Structured settlements

Many Californians, disabled and injured in accidents and product failures, as part of a court settlement, elect to enter into structured settlement agreements which provide a guaranteed stream of payments over time.

These settlements offer stability and certainty to people whose lives have been shattered by tragedy, thereby bringing security and stability to families by providing a regular income stream to meet present and future financial obligations. This is especially important for those with life-long disabilities as studies have shown that 25-30 percent of all lump sum settlement payments are gone within two months and 90 percent are completely gone within five years; structured settlements are intended to prevent this rapid dissipation.

As is evident by the large number of television commercials targeting recipients of these awards, encouraging them to trade in their future payments for cash, now, corporations, some more scrupulous than others, see a ready profit in purchasing these financial instruments for mere pennies on the dollar. As a result, many sellers don't understand the full impact of their decisions.

To protect these recipients from unscrupulous purchasers, California laws require court approval for the transfer of such payments. Unfortunately, courts currently have very little guidance regarding the criteria to consider when deciding whether such a sale is in the "best interests" of the consumer.

To further protect these recipients, and to protect Californians from having to pay future expenses which would be covered by these agreements, the California Legislature should adopt SB 510, which will provide judges with clear guidance when deciding whether the recipient of a structured settlement agreement can sell the rights to future payments.

The Intention of Structured Settlement Agreements and Problems with Buyouts

To understand the need for this legislation, one must first understand the intention and purposes of structured settlements. Structured settlements are used most often where the injured party may be permanently disabled from employment, require future medical treatment, or require long term care. Usually these cases involve significant life changing injuries or the death of a primary financial provider.

Another area where they are frequently used is in the case of a minor child who has been injured. The law requires that funds received on behalf of a minor are secured and invested until that child reaches the age of majority, 18. Structured settlements are often used to plan for the future care needs of the child once they reach adulthood and/or to help pay for their college education.

By spacing payments over time, such agreements ensure that money for medical care is available as it becomes necessary. The structured settlement may pay for college or replace long-term lost wages with regular payments that can be used to meet care needs and/or household expenses. Again, the incremental nature of the payments is a financial planning device that times receipt of funds with the rhythm of needs.

When the beneficiaries of these agreements sell the right to future payments for a present cash buyout, they undermine the intent of the structured settlement and create further instability in a life already fractured by tragedy. By the time surgery is necessary, or the injured person's savings are exhausted, the structured settlement payments may be gone as well. This could potentially shift the burden of care back upon the taxpayers as a provider of last resort.

More than just undermining careful financial planning that goes into structured settlements; the terms of these sales often result in a deep discount being taken on the funds by the seller. In effect, they give up tens or hundreds of thousands of dollars in future payments for an immediate lump sum payment. Companies charge significant fees ranging from 21 to 70 percent of the total value of the settlement. The predatory practices of these lenders leave many people surrendering much of the settlement without fully recognizing the tradeoffs.

SB 510 Will Protect Beneficiaries of Structured Settlement Agreements

To protect vulnerable individuals, California law requires court approval for the sale of a structured settlement agreement. Current California law requires that the sale be in the "best interests" of the person seeking to sell the settlement. However, the current law lacks detailed guidance for a judge when she is conducting a cost benefit analysis to determine if the liquidation of a structure is in the "best interests" of the seller. This lack of guidance results in inconsistent application of the law with potential disastrous consequences to both the seller and the State, which may become financially responsible for the injured party's medical care in the future.

SB 510, introduced by Senator Ellen Corbett, provides clarity to the petition and sale process providing clear, objective, criteria for the courts to consider when determining whether to permit a sale. Among other things, the court would consider:

• The reasonable preference of the person receiving payment
• Purpose of the transfer;
• Whether structured settlement was intended to cover future income loss or medical expenses;
• Intention of the periodic payments;
• Potential need for future coverage of medical treatment;
• Whether the person receiving payment has other means of support;
• Whether the person receiving payment has received independent legal and financial advice; and
• The impact of such a sale on not just the seller, but his dependants, child support obligations, etc.

