Selling Your Structured Settlement

selling structured settlement

Why Would You Want to Sell Your Structured Settlement Payment Rights?

If you settled a personal injury lawsuit, inherited a structured settlement annuity, or are receiving payments from an insurance company, you have a valuable but inflexible income stream.  But did you know that you also have options? In 49 of 50 the states, you can transfer the right to receive a portion of or all of your structured settlement payments in exchange for an immediate lump sum.

People sell their payments every day to fulfill any multitude of needs such as buying a home, investing in a business and paying for medical bills.

But watch out- before you even consider this as a way to raise cash,  be sure to try to raise your needed funds through a more conventional borrowing.  Here’s why:

Your payments are valuable and the income is hard to replace.  You have a structured settlement in the first place as compensation for injuries, so make sure you can support yourself when the payments are sold because selling payments is a permanent decision.

Once the payments are sold, they are gone.  The truth is, consumer financing options like a personal loan, home equity loan or a business line of credit all carry a significantly lower interest rate and just cost less.

Still Want To Sell Your Payments?

If you have exhausted the other options or don’t have traditional borrowing options and need to raise cash by selling your payments, there are many companies out there who will compete for your business.  Let’s look at them:

Pros and Cons of Big Factoring Companies

The larger transfer companies, like JG Wentworth and Peachtree, have access to Wall Street and global capital markets.

These larger transfer companies have aggressive sales teams and buy millions in payments every day and then package up the payment streams.  The large pool of payments create an ‘asset-backed note’ and this security offering is sold to institutional investors.

Because they have a high overhead and significant ad budgets, as well as shareholders who want to earn money, the larger transfer companies are not always aggressive when pricing your proposed structured settlement transfer. Shopping around may get you a better offer.

On the plus side, the larger transfer companies can at times quote price with a competitive effective discount rate when rates are low or due to market forces associated with their securitizations. Timing is everything when working with a large transfer company to get the best offers on any given structured settlement transfer.

Annuities for Deferred Compensation

deferred compensation for attorneys

Attorneys received a special consideration by the same Congressional legislation that promoted  structured settlement annuities — the Periodic Payment Settlement Act of 1982. Because many attorneys use period certain annuities in structured settlement annuities in their professional practice, it is only logical for those same any attorneys to use their unique ability to defer taxes on their fees to buy period certain income annuities for retirement.  The combination of safe growth and tax deferral gives attorneys a huge advantage over all other professionals who have to pay taxes on their income when it is received.

How Can Attorneys Use Annuities for Deferred Compensation?

Structured settlements are an excellent solution for victims of personal injury. But structured settlements are not just for plaintiffs.  Attorneys can benefit from the same laws that give plaintiffs tax-free status to defer taxes on their own fees.

The key difference between the tax-free structured settlement annuity and the attorney fee deferral lies in the tax treatment. The attorney’s version of the product comes tax-deferred instead of tax-free. But make no mistake- this represents an essentially unlimited tax deferral vehicle, like an uncapped 401K or IRA, that is open only to attorneys and not available to any other professional or the general public.

Injured plaintiffs and their families use structured settlements to ensure a lifetime of financial security.  And contingency fee attorneys can also use the same strategies and innovative financial solutions to facilitate their long-term wealth accumulation. Attorneys are able to defer receipt of a part or all of their contingency fees in a deferred compensation plan, and many chose to place their fees into deferred income annuities to guarantee future payments.

In this manner,  in lieu of the currently taxable lump sum attorney fee, the participating lawyer will receive guaranteed periodic annuity payments over the arranged amount of time, and only incur a tax liability when the money is received.

An attorney benefits from a fee deferral first and foremost from the immediate reduction in taxes, just as a regular saver puts pre-tax money into a qualified plan like a 401K or IRA.

However, the little known advantage that attorneys have is that they do not have to follow the qualified plan’s rigorous rules and requirements for a limit to the contributed amount. For many high-income earners, qualified plans like Roth IRAs and 401K’s have laughable contribution limits that make participation more trouble than its worth.

