selling structured settlements - Selling Future Payments

Many individuals receiving a stream of monthly payments under a settlement agreement don't realize that they can sell all or a portion of their annuity payments and be paid a cash sum. Access to this money could provide funding to meet the current life needs of your family instead of waiting for a future stream of inflexible payments structured over a period of a year or more. This process of entering into a contract to sell ones legal right of receiving future structured payments to settlement companies in exchange for the present value of the money is called factoring.

A large number of companies now offer cash for a structured settlement payment. When evaluating your options, try to work with financially sound companies that are competent and ethical. These factors are important considerations to note of when you compare the knowledge and integrity of a company or corporation as well as their dollar offers. It is a always a good idea to shop around and compare companies and offers.

selling structured settlements - Cash Payments or a Structured Settlement?

In traditional settlements, compensation for damages has usually consisted of a single cash payment. History has shown that this money is often unwisely managed and quickly spent, leaving no funds available to provide for future needs. Alternative arrangements know as structured settlements were created in the 1980's. Under these arrangements the beneficiary would receive cash structured settlement payments on a periodic basis. This guaranteed stream of annuity payments could be paid over a period of months, years or a complete lifetime.

Federal and state laws have been created as part of a nationwide policy encouraging the use of structured settlements over cash payments in cases involving injuries. These structures are a favored means of providing annuity income to a beneficiary and reducing their risk of rapidly spending the capital proceeds from a cash settlement. In some cases, former recipients have found themselves with no cash flow, relying on loans for family living expenses. Others have had to rely on direct public assistance as a source of support for the rest of their life. To encourage their use, favorable tax treatment rules have been extended to the cash received under a structured settlement agreement.

selling structured settlements - new law provides tax relief on viatical settlements

Contemplation of death is difficult. Most of us fear C the unknown of our own death and for the financial security of those we leave behind. Life insurance is the vehicle we most often use to provide that financial security. It is paid when our loved ones need it the most in a lump sum or an annuity. Moreover, it usually is income tax-free and, if appropriately structured, can escape any estate taxes.

However, what if we were subject to a fatal illness where there was almost a certainty of non-recovery@ To prolong any sort of life, astronomical medical expenses would be incurred. Many chronically or terminally ill individuals with short life expectancies have sold or assigned their life insurance policies to what are known as viatical settlement providers. These companies typically buy policies from people with life-threatening illnesses for a percentage of the policy's face value.

In the past, viatical settlement payments were subject to Federal income taxes. Life insurance proceeds normally would not be taxable because they would be received and paid by reason of death. Since viatical life insurance payments would not be paid by reason of death, they would be taxable. Accordingly, people opted not to use viatical settlements because they did not want a significant part of their money going to the Internal Revenue Service.

This has all been changed by the Health Insurance Portability and Accountability Act, signed into law by Pres. Clinton on Aug. 21, 1996. It allows those suffering from chronic and life-threatening illnesses to receive the proceeds of living benefits in the form of viatical settlements free of any Federal income taxes. After Dec. 31, 1996, viatical settlement companies will be able to pay out a percentage of the policy's face value to the policyholder, assume responsibility for premium payments, and become the policy's beneficiary. Moreover, there are no restrictions on the use of the funds received from viatical settlements. This means the policyholder need not use the money for medical purposes, a final vacation or new car could be an acceptable purchase.

According to a Congressional joint conference committee, a "chronically ill" individual is one who has been certified within the previous 12 months by a licensed health practitioner as being unable to perform (with substantial assistance) at least two of daily living chores - eating, dressing, toileting, transferring, and continence - for at least 90 days as a result of loss of functional capacity; or having a similar level of disability as determined by the Secretary of Health and Human Services; or requiring substantial supervision to protect such individual from threats to health and safety as a result of severe cognitive impairment.

In the case of the chronically ill, there is a $175-per-day ($63,875 annual) cap on excludable benefits that applies for per diem-type long-term care insurance contracts. The cap was instituted during the final stages of the legislation because Congress recognized the need to coordinate long-term care provisions with viatical settlements. If there were no cap, there would be little to no incentive to purchase a long-term care policy.

This cap can be avoided easily. Under the law, chronically ill individuals may enter into a viatical settlement arrangement that is structured to indemnify the individual for any long-term care expenses. As a result, amounts spent for long-term care expenses could be deducted from the full amount of viatical proceeds, thereby allowing an individual to exceed the $175-per-day or $63,875 annual cap.

A terminally ill individual, meanwhile, is one who has been certified by a physician as having an illness or physical condition that reasonably can be expected to result in death within months of the date of certification.

The National Association of Insurance Commissioners, Viatical Settlements Model Act outlines guidelines for fair payments to policyholders. These standards compare the minimum percent@ age of face value the ill individual can receive, less outstanding loans, to the insured's life expectancy.

