Structured Settlements Explained
Legal language aside, structured settlements are simple. In a civil case, someone is either forced or agrees to pay someone else money to right a wrong. Instead just writing a check, the at-fault person outs the money towards an annuity from a life insurance company. In that annuity contract are details on the series payments the person who was wronged will receive from the life insurance company.
By structuring the money over a longer period of time, a structured settlement offers a better future guarantee of money than a single payout which can be spent quickly.
The process is around 40 years old. In the 1970s, the courts ruled that a medication called Thalidomide given to pregnant women was responsible for serious, lifelong birth defects, structured settlements emerged as a way to make sure the money awarded to the child lasted a lifetime.
Still, today, most settlements from civil cases are lump sums. There are two key differences between lump sum settlements and structured settlements: long term security and taxes. By structuring the money over a longer period of time, a structured settlement offers a better future guarantee of money than a single payout which can be spent quickly. Money you receive from a personal injury is almost always tax free when you receive it. However, once the money is yours, you’re liable for taxes and dividends from the lump sum.
- Structured settlement payments are tax-free.
- In the event of the recipient’s premature death, the contract’s designated heir can continue to receive any future guaranteed tax-free payments.
- Payments can be scheduled for almost any length of time and can begin immediately or be deferred for as many years as requested. They can include future lump-sum payouts or benefit increases.
- Spreading out payments over time can reduce the temptation to make large, extravagant purchases and guarantees future income. This is especially helpful if the recipient has a medical condition that will require long term care.
- Unlike stocks, bonds and mutual funds, structured settlements are not dependent on fluctuations of financial markets. Payments are guaranteed by the insurance company that issued the annuity.
- A structured settlement often yields, in total, more than a lump-sum payout would because of the interest your annuity may earn over time.
- Once terms are finalized, there’s little you can do to alter them if they do not meet your needs. You cannot renegotiate the terms if your financial situation or the overall economy changes.
- Funds are not immediately accessible in case of an emergency, and recipient cannot invest the lump-sum payout in other investments that carry higher rates of return.
- Tapping into your structured settlement without selling payments will cost you money. You will pay surrender charges and IRS penalties if you withdraw funds before age 59½.
- Some parts of a settlement, such as attorney’s fees and punitive damages can be taxed.
- Not all states require insurance companies to disclose their costs to establish a structured settlement or lump-sum annuity. Without this information, a recipient could lose a significant amount of money from their settlement through administrative fees.
The traditional structured settlement for physical injury or sickness claims must meet certain requirements in order to qualify for tax exemption. These requirements include: the settlement amount has to be placed in an annuity, periodic payments are fixed and determinable as to amount and time of payment, claimant cannot modify the periodic payments, and those payments must be payable to the recipient or liability insurer.
This type of settlement is used when claims for damages fall outside the usual scope of physical injury, sickness or wrongful death and thus are not tax exempt. They are often used for claims involving racial discrimination, sexual harassment, wrongful termination, or violation of the Americans with Disabilities Act of 1990 or the Employee Retirement Income and Securities Act of 1974. The tax benefits differ among the types of transactions.
When dividing assets in a divorce, structured settlements can subject to being split between the two spouses.
Typically the spouse who doesn’t keep the settlement will get a different asset to balance out the overall division of assets.
How a settlement is handled in a divorce depends on the approach your state takes in asset division. States either divide assets according to community property or by equitable division.
According to community property, anything owned by either spouse before and during the marriage is considered property of the union and can be subject to division. If you live in a state with equitable distribution and you had the settlement before you were married it is likely you will keep the settlement.
In any state, the division of assets doesn’t mean the settlement check itself gets divided. Typically the spouse who doesn’t keep the settlement will get a different asset to balance out the overall division of assets. If you have a settlement and are facing divorce, you may want to hire a lawyer or mediator with experience handling complex assets.
Rights to Sell Structured Settlements
Structured settlement terms are unable to be renegotiated once the annuity contract has been issued. For some, this means not being able to access their money when they need it.
The structured settlement secondary market emerged because people wanted a way to sell future payments for a lump sum today.
However, for those who have a financial need, there is a way to access their funds by selling payments. The structured settlement secondary market emerged because people wanted a way to sell future payments for a lump sum today. So companies now exist which buy structured settlements in exchange for cash now.
As with any major financial decision, the choice to sell should be something you carefully consider. Federal and state regulations requires the sale of structured settlement payments to go through a judge to ensure it’s in the best interest of the person selling.
Best Structured Settlement Buyers
Selling your structured settlement payments is possible and perfectly legal. Unfortunately unscrupulous companies may try to prey on the financial need of those looking to sell.
Signs of a bad structured settlement buyer:
- Misleading behavior, for instance says one thing but puts another thing in writing
- Rushes you to sign something you don’t understand
- Asking you to lie or misrepresent yourself on a form
Signs of a good structured settlement buyer:
- Gives you personalized service with a real person, not an automated telephone system
- Takes the time to make sure you understand the selling process
- Gives you time to examine the contract
A:The Defendant uses a structured settlement to give money to the plaintiff while not being liable long term.
B:The defendant works with a qualified assignee to determine the terms of the structured settlements.
C:The qualified assignee works with a life insurance company to purchase an annuity which matches the settlement needs.
D:Then the life insurance company pays the plaintiff a series of payments over time.
Structured settlements have become popular in accident or personal injury lawsuits involving children.
In the past, many adults acting as parents or guardians of injured children had unlimited discretionary use of a minor’s settlement funds. They spent the money irresponsibly on purchases unrelated to their court-prescribed purposes.
Timed payouts were developed as an alternative to ensure that minors had money for essential long-term necessities, like food, clothing and shelter, and for any continuing medical care.