Not so with a contingency fee deferral strategy.  With a deferred contingency fee compensation plan using period certain annuities, the attorney may structure the benefits to start whenever they wish, and last as long as they need.  One of the benefits of this is that it may allow a high-income attorney to put off receiving money until after retirement, at which time he or she may well be in a lower tax bracket.

Some contingency fee attorneys use deferred compensation structures to invest in the markets in a traditional managed money environment.  While this is feasible, it often saddles your investment account with fee layers that can greatly eat into overall returns.

Another strategy, however, is to use the same set-and-forget guaranteed, period certain annuities the plaintiffs use in their structured settlement awards.  With a little planning on the front end by the attorney and a creative settlement planner, attorneys can set up a ladder of income over the retirement years and know with certainty that the income will be paid, and often by the same high-quality carriers their plaintiffs rely on.

Attorneys and settlement consultants should contact us to learn more about using Secondary Market Annuities for both new structured settlements, and for deferred attorney compensation plans. We can assist with both onshore and offshore assignment companies to facilitate these transactions.

History of Deferred Compensation

In 1996, the 11th Circuit affirmed the 1994 Tax Court’s ruling in Childs v. Commissioner (103 T.C. 634). The Court ruled that:

  • Attorneys involved in tort cases under contingency fee agreements have the unique opportunity to receive their fees in the form of periodic payments.
  • Attorneys may elect to defer all or a portion of their fees.
  • Fees included in the structure will not be taxed until the year(s) in which they are received.

Internal Revenue Code Section 409A includes an express carve-out allowing for the deferral of attorney fees. IRS Notice 2005-1, 2005-1 C.B. 274 provides further guidance on this application of § 409A.

Attorneys can establish these payments to suit their own firm’s or personal needs. Such payments can be arranged in any of the following different configurations:

  1. Monthly payouts
  2. Quarterly payments
  3. Yearly amounts
  4. Deferred lump sums

These deferred fees become taxable when received.

Uses for Annuities in Deferred Contingency Fee Compensation Plans

Attorneys have a number of practical uses for annuities in their deferred fee compensation plans. Some of the most commonly utilized and cited ones are as follows:

  • Retirement Planning – Most traditional and company-sponsored retirement plans include limits on contributions and are subject to required minimum distributions. A retirement plan built using tax-deferred contingency fees and annuities, however, gives attorneys their own specifically tailored, customized plan for retirement that meets their own unique needs, yet with unlimited contribution, and no required distributions, and all with tax deferral. Attorneys have an unfair advantage in retirement planning.
  • Firm Overhead Costs – The income that personal injury attorneys command often varies considerably. Sometimes there are leaner months. This is where structured guaranteed income payments can deliver an effective, much-needed, and reliable income source to help smooth out the monthly income variances for their firm. The resulting predictable, safe stream of cash flow allows attorneys to sleep better at night, knowing that normal expenses like staff salaries, office overheads, and costs for future casework will all be covered each month regardless of workflow and firm income.
  • College Planning – Attorneys have children to put through university, and these considerable education expenses can be daunting even for professionals enjoying a higher level of income. Thanks to the flexible nature of a well-crafted fee deferral plan, lawyers can rest easy knowing that they have a strong and dependable planning tool for handling future upcoming costs.

Advantages of Annuities for Attorney Fee Deferred Compensation

There are many advantages of annuities for helping out participating attorneys. These include all of the following practical benefits:

  • Reduced tax bracket for federal income taxes
  • Deferred state and federal income tax liability for those bigger yielding cases and payouts
  • An effective and reliable tool for the preservation of capital and wealth
  • A guaranteed and locked-in rate of return on period certain payments
  • An extremely low-risk platform for a well-diversified investment portfolio
  • Stability of the future months’ and years’ income for the firm or individual attorney in question provides peace of mind and allows for better case planning and flexibility

Disadvantages of Annuities for Attorney Fee Deferred Compensation

There are disadvantages to using annuities for deferred compensation, including:

  • Deferred compensation means just that- not taking constructive receipt of the fee.  This may not always be appropriate for a firm, depending on their  individual situation
  • Period certain annuities have defined payouts that are typically not very flexible.
  • Changes to defined payments from period certain annuities can be difficult or expensive to change once set up.