Those with less than six months to live would be guaranteed 80% of the policy's face value, while those with at least six, but less than 12, months would be guaranteed 70%. If the insured is expected to survive at least 12, but less than 18, months, 65% would be granted, and if life expectancy is at least 18, but less than 24, months, 60% would be the minimum. After 24 months, the return for selling the insurance policy starts at 50%.

Those most likely to reap the benefits of the new law's living benefits provisions are individuals with chronic and life-threatening illnesses such as cancer, heart disease, Alzheimer's disease, and acquired immune deficiency syndrome. According to Amy Anderson, legislative representative for AIDS Action, HIV and AIDS have very expensive treatments and someone may become impovished and end up on public assistance. Viatical settlements will keep them from relying on public assistance and ... the person with more money can have a better standard of life for what time they have left." It has been estimated that 22% of individuals between the ages of 65 and 74, and 25% To of those over the age of 75, lose most or all of their family savings as a result of serious illness.

selling structured settlements can help protect clients from themselves

This article originally appeared in Minnesota Lawyer, another Dolan Media publication.

MINNEAPOLIS - A minor settles a personal injury action for a lump- sum payment that is placed in a special account until he turns 18. Upon reaching the age of majority, he moves in with friends and uses the funds to buy a car and party down, burning through $90,000 in a year.

It sounds like a parent's worst nightmare - and it's exactly what happened in a personal injury case handled by Duluth, Minn., personal injury attorney Robert C. Falsani several years ago. That's one I wish had back, he recently told Minnesota Lawyer.

How can such a situation be avoided?According to personal injury attorneys, use of structured settlement payments is the best way to prevent such a scenario. Under a structured settlement, parties don't receive lump-sum payments for their injuries but instead receive a stream of tax- free payments over their lifetimes that are tailored to meet future needs.

While structured payments may deny an injured party access to settlement funds in the short run, practitioners say that long- term, they are often the best way to go.

Minneapolis personal injury attorney Edward W. Gale said that particularly with larger settlements, setting up a structured payment schedule is a much better idea than letting people invest the money on their own. Most people don't have the financial sophistication to manage their own portfolio, he said.Falsani agreed. I love structures, and the reason is that statistically, within three years, a lump sum vanishes, he said. Most Americans are horrible at saving.

Minor matters

Attorneys contend that in most cases, the advantages of setting up a structured settlement far outweigh the downside of not receiving an immediate lump-sum payment. They assert that structured payments are particularly effective when minors are involved.

Plymouth, Minn., personal injury attorney T. Joseph Kane Crumley explained that in cases involving a child under age 18, court approval of a settlement is required. In addition, some very detailed Minnesota rules require that any funds the child receives be set aside until he or she reaches the age of majority.

By using a structured settlement, payments can be set up to be disbursed at a later age, such as when the minor is more mature and able to handle receiving a potentially large sum of money, Crumley continued.

Generally that is what drives a lot of them, said St. Paul, Minn., personal injury lawyer Robert J. Leighton, explaining that parents are often concerned about an 18-year-old receiving a large monetary payment.

Falsani agreed. A structured settlement gives parents some control over how the kid is going to get payment, he said, pointing out that at 18, a large sum of money can become a negative thing.

Stream of income

Another benefit of a structured settlement is that it provides a steady stream of income to the client, which is particularly helpful in cases where the client is out of work or has ongoing medical care costs.

You are providing some financial security in the future for your client, Gale observed.

Falsani explained that many personal injury plaintiffs who settle their cases do so under pressure from family and friends -some of whom want money or loans - and having $100,000 to $300,000 sitting in a bank account burns a hole in their pocket.

Structured settlements are a way to protect clients from themselves and others, he said.

There is a hidden advantage to lawyers also, Falsani observed. As each check comes in, clients think fondly of their lawyer, he quipped.

Tax free

Tax advantages are another major benefit of setting up a structured settlement. While personal injury settlements themselves are not taxable, the interest that accrues on such an investment is taxable.

That can add up to a lot over time, said Crumley. It can be fairly substantial if it's a large settlement.

However, since 1982, when Congress began encouraging structured settlements, the Internal Revenue Code has contained a provision providing that 100 percent of every structured settlement payment, including interest payments, is exempt from state and federal income taxes.

Thus, a client can get double or triple the amount of the actual settlement, and none of it gets taxed, Crumley noted.

It's a benefit if it's a big dollar structure, Falsani added.

Don't be a pauper

Despite a generally favorable view of structured settlements, attorneys concede that there may be some circumstances in which they are not the best way to proceed.

For example, if the settlement amount is minimal, it may not be worth the administrative costs involved in setting up a structured settlement.

In smaller settlements for adults not under infirmity, clients often prefer to just have the money right away, Gale noted.

Crumley warned against setting up a structured settlement in a case where a person really does need money in the immediate future. They don't want to be in a situation where they paupered themselves in the short term in favor of long-term financial security, he said.