and most prominent insurance company, AIG. Headlines scream that AIG is “in trouble” and so forth. Read further and you will see, almost mentioned in passing, that the insurance business units at AIG, particularly the life insurance companies, seem to be sound. The fact that potential buyers are clamoring for AIG’s insurance lines should tell us all something.
The insurance business is unique. In our otherwise generally laissez-faire economy, insurance is excruciatingly and minutely controlled by state regulators. Details concerning what can be sold and to whom, and how payment obligations and risks are planned for and capitalized are all subject to strict rules and review. By all accounts at this point, the system is working, even at AIG.
Some insurers have failed in the past to be sure. But to echo remarks made by Messrs. Darer and Cravenho, these are few and far between. The largest “failure” that I know of is Executive Life of New York (ELNY). In 1991 ELNY was taken over by the State of New York and has been in “rehabilitation” ever since. To date, all policies have been paying as planned. Recent news was made when regulators from New York determined that there might be a shortfall in 12-15 years unless corrective action is taken now. Let me summarize: This “failed” insurer has been able to pay 100% of its obligations for the past 17 years, and while ELNY is likely to need its own bailout/rescue from New York regulators, it appears that individual payees of ELNY structured settlement annuities should fair well in the ultimate resolution of this company. To be sure, the projected shortfall needs to be addressed, and I think it will be, but individual payees should take comfort from this example of a “failure.”
AIG is not only one of the largest insurers, but is one of the largest structured settlement annuity issuers. Structured settlements remain a very viable and useful means of settling personal injury lawsuits, providing long-term financial security for tort victims. Predictable and reliable monthly or yearly tax-free income is a great boon for these former plaintiffs and their families, and all indications are that nothing in this current economic turmoil will diminish those benefits. Structured settlement recipients and their advisors should think twice about trying to “dump” this asset in the face of generally bad economic news. The “best interest” standard given in the federal tax code and in most state transfer laws still applies, and a decision to liquidate all of one’s future structured settlement payments in a factoring transaction because of bad news in the press is probably a bad one. Moreover, liquidating solely because of fear and uncertainty relative to the financial circumstances of AIG or any other annuity issuer would likely not meet the best interest standard required for court approval of a transfer.
However, if a structured settlement recipient does have a real need to sell future payments, structured settlement factoring companies can help. But, in this and all things, “let’s be careful out there.”
If you would like to discuss this or any other matter, please contact me at mbracy@setcap.com. I welcome comments to this and all articles, either here on the blog, or privately to me via email or phone.
Don’t Mess With Taxes: Inaccuracies Abound in Structured Settlement Reporting
Wednesday, July 16, 2008 at 02:55PM 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:
As always I welcome your comments, questions and suggestions. You can reach me at mbracy@setcap.com.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
Part 2 of "A Critical View of Factoring"
Friday, May 16, 2008 at 09:17AM Click below for part 2 of Jan Schlichtmann's "cross-examination" of me on factoring issues. As always, I look forward to your comments and questions. You can reach me directly at mbracy@setcap.com
Factoring 101: The Truth About Servicing
Tuesday, April 22, 2008 at 04:17PM This is the first article in a new series on structured settlement factoring basics. These articles will attempt to educate about factoring, open a dialogue on some basic factoring issues, and dispel rumors and misunderstandings. If there is a topic you think should be addressed here, please let me know.
“Servicing” refers to a common practice in structured settlement factoring transactions, where only part of a monthly or lump sum payment is purchased by a factoring company, but the factoring company receives the entire payment. Once received, the factoring company sends the unpurchased portion to the seller/payee. As explained below this is actually a good and necessary practice (contrary to comments by John Darer and Andrew Cravenho, who seem to not fully understand it).
Servicing can best be understood in the context of a typical factoring transaction. Here’s an example: Assume a payee receives $1,000 per month from a structured settlement. The payee has a need for a lump sum for some reason, let’s say it’s to replace an old and not working car.
First Question: How Much?
The payee (now “seller”) contacts a structured settlement factoring company, who first asks the seller how much money they need and why. The new car costs $20,000, and without reliable transportation the seller can’t get to work.