In general though, it is hard for attorneys to go wrong with this model of deferring taxes and creating stabilizing, dependable, reliable income for years to come.

Are you an attorney looking to buy structured settlements backed payments with your deferred compensation? At DCF Annuities we can help with an offshore assignment company and high yield, period certain payments.

Period Certain Annuities for Guaranteed Income

guaranteed income

One of the most compelling features of structured settlement annuities is their tax-free status to the original recipients.  Congress passed legislation that amended the federal tax code with The Periodic Payment Settlement Act of 1982 (Public Law 97-473).  This law promoted the use of structured settlements by granting them tax-favored status.

Internal Revenue Code §104(a)(2) and §130(c) further clarified that the full benefits received from a qualified structured settlement annuity that derived as a result of a personal physical injury would be tax-exempt when received.

What this means that not only is the award tax exempt, but the investment income realized during the life of the annuity is also tax exempt.  By contrast, when a structured settlement recipient receives only a lump sum payment and then invests that money, the investment earnings are generally subject to taxation.

So not only does the beneficiary obtains a dependable and consistent income, but those payments are tax-free.

Features of Guaranteed Income

Guaranteed income is not just the domain of structured settlement annuities. In fact, the point of all investment is to create income, and in retirement, the key is to do so safely, dependably, and for as long as it is needed.

Retirees seeking safety, a secure income, and freedom from worry about their investments look to a wide range of sources, like index annuities, fixed, and immediate income annuities, CD’s and even real estate.  Structured settlement recipients often don’t know how good they have it with their guaranteed payments- it’s the sort of safe and secure income investors struggle to find

For truly guaranteed and period certain income, structured settlements are a potent weapon for securing a financial future and freedom from limitations and fear. Several key features of these period certain annuities are as follows:

  • Structured settlement annuities offer original recipients payments completely tax-free, thanks to IRS Code section 104(a)Structured settlement annuities are tailored to recipients to meet their life needs, such as college, house purchase, children, and lost working capacity.
  • Payments are made by some of the strongest life insurance institutions in the world.

Benefits of Guaranteed Income

There are a wide variety of advantages that period certain structured settlement annuities offer to recipients and buyers, including:

  • Stability– Structured settlement recipients can depend on their income without any volatility from market forces.
  • Financial Security -Thanks to the financial strength of the issuing life insurance companies, the income from structured settlement annuities will always be there.
  • Tax Advantages – All qualified structured settlement payments benefit from the tax-free status of the structured settlement vehicle for the original victim. This includes the lump sum payouts, periodic payments, and interest earned in the annuity. This is established in the Internal Revenue Code section 104(a).
  • Customized Payments – Guaranteed income settlement annuities are typically tailored to the needs of the recipient. One client will have differing needs from the next, and when properly constructed, these period certain annuities address the needs to the recipient for decades into the future. As an example, any victim who is no longer capable of working as before the accident can have a structured settlement established to supplement income each month or to substitute for lost income. In other cases where the victims need special attending care for the rest of their lives, these guaranteed settlement payments can be established to meet this need. For those beneficiaries who are minors, they can set up payments that will not start until a future fixed point. These might include payouts for vocational school, college or university, or once the minor reaches adulthood.
  • Protection From Waste – a huge benefit consistently raised with these guaranteed income streams is that they prevent any spendthrift habits from wasting the award the victim receives. This is critical for those beneficiaries who have been badly injured. They need certainty that their award will always deliver an income when they require it.
  • Confidence – the payments to the beneficiary of the structured settlement have full confidence in knowing that the periodic payments will always be received as promised and on time.

