Factoring a Structured Settlement

by: Thomas D. Begley, Jr.

An alternative to commuting a structured settlement is to sell it on the open market. There are a number of companies, including J.G. Wentworth, which will purchase structured settlement annuities. The companies do not buy the structured settlement annuity itself, but rather buy the right to the income stream.  These companies pay less than the present value of the periodic payments that they acquire.  The discount from present value enables the acquiring company to make a profit.  These companies will buy all or a part of the income stream.  These companies have a trade organization known as the National Association of Settlement Purchasers (NASP). There are two tax issues that arise when the right to receive periodic payments under a structured settlement are factored.  Clearly, any future investment earnings from the lump sum are taxable income.  The receipt of the lump sum itself may be deemed taxable since it can be argued that the lump sum does not directly arise because of the personal injury but because of the exchange of contractual rights for cash.  In the early days of factoring a structured settlement there were widespread abuses and individual beneficiaries of structured settlements were preyed upon by unscrupulous factoring companies. Most states have adopted some form of the Model State Structured Settlement Protection Act.

The Factoring Transaction

Structured settlement agreements typically provide that the right to future payments may not be assigned. State statutes and court orders often also restrict or prohibit such assignment. Notwithstanding these prohibitions, a secondary market in structured settlements has developed, beginning in the early 1990s. Factoring companies circumvented these restrictions by arranging for the payees to redirect their payments to the factoring company address. The factoring company would then collect the payments and endorse the check using a power of attorney granted by the original payee and using signature stamps. Customarily, the insurers were not advised that the payments had been assigned.

Unlike a commutation where there has been a factoring transaction, the original payee transfers the right to receive the future payments and the original payer continues making the periodic payments. It is possible to factor all or a portion of the remaining periodic payments, only the payee is changed.

Court Approval

Under the Model Act the assignment of a structured settlement is void unless court approval is obtained. No direct or indirect transfer of structured settlement payment rights shall be effective, and no structured settlement obligor or annuity issuer shall be required to make any payment, directly or indirectly, to any transferee of structured settlement payment rights, unless the transfer has been approved in advance in a final court order or of a responsible administrative authority based on expressed findings by such court or a responsible administrative authority that:

  • The transfer is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents;
  • The payee has been advised in writing by the transferee to seek independent professional advice regarding the transfer and has either received such advice or knowingly waives such advice in writing; and
  • The transfer does not contravene any applicable statutes or the order of any court or other governmental authority.