The process for selling the structured settlements of minors is highly regulated, and these payments are not often approved for transfer.
Because of the danger of parents inappropriately using settlement funds, the process for selling the structured settlements of minors is highly regulated, and these payments are not often approved for transfer.
In an effort to protect the rights of annuity and settlement sellers, Texas has enacted the Structured Settlement Protection Act. Buyers should be aware of some specific provisions in this law as compliance with the Texas law ensures a successful transaction resulting in faster approval from a court judge and fair financial compensation in the form of a lump sum payment for the structured settlement annuity payments. The following are a few important legal considerations for those who want to buy or sell a structured settlement in Texas:
- The transfer must be approved by a local court judge in Texas-based on the best interests of the seller
- Three days before the seller signs the transfer agreement, the buyer must provide the seller with a disclosure statement
Texas Civil Practice & Remedies Code Section 141.003 covers more detail on the required payee disclosure agreement. The disclosure statement must be in bold type and at least 14 points in size. The agreement must state:
(1) The amounts and due dates of the structured settlement payments to be transferred;
(2) The aggregate amount of the payments;
(3) The discounted present value of the payments to be transferred, which shall be identified as the ‘calculation of current value of the transferred structured settlement payments under federal standards for valuing annuities,’ and the amount of the Applicable Federal Rate used in calculating the discounted present value;
(4) The gross advance amount;
(5) An itemized listing of all applicable transfer expenses, other than attorney’s fees and related disbursements payable in connection with the transferee’s application for approval of the transfer, and the transferee’s best estimate of the amount of those expenses;
(6) The net advance amount;
(7) The amount of any penalties or liquidated damages payable by the payee in the event of any breach of the transfer agreement by the payee; and
(8) A statement that the payee has the right to cancel the transfer agreement, without penalty or further obligation, not later than the third business day after the date the agreement is signed by the payee.
At Annuity Transfers, we will make the process of selling your structured settlement in Texas as smooth as possible. Because the transaction requires approval from a judge, you can expect it to take on average 8 weeks. We will be there every step of the way and work hard to make sure you get your money as quickly as possible.
If you are a Texas resident and have a need to sell your structured settlement payment, we are here to help you. You can get the process started by sending us a description of your annuity payment stream through our Automated Quote Request. We will give you a call after we receive your request to discuss your specific needs.
We will contact you at your earliest convenience. We appreciate the opportunity to earn your business and look forward to serving you!
What is a Structured Settlement?
Structured settlement annuities are a financial instrument that is normally used to provide regular, tax free payments to personal injury victims over a long period of time. Instead of facing unexpected stress and management issues that come with receiving a lump sum of money, the recipient is protected from bad judgment that could result in spending a large portion of the money that he or she needs to manage a lifetime of injury related expenses.
How do I sell my Structured Payments?
You may need to buy or repair a home, start or invest in a business, fund a college education, pay off a debt, divorce or invest. These some valid reasons why you’d like to have lump sum in your hands rather than your periodical payments. The process of selling an annuity or structured settlement is not difficult, but it involves you taking the step to sell, deciding how much to sell and going before a judge to approve your request prior to accessing your cash.
All this process includes five steps:
- Make the decision to sell | you can start the sale of your settlement process if you have valid reasons for it and the sale of your payments will not have any effects on your future financial needs.
- Shop around to find the discount rate and service on your sale | it is important that you work with a funding company that is reputable and has your best interests in mind, uses its own money to fund (is not merely a broker), is experienced in completing the court ordered transfer process, and has A+ rating on the Better Business Bureau and very few complaints, if any.
- Choose the company you like best and start the sales process | you must begin the paperwork process. After you submit the proper paperwork (your annuity policy, settlement agreement or benefit’s letter so the transfer company can verify your payments, application, ID), all materials are reviewed to ensure they are complete and accurate.
- Have your sale approved by a judge | once the relevant documents are returned and they are fully signed, a local attorney files them with court and after that the court will schedule a hearing. This is the beginning of the waiting period. In the court you will be required to justify why the money is needed and you should be in a position to show that you are not putting your and your family’s financial future in jeopardy. Unless there are any problems with your request of transfer, the judges mostly approve the transfer at this stage.
- Get your money | Once approved, the judge will sign the order approving your transaction and the order is sent over to the insurance company to wire funds.
How long does it take to sell my Structured Payments?
After you’ve signed the contract, on average it takes about 45 days to receive your money. However, keep in mind that every structured settlement purchase transaction is different due to each state’s laws regulating such purchase transactions. In addition, you may qualify for an immediate cash advance to help you through a particularly tough time.
What discount rate is normal when selling Structured Settlements?
If you are considering selling your annuity, you need to be sure that the offers you are getting are reasonable and fair as you’ll have to get the lump sum reduced by a factor of the projected interest earnings, known as the discount rate. The exact discount rate that you will need to give in order to sell your structured settlement will depend upon the total amount of your settlement payments, the number of payments you have remaining, the date those payments are due to arrive, the number of payments you wish to sell etc. The longer people have to wait to receive their payments, the greater the discount rate will need to be. Discount rates from factoring companies to consumers can range anywhere between 8% up to over 18% but usually average somewhere in the middle. An average discount rate of 12% should be reasonable but there are some companies that will want to take as much as 30% discount.
Will I be forced to pay tax if I Sell my Annuity or Structured settlement?
The money you receive from selling your structured settlement payments will have the same tax treatment as the payments you receive from your structured settlement annuity.
The Periodic Payment Settlement Act of 1982 (Public Law 97-473) formally recognized and encouraged the use of structured settlements in physical injury cases by designating payments from a structured settlement as tax-free.