Uses of Guaranteed Income

Guaranteed income is specifically designed to deliver practical results. Some of the more common uses of guaranteed income from period certain structured settlement annuity payments are as follows:

  1. They provide freedom from fear and worry – thanks to the income that is both guaranteed and completely income tax-free, the victims and their families are able to concentrate their entire efforts on rebuilding their shattered lives following a case of wrongful death or a life-altering tragic accident.
  2. Unexpected future needs – Many different unanticipated future time needs can arise. One of these might be an unplanned move or an untimely death in the family.
  3. Home buying – many victims will want to have their own home at some point. Without an ability to work and earn a consistent income or to continue to maintain good credit, this would be practically impossible. Thanks to these guaranteed payments, victims can prove their ability to purchase a home to their financial institution.
  4. College education expenses – children will want to go to university, and victims themselves may find it helpful to go back to school or if they are minors to set aside money for future higher education or vocational training. All of this needs the income provided by period certain annuities and guaranteed income.
  5. Weddings – it may be that the beneficiary wants to get married, or one of their children needs help in paying for a wedding. Wedding costs are astronomical anymore. With a lump sum payout or using the guaranteed income provided by the periodic payments, weddings can be effectively planed and covered.
  6. Travel – there are a variety of travel needs that could arise for the injured individuals. This might be medically, family, or personally related. Guaranteed income means that the cost burdens associated with travel can be met.
  7. Inheritance planning – Those structured settlement annuity recipients have the ability to pass on the guaranteed income payments as well as the tax-free consideration for them and on all interest earned by the vehicles to their heirs. Some inheritance and estate planning is necessary.
  8. General income stream – Many victims will simply be grateful to have the guaranteed monthly income payments that substitute for lost wages and earnings from their past lives and former employment.

Guaranteed Income Is Ideally Suited For A Range of Cases

The Congress knew what they were doing when they established guaranteed income structured settlement annuities over 35 years ago. They crafted a vehicle that ideally suits many different cases, particular needs, and circumstances of accident victims.

People who can benefit from the period certain annuities have situations such as in the following cases:

  • Suffering from either permanent or temporary impairment and disabilities
  • Successful cases of workers’ compensation
  • Intense and lasting injuries, particularly in the case where they lead to longer term medical care needs, family support, and ongoing living costs
  • Wrongful death cases that leave survivors such as children and spouse with desperate needs for reliable and consistent monthly (or annual) income
  • Minors or mentally incompetent persons whose cases require guardianship

A number of independent studies and surveys reveal that as injuries are more severe and lasting, this increases the odds that the courts and defendants will consent to the vehicle of guaranteed income structured settlement annuities.

This graphic shows a number of the largest firms:

The Ultimate Guide to Structured Settlement Annuities

structured settlements

What Are Structured Settlements?

A structured settlement is a financial arrangement that provides financial benefits to a plaintiff over the course of time, as opposed to a single lump sum all at once.  Structured settlements are usually funded by defendants or their insures with the purchase of one or more annuities that offer a combination of period certain guaranteed payments, life contingent payments, and lump sum payments.

With structured settlements, payments are spread out over time to meet the needs of the payees and their families. Instead of a one-time lump sum, with the risks inherent in sudden wealth, a structured settlement recipient receives payments spread across a long time frame.

This may seem anticlimactic to people who are enamored with a large settlement up front. Yet such annuities often guarantee a better future through consistent payments than would a single one-time payment that can be easily spent in a matter of months.

The Tax-Free Benefits of Periodic Payments

Strictly speaking, a structured settlement funded with an annuity provides consistent periodic payments.  The injured party is the payee, and the annuity is purchased by the defendant and typically held by a qualified settlement fund of assignment company.

Structured settlement annuities are usually issued by only the highest rated life insurance firms, and deliver guaranteed long-term income payments with significant and lasting tax advantages.

First and foremost, payments are completely tax free to the recipients. This is memorialized in the Periodic Payment Settlement Act of 1982, more commonly referenced as section 26 U.S. Code § 130. The act not only officially recognized the existence of structured settlements at the time, it also promoted their utility in the cases of tort physical injury.