Additionally SB 510 requires that the court look at what is referred to as the "discount rate," the rate which is used by the purchaser in determining what fraction of the payment stream they will pay now, to see if it is in line with the current market rate. The law also requires that there be a full and clear disclosure of what the selling party would have received had they kept their structure, and the value of what they are giving up in exchange for immediate lump sum payment.

Some may argue that structured settlement agreements are too paternalistic; when someone is injured, that person should have the freedom to make their own decisions regarding any financial compensation they receive. These people fail to recognize that a structure is never forced upon a party; it is something that they elected as a careful financial plan when they were resolving their legal dispute. As such, these careful financial plans should only be disturbed when unforeseen circumstances dictate that the benefit of the change to the financial plan outweighs the significant costs. A strengthened review process, with clear guidelines and priorities, helps not only the court to make these decisions, it encourages and helps the seller to understand the significance of their decision, creating a time and process for reflection.

The proposed legislation will help to ensure consistency across decisions, force judges to consider all of the relevant factors and ensure that potential sellers understand the terms of the sale. Ultimately, this will help to protect people in California from predatory settlement purchases.

Source

A fixed rate structured settlement annuity is often created in connection with the settlement of a personal injury lawsuit. In a typical transaction, the defendant and plaintiff reach a settlement which provides for the plaintiff to receive periodic payments over a period of time.

The use of structured settlements has risen dramatically in the past twenty years. Previously, claimants were presented with the option of an immediate cash settlement, which created significant tax related burdens, and did not always address the long term needs of the plaintiff. Structured settlement growth is most attributable to the favorable federal income tax treatment that such settlements received as a result of the 1982 amendment of the Internal Revenue Code. These amendments approved a structure under which personal injury tort claimants could receive periodic payments over a term of years in settlement of their claim from insurance companies and assignment companies. These amendments confirmed that the personal injury tort plaintiff could receive the periodic payments under a structured settlement on a tax-free basis, including the ability to receive the “inside build-up” value or gain in investment value over the life of the payments. The Internal Revenue Code was also amended by adding new Section 130, which provided substantial tax clarity to insurance companies that establish “qualified” structured settlements and led to the creation of assignment companies that were affiliated with the insurance companies that issued the annuities.

The most significant downside for a plaintiff with a structured settlement comes from its inherent inflexibility. In ways unforeseen at the settlement table, the plaintiff’s financial needs often change over time resulting in a demand for liquidity options. Beginning in the late 1980s, a few small specialty finance companies started meeting post settlement liquidity demands by offering new flexibility for structured settlement payees through a lump sum cash payment to the plaintiff in return for some or all of the rights to the plaintiff’s structured settlement payments. During the late 1980s and early 1990s, certain legal and tax issues surrounding settlement transactions limited the growth of the assigned structured settlement market.

Federal legislation

In 2001, Congress passed H.R. 2884, which was promptly signed into law by the President. This legislation enacted Internal Revenue Code Section 5891 effective July 1, 2002 which largely eliminated the remaining material tax issues associated with the purchase and sale of Structured Settlements. Through a punitive excise tax penalty imposed on the Structured Settlement purchaser, Code Section 5891 created the de facto regulatory paradigm for the industry. To avoid the excise tax penalty, a state court, in accordance with a qualified state statute, must approve all structured settlement transactions. Qualified state statutes call for certain baseline findings, including a requirement that the transfer is in the best interest of the seller taking into account the welfare and support of any dependents. In response, many states enacted statutes regulating structured settlement transfers in accordance with this mandate.

Post-2002

Today, virtually all transfers are completed through a court order process. As of January 15, 2009, 46 states have transfer laws in place regulating the transfer process. Of these states, 41 are based in whole or in part on the model state law (“Model Act”) enacted by the National Conference of Insurance Legislators. In cases when the state law predates the Model Act, they are substantially similar. Most state transfer laws contain the following similar provisions:

1. Pre-contract disclosures to be made to the seller concerning the essentials of the transaction.
2. Notices to be issued to certain interested parties.
3. An admonition to the seller to seek professional advice concerning the proposed transfer.
4. A court approval of the transfer, including a finding that it is in the best interest of seller, taking into account the welfare and support of any dependents.