When my clients consider selling their settlement for a lump sum payment, I work with them to determine if the offer is in their best interests. This is called “independent professional advice” because my only loyalty is to my client. My only goal is doing what is best for my client.
This “independent professional advice” is required by Minnesota law to prevent structured settlement buyers from taking advantage of people. The Star Tribune has documented such abuses: Desperate, Then Offered Quick Cash: They’ve suffered tragic, disabling injuries, and received large settlements to be paid over their lifetimes. Then little-regulated firms came calling.
When I talk with my clients, I spend time asking questions and understanding their circumstances. We also consider potential alternatives to getting money: whether there are ways to accomplish their goals without selling their settlements at a discount.
If you are considering selling your structured settlements in exchange for a large payment, here is what you should know:
When to Keep a Structured Settlement: If people don’t immediately need funds, they are usually better off not selling the settlements. If you sell a settlement, you will get less money than if you waited for it.
When to Sell a Structured Settlement: People generally sell their structured settlements when they conclude they will be better off with a lump-sum payment rather than waiting for their remaining settlement payments to come in. That is, some people are better off with immediate funds even if that means they will get paid less.
For example, in the past, I have seen people sell structured settlements to invest in their future earning potential by paying for college, buying a vehicle to get to work, and buying a home to stop renting.
By getting independent professional advice before selling your structured settlement, you can get help determining what is best for you. Here are some questions to consider asking your independent professional advisor:
- Can you think of any other ways I could accomplish my goals without selling my settlement?
- If you were in my shoes, what would you do?
- What factors should I consider when determining whether selling my settlement is the best for my long-term future?
To learn more about structured settlements, the information below explains background legal information.
What is a Structured Settlement?
A structured settlement is a financial or insurance arrangement, including periodic payments, that a claimant accepts to resolve a personal injury tort claim or to compromise a statutory periodic payment obligation.
What is the History of Structured Settlements?
Structured settlements were first utilized in Canada and the United States during the 1970s as an alternative to lump-sum settlements. Structured settlements are now part of the statutory tort law of several common law countries including Australia, Canada, England, and the United States.
Although some uniformity exists, each of these countries has its own definitions, rules and standards for structured settlements. Structured settlements may include income tax and spendthrift requirements as well as benefits. Structured settlement payments are sometimes called “periodic payments.” A structured settlement incorporated into a trial judgment is called a “periodic payment judgment.”
How are Structured Settlements Used in the United States?
The United States has enacted structured settlement laws and regulations at both the federal and state levels. Federal structured settlement laws include sections of the (federal) Internal Revenue Code. State structured settlement laws include structured settlement protection statutes and periodic payment of judgment statutes.
Medicaid and Medicare laws and regulations affect structured settlements. To preserve a claimant’s Medicare and Medicaid benefits, structured settlement payments may be incorporated into “Medicare Set Aside Arrangements” “Special Needs Trusts.”
Structured settlements have been endorsed by many of the nation’s largest disability rights organizations, including the American Association of People with Disabilities and the National Organization on Disability.
In April 2009, financial writer Suze Orman wrote in a column that structured settlements “provide ongoing income and reduce the risk of blowing a lump sum through poor financial choices.” In response to a reader’s question, she added that financial security can be improved “if you use the structured payouts wisely.”
What is Federal Structured Settlement Law?
The United States definition of “structured settlement” for federal income taxation purposes, found in Internal Revenue Code Section 5891(c)(1) (26 U.S.C. § 5891(c)(1)), is an “arrangement” that meets the following requirements:
- A structured settlement must be established by:
- A suit or agreement for periodic payment of damages excludable from gross income under Internal Revenue Code Section 104(a)(2) (26 U.S.C. § 104(a)(2)); or
- An agreement for the periodic payment of compensation under any workers’ compensation law excludable under Internal Revenue Code Section 104(a)(1) (26 U.S.C.§ 104(a)(1)); and
- The periodic payments must be of the character described in subparagraphs (A) and (B) of Internal Revenue Code Section 130(c)(2) (26 U.S.C. § 130(c)(2))) and must be payable by a person who:
What is a Structured Settlement Example?
The typical structured settlement arises and is structured as follows: An injured party (the claimant) settles a tort suit with the defendant (or its insurance carrier) pursuant to a settlement agreement that provides that, in exchange for the claimant’s securing the dismissal of the lawsuit, the defendant (or, more commonly, its insurer) agrees to make a series of periodic payments over time.
The insurer, a property/casualty insurance company, thus finds itself with a long-term payment obligation to the claimant. To fund this obligation, the property/casualty insurer generally takes one of two typical approaches: It either purchases an annuity from a life insurance company (an arrangement called a “buy and hold” case) or it assigns (or, more properly, delegates) its periodic payment obligation to a third party which in turn purchases an annuity (which arrangement is called an “assigned case”).
In an unassigned case, the property/casualty insurer retains the periodic payment obligation and funds it by purchasing an annuity from a life insurance company, thereby offsetting its obligation with a matching asset. The payment stream purchased under the annuity matches exactly, in timing and amounts, the periodic payments agreed to in the settlement agreement. The property/casualty company owns the annuity and names the claimant as the payee under the annuity, thereby directing the annuity issuer to send payments directly to the claimant. If any of the periodic payments are life-contingent (i.e., the obligation to make a payment is contingent on someone continuing to be alive), then the claimant (or whoever is determined to be the measuring life) is named as the annuitant or measuring life under the annuity.
In an assigned case, the property/casualty company does not wish to retain the long-term periodic payment obligation on its books. Accordingly, the property/casualty insurer transfers the obligation, through a legal device called a qualified assignment, to a third party. The third party, called an assignment company, will require the property/casualty company to pay it an amount sufficient to enable it to buy an annuity that will fund its newly accepted periodic payment obligation. If the claimant consents to the transfer of the periodic payment obligation (either in the settlement agreement or, failing that, in a special form of qualified assignment known as a qualified assignment and release), the defendant and/or its property/casualty company has no further liability to make the periodic payments.
This method of substituting the obligor is desirable for property/casualty companies that do not want to retain the periodic payment obligation on their books. Typically, an assignment company is an affiliate of the life insurance company from which the annuity is purchased.
An assignment is said to be “qualified” if it satisfies the criteria set forth in Internal Revenue Code Section 130. Qualification of the assignment is important to assignment companies because without it the amount they receive to induce them to accept periodic payment obligations would be considered income for federal income tax purposes. If an assignment qualifies under Section 130, however, the amount received is excluded from the income of the assignment company. Section 130 was enacted to encourage assigned cases; without it, assignment companies would owe federal income taxes but would typically have no source from which to make the payments.