How Structured Settlements and Annuities Work In Practice

There is actually a four step process with structured settlements, as shown in the graphic below. This process is as follows:

  1. The aggrieved party opens the process with a lawsuit against the defendant – the goal is to gain compensation for illness, an injury, or death of a loved one that was caused by the defendant. Commonly the guilty party will consent to provide the aggrieved party with a structured settlement rather than have the case actually go to trial. When the cases go through a long, expensive, and sometimes exhausting process and the judge rules for the aggrieved party, the court will make the defendant establish either a larger lump sum payment or a structured settlement.
  2. The defendant and plaintiff sit down with a structured settlement consultant – Structured settlement consultants greatly assist in the settlement process to determine the structured settlement terms. This includes the amount of the periodic payments, for how long they ought to last, and whether or not they need to go up in amount during later or particular times. A qualified assignee or intermediary is involved who takes on the defendant’s liability, and takes in the premium from the defendant that is necessary to fund to purchase the victim’s annuity.
  3. The qualified assignee then buys the annuity from a highly rated life insurance company –  this is the point where the qualified assignee establishes the structured settlement annuity contract so that it will pay out according to the requirements of the agreed upon settlement. These annuity terms may never be altered once they have been set up. It is usual that part of the qualified assignment and settlement sets aside a one-time amount to pay to fund a trust or pay the expenses of the attorney.
  4. The life insurance company makes the annuity payments to the victim consistently and periodically as agreed – by the annuity contract terms. The structured settlement annuity typically includes monthly and lump sum payments, and interest accrues over time.  Both the initial award and the interest earned on the annuity are tax free to the payee, and the added benefits and total payout to the annuitant can be substantial and last a lifetime.  It’s important to note, however, that structured settlement annuities are inflexible.  It is only possible for the victim to receive any additional cash out of the settlement before the scheduled payment if he or she sells rights to future payments. They can do this on the secondary market.

Because life challenges, medical history, settlement costs, and a host of other considerations all need to be weighed when crafting a structured settlement, it is common for settlements to be complex and time consuming.  The assistance of a skilled structured settlement consultant is essential to achieve the best outcome for all parties, and to find the right combination of benefits for appropriate compensation for the plaintiff’s injury.

How Structured Settlement Annuities Are Used

Structured settlement annuities are used in a wide range of situations.  Plaintiffs and injured parties may be workers, medical malpractice victims, auto or workplace injuries, or even families, dependents and children. In minor’s cases, the courts commonly use structured settlements to ensure that money given to the minor is fairly utilized and protected in spendthrift trusts or protected from guardians or trustees.  Other uses of structured settlements include:

  • Delaying benefits until the age and point of retirement
  • Provide income enough to pay down debt
  • Offer enough consistent stream of money to cover regular bills
  • Deliver an annual stream of income, with diminishing or increasing payment levels during the term of the annuity

Interestingly enough, though the defendant pays for the annuity to be funded, it is the victim who decides how the structured settlement will be practically distributed and the annual payout amount. In the range of options that are available, the most common choices that the recipient will have to make are as follows:

  1. Will there by a lump sum paid out along with the periodic, dependable payments?
  2. How flexible will the structured settlement actually be?
  3. What will the beginning and end dates be on the annuity contract?
  4. What payment amount and payout frequency will be set?

Who Uses Structured Settlement Annuities?

Structured settlements and structured settlement annuities are increasingly common.  In fact, over $5.5 billion USD in new premium was written in structured settlement annuities last year alone.

The most common scenario is for settling a lawsuit before a trial begins or out of the courtroom. With a majority of the claimants in these cases, weighing a structured settlement means deciding between a a one time lump-sum payment, or a more reliable annuity-backed income stream and lump sum payout.

For defendants, structured settlements also are beneficial.  In some cases it may lower the total cost of a settlement that they will have to pay as a result of their negligence or mistake. And defendants in many situations like the dependability and security of a guaranteed, reliable income.

