Factoring structured settlement payments is completely legal. However, it is regulated. Before the year 2000 a person was able to sell their structured settlement without getting the courts involved. However, the annuity companies who held the structured settlements became concerned. They knew that personal injury lawsuit payments were free of both federal and state tax. However, they worried that if a person were to sell their payments for a lump sum of cash that the lump sum may be taxable as income. This would mean the person could pay 10-30% of their money in taxes. Eventually, the United States Congress dealt with this concern.
Congress added language to a bill that said that the only way lump sum cash outs through factoring structured settlement payments would be tax free is if a judge approved the sale. In short, if a person sells their structured payment without a judge's approval, they will have to pay income taxes on it. However, if the person goes through the proper channels, files the paperwork, goes to court and receives a judge's approval, they do not have to pay taxes. But does this law apply to federal and state?
The above refers to a federal law, which impacts all 50 states. However, some laws can be overridden or altered based on the specific law in that state. Today, 46 of the 50 United States have their own laws regarding factoring structured settlement plans. Most of these states use language very similar to the federal guidelines and very similar to the other 45 states. In fact, many of the states built their own laws using generic language that was written by the National Structured Settlements Trade Association and National Association of Settlement Purchasers. This language was called the Model State Structured Settlement Protection Act. The wording was created to make it easier for states to adopt consistent language that protected settlement owners. State laws can vary, but overall most allow factoring structured settlement payments with a judge's approval.
This language was written only as a model for states to adopt, or adapt, as they saw fit. However, most states did use this language to inspire their own state statutes. In fact, most of the 46 states with their own laws have legal language that very closely resembles this model act. So, let's look at this factoring structured settlement act. It has seven main sections which lay out protections as follow:
Section 1 simply names the act, suggesting, "Structured Settlement Protection Act."
Section 2 defines a number of words including: annuity issuer (the insurance company that sends the annuity checks), "discounted present value" (the present value of future payments accounting for inflation), "gross advance amount" (the lump sum the owner would receive) and more.
Section 3 describes what information the structured settlement factoring company has to disclose to the seller. This information must be provided three days before the final sale (similar to mortgage regulations). The disclosure information includes things such as the following: how much money will be transferred and on what dates; how much these payments equal to; the gross value compared to the net value (after all fees); a statement describing the settlement owner's right to cancel.
Section 4 describes the approval process for all factoring structured settlement transfers. In short, it suggests that the court has to approve all sales in advance.
Section 5 talks about how once the annuity that funds the structured settlement is sold, the original annuity payment recipient (the original plaintiff) has no obligation or relationship to the annuity any longer.
Section 6 discussed the specific procedures required for receiving approval to sell a settlement. This includes talk about going to court, where the court is, how long the hearings take and so on. This is the information that is most likely to change from state to state.
Section 7 lays out all of the general provisions that were not covered anywhere else in the act.
You can learn more about your rights, tax implications and so much more by browsing through our website. Then, when you want to talk about your specific situation give us a call.
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