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Are factored payments streams legal?
Buying an existing structured settlement annuity, and having the rights to the payments due under the structured settlement annuity policy is legal in all 50 states. The Structured Settlement Protection Act of 2002 paved the way for a court ordered Transfer process, making the purchase and resale of payment rights due under structured settlement annuities a Secondary market.
are structured settlements legalWhy does this industry get such a bad rap?
The issue can be mostly attributed to current marketplace practices and the lack of a true market. Trial lawyers and their advisers (like us here at Milestone) spend an immense amount of time trying to figure out how to protect their clients from life’s harsh challenges when it comes to large lump-sum recoveries. Why did trial lawyers ever recommend structures in the first place?
It’s simple. As a tax incentive for people considering large lumps sum payments, and in an effort to keep as many of these citizens off the welfare rolls, Congress provided the “single largest tax exemption ever” to private citizens with structured settlements. Before the early 2000s, a plaintiff could invest $1,000,000 of his or her net settlement into the form of a structured settlement and over the next 40 years receive $8,000,000 in payments, guaranteed and tax free. That’s a $7 million tax exemption for a single person.
During that time, the best part about a structure was that it could protect absolutely. In order to receive this tax windfall, plaintiffs were required to enter into irrevocable periodic payment obligation, or structured settlement. These contracts provided for their guaranteed payments, as well as the ability to leave the annuity and all of the tax-free payments to an heir through a beneficiary designation. The catch? These arrangements could never be changed. You were unable to sell it, accelerate the payments, encumber them, or take a loan out against the base asset (the annuity policy). The tax-free nature was a trade off in liquidity.
It made sense. Most plaintiffs that became disabled were happy with the prospect of receiving an annual guaranteed income and the quality of life that came with it. The security and dignity that came with the creation of permanent financial security was hard to replicate with traditional markets and investing.