Structured settlements may be the perfect solution to lost income. Examples of such cases that commonly end in an award of a structured settlement annuity are the following:

  • Personal injury awards
  • Workers comp payments
  • Product liability issues
  • Wrongful death lawsuits

Minors also benefit from structured settlement annuities. They provide a range of useful options for a child, such as:

  • Making sure a child will have money for the future
  • Providing for ongoing immediate needs like medical care and treatment
  • Helping to pay for education in the present and future

History of Structured Settlement Annuities

Interestingly enough, structured settlements did not originate in the United States even though we are a global center for their use.  Instead they arose in Canada because of medical liability cases against thalidomide.

The claimants obtained annuities which proved to be popular, and similar cases were filed around the U.S. It was the United States’ practice that made structured settlements so popular in the medical malpractice industry. The federal government saw the benefits that these structured settlements offered to accident victims and their families and wished to make such financial security a permanent and reasonable expectation.

Thus, structured settlements (and the annuities behind them) became substantially more popular across America once the 26 U.S. Code § 130 federal legislation granted tax-free status the to payments for structured settlement payees.

Selling A Structured Settlement Annuity

Structured settlements are designed to be permanent solutions to permanent losses.  Wrongful death, medical malpractice, injury, and other claims that result in structured settlement awards leave permanent scars.

But one of the largest complaints about most structured settlement arrangements is that they are inflexible to the needs of people over time.  Frankly, life happens, and what seemed like a reasonable monthly award years ago might not be useful today.  Needs, costs, and bills tend to grow faster than income.  There are a lot of reasons why people sell payments:

  • Buying a house
  • Expenses for education
  • Purchasing a car
  • Opening a business
  • Paying down debt
  • Medical costs
  • Unanticipated moving costs
  • Vacation expenses
  • Funeral costs

As financial planners we would never encourage people to sell a structured settlement annuity payment stream without first exhausting all other avenues of credit and income.  These might be options like a new job, a lower cost house, or other measures.  The rationale here is simple- annuities are expensive, and if you already have a structured settlement annuity, you should only sell it if you are 100% sure you can make more with the money today than what you will get out of the annuity in the future.

But if you are totally sure you need to sell, you owe it to yourself to get the best deal possible for your payments.  Click Here to get a quote directly from an investor.

Selling Structured Settlement Annuities on the Secondary Market

The only way a structured settlement owner can get access to a lump sum instead of their scheduled payments is by selling the right to receive those future payments in a court ordered transaction.  Even when the payments were structured in an out-of-court agreement, the transfer of structured settlement payments is a lengthy process.  Each state has different structured settlement transfer protection laws in place, but most follow the national standard which requires adherence with IRC 5891

Factoring Structured Settlement Annuities

It is typically factoring companies that buy structured settlement annuities.  Factoring simply means advancing funds today for payments tomorrow.  The factoring of structured settlements is a small industry in the larger financial landscape, but JG Wentworth is the largest company and has invested millions in becoming a household name.   They have also gone bankrupt several times in the last few years.

Initially, factoring was largely unregulated, but since 2002, the IRS section 5891 established a uniform process to transfer payments.  This guidance prompted the states to adopt regulations governing the sale of payments, and we now have 49 states (all except New Hampshire) operating under consumer friendly protection statutes that provide safety and guidance for these transactions.

Pros and Cons of Structured Settlement Annuities: Pros

There are many advantages to structured settlements. These include:

  • Payments from the settlement are not counted as taxable income, nor is the interest earned over time
  • The contracts survive death and are inherited by the heir of the contract, still tax free
  • Income amount for structured settlements does not impact Social Security Disability or Medicaid benefits
  • The income is guaranteed, steady, and stable
  • Stock and bond market fluctuations do not impact the value or payout of structured settlements
  • State guarantee associations back up the already highly-rated insurance companies
  • Well crafted payout arrangements typically anticipate all of life’s needs

Pros and Cons of Structured Settlement Annuities: Cons

  • The settlement terms can not be easily altered to suit unexpectedly arising needs
  • Selling future payments is expensive and may trigger IRS penalties if the transfer is not in compliance with state and IRS guidelines