Second Question: How Many?
There are many options available to the seller to reach the desired funding amount, and many factors will go into this analysis. One option would be for the seller to transfer 100% of the monthly payments for a period of time. Under this scenario, the seller would transfer about a couple years worth of payments to generate the desired $20,000.
An obvious problem with this scenario is that it leaves the seller with no monthly income from the structured settlement during those years. Depending on the individual circumstances of the seller, that might be acceptable. For others who rely on some of that monthly income for fixed costs, that would not be the best alternative.
Another option would be to sell just a portion of the monthly payments. For example, the seller could receive $20,000 by transferring $500 per month out of the total $1000. Under this scenario, the seller would need to sell more months of payments, but will be keeping $500 per month throughout. For the remainder of this hypothetical example I will assume that this is the most desirable course for the seller.
Third Question: How’s it done?
Most structured settlement factoring transfers involve only part of the structured settlement payment stream. Sometimes that part is 100% of the payments, but only for a period of time less than the total payment stream (as in the first example above). Sometimes, probably most often, the partial transfer is of a part of the monthly payments or lump sum (as in the latter example above).
There are two ways to accomplish this kind of transfer. First, which is the easiest and preferred method, is for the insurance company that issues the payments to “split” the payments in question, sending the purchased part to the factoring company and rest to the payee/seller. However, in some cases and for a variety of reasons, the issuer will not agree to split the payments. When the payments cannot be split, the only other option is for the entire payment to be sent to the factoring company, who in turn sends the unpurchased portion to the payee/seller. This is called “servicing.”
In circumstances where the annuity issuer will not agree to split payments, servicing is the best alternative for the annuitant. Absent the servicing option, sellers would either not be able to factor payments at all, or would be forced to sell more payments than necessary (or more than is in their best interest to sell). I am not aware of any factoring company that charges a fee for servicing payments in this way. Payees receive their serviced portions promptly and generally experience no significant delay.
Such servicing arrangements should be reflected in the transfer order. Payees/sellers who later elect to sell more payments should be free to do so, and the order approving the subsequent purchase should simply reflect that the prior order is amended as to the servicing and the serviced portion should now go to the new factoring company.
If you have any questions about servicing or factoring in general, please do not hesitate to contact me at mbracy@setcap.com.
***Update 4/23/2008: Messrs. Darer and Cravenho have both responded to this article on their blogsites. My response is attached as a comment to Mr. Darer's blog post here.
Misinformation and Misconception
Monday, January 14, 2008 at 04:22PM When it comes to structured settlement factoring, terms and terminology get constantly mixed up, misquoted and misrepresented. Folks can’t seem to get it straight that “structured settlement brokers” are not in the factoring business and factoring companies are not in the structured settlement brokerage business. Misinformation is rampant. Depending on who you read and your perspective, factoring is evil, a necessary evil, a viable alternative, or the only way. Where is the truth in all this?
It seems the world’s understanding of structured settlement factoring, and the intersecting world of structured settlements, is in disarray. Why are the basic facts constantly misstated, overstated, understated or not stated at all? How can you explain the enormous quantity of misinformation on the internet?
The large volume of “information” on the internet concerning structured settlement factoring is undoubtedly a function of the high cost of terms like “sell structured settlement” for sponsor ads on Google and such. With lots of money to be made on the internet by simply getting people to click on ads, nature takes over and you then have many, many internet sites featuring information on how to “sell your structured settlement”. Naturally there is no real regulation or screening, and much of what is written about factoring is garbage. The volume of misinformation is astounding, with new entries nearly daily.
I have discussed such misinformation in the past. Another recent example is the “Ezine” article by Lance Winslow. Although Mr. Winslow has a very diverse background, and is a self-proclaimed Very Interesting Guy who traces his ancestry to the Mayflower, he knows little or nothing about structured settlements and factoring. For instance, Mr. Winslow’s short breezy article on structured settlement factoring states that you can use the money you generate from the factoring sale for "investing, buying a house or buying new car, plasma TV and other things humans want to make them happy.” I wonder if Mr. Winslow would like to come to court with me and explain how selling guaranteed, income tax-free payments and buying a plasma TV is in the “best interest” of the seller.
