Historically, most investors who purchase structured settlement payment rights from factoring companies are sophisticated investors, wealthy individuals or financial institutions. Ironically, some of these investors are life insurance companies who also sell structured settlement annuities.
Typically, these investors are taxed on the income generated by these investments even when the claimant who originally owned the structured settlement payment rights received his or her periodic payments income tax-free.
The principal risk to downstream investors who purchase previously-factored payment rights is that a court can later vacate the original transfer of payment rights. Possible reasons: the tort victim/rights holder lacked authority to transfer those rights in the first instance or because court approval of the underlying transfer was later vacated for some other reason (such as contravention of other applicable law). Possible result: the downstream investors lose their purchased asset.
Some secondary market brokers and settlement planners offer these “re-cycled” future payment rights to separate claimants in the context of personal injury settlements. The characteristics and promotional names of these investments vary.
For example, some brokers package and promote re-cycled structured settlement payment rights as tax-free “in-force annuities.” Significantly, these investments are not annuities and they are not structured settlements as that term is defined in IRC section 5891(c)(1).
SEC and FINRA Warnings
In May 2013 both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) published identical investor bulletins providing advice for individuals who are contemplating selling or purchasing (as investors) structured settlement payment rights and highlighting general due diligence questions they should ask:
- Is the transaction legal?
- Is the transaction worth the cost?
- What is the reputation of the company offering the lump sum?
- Will the factoring company require life insurance?
- What are the tax consequences?
- Does the sale fit your longer term financial goals?
- Is the financial professional selling the product registered with a state or federal regulator or with FINRA?
- How is the salesperson being compensated?
- Is the salesperson authorized to sell this product?
- What is the reputation of the company selling the product to me?
- What are the tax consequences?
- What organization is ultimately paying you?
- Who is sending the check?
The SEC’s Investor Bulletin includes a number of additional warnings and resource links and concludes with the following admonition:
“Whether you are thinking about selling a … structured settlement, or buying one from someone else, remember that the risks in doing so are substantial and the safety net if things go wrong may not be very strong. Don’t shy away from asking probing questions—and shop around. there may be less risky alternatives to help you achieve your financial objectives.”
Payee Protection Plan
For the record, Independent Life opposes and is not involved in the re-sale market or in ‘factoring’ transactions. We are singularly focused on the primary market for structured settlements. In response to the often disreputable business practices in the secondary market, Independent Life created the industry’s first Payee Protection Policy to offer
security for our payees and peace of mind for the professionals who work to create the best financial plan for personal injury victims.
Portions of this article are excerpted with permission from “Structured Settlements and Periodic Payment Judgments” © 2020 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.