If you are involved in the structured settlement business, please take some time to educate yourself on what factoring really is, how it works and how courts influence the process and the underwriting.
More Old News
Friday, October 5, 2007 at 09:14AM 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.
Old News
Thursday, September 6, 2007 at 02:58PM One of the ironies of living in the “Information Age” is that information tends to stick around, even beyond its “expiration date.” This is nothing new really, since the written word has always had a durability beyond the writer, and often to his chagrin. The difference today is that written words are easily searchable and accessible through the internet. Plus, internet-based writing often fails to follow the conventions we are used to with other writing. For instance, it is unfortunately common to find articles on the internet that are undated, with little care devoted to updating. If you found a book in the library on the stock market, but noticed that it was written in 1928, you would (or should) instantly know that the regulation and workings of the market have changed drastically since then. If such a book were undated and never updated it may well lead to some confusion in readers.
Searching the internet the other day for “structured settlements” I ran across an article entitled “ Selling a Structured Settlement: It Could Cost You More Than You Know ,” by respected Massachusetts attorney Kenneth Kolpan. Sadly, this article contains many factual errors, at least in terms of what is happening today in the structured settlement factoring industry. Surely this article must have been written many years ago, yet it is undated so I can’t tell for sure. I tried to contact Mr. Kolpan to point out these inaccuracies, but have not heard back from him. His article is still up and is here: http://www.kolpan.com/lawyer-attorney-1145241.html. To clear the internet “record” so to speak, here is what I wrote to him on August 22, 2007:
Dear Mr. Kolpan:
I found your article today entitled "Selling a Structured Settlement: It Could Cost You More Than You Know" which is posted on your website. I found it interesting and generally well reasoned; however, there are some blaring inaccuracies, in my opinion. The article does not give a publication date, and it may well have been written some years ago, which would explain many of the inaccuracies I found. I urge you to consider the following points and to amend or rewrite your article.
Although your article is generally accurate about the history and mechanics of structured settlements, I found your characterization of factoring and the companies in this industry to be unjustifiably negative. You use statements like, "Persons in these situations [experiencing a sudden financial need] are at the mercy of companies (factoring companies) who use cash to buy the structured settlements." In a free and competitive market, it is difficult for me to imagine why a seller of structured settlement payments is "at the mercy" of a prospective buyer, and more than a home owner with a broken water heater is at the mercy of a plumber. There is a need and an available solution.
Other than negative references to factoring, your article also contains some factual inaccuracies, some of which may be due to being out of date. For instance, you make two references to alleged or suspected lack of disclosure to the seller of the essential terms of the sale. 47 states have adopted statutes governing the sale of structured settlement payment rights. The vast majority of these, including your state of Massachusetts, are based on a model act approved and promulgated by the National Conference of Insurance Legislators. This model act was the result of a cooperative effort between the structured settlement primary market of insurers and brokers and the factoring industry. Under the model act (and Massachusetts law, MGLA 231C, § 2(a)(2), for instance) a prospective seller of structured settlement payment rights must be given a disclosure statement prior to entering into the sales contract. This disclosure statement outlines the details of the transaction in statutorily prescribed fashion and language. Further, under the model act, Massachusetts law, and under federal law (IRC 5891), all structured settlement factoring transactions must be approved by a court. The crucial inquires for the court are whether the transfer statute (including the disclosure statement requirements) has been complied with, and whether the transfer is in the best interest of the seller, taking into account the welfare and support of any dependents.
Elsewhere in your article you question whether the cash purchase price paid to a seller would be nontaxable. 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).
Structured settlement factoring has come a long way since its inception in the late 1980s. I would welcome the chance to discuss this with you in more detail, or answer any questions you might have.
Sincerely,
Matt Bracy
For more information about this or any other topic relating to structured settlement factoring, feel free to contact me at mbracy@setcap.com.