Structured Settlement Payments Are Inflexible
To achieve "qualified" status and receive tax benefits, the settlement must include provisions that make the structured settlement payments inflexible. Once settled, the agreed-upon payment amounts and schedule of payments cannot be changed. In some circumstances, structured settlement recipients may find the inflexibility of their settlements too constraining.
The settlement payee or a close dependent might fall ill and might need a substantial sum of cash might to pay for expensive medication. An investment opportunity might appear that promises definite returns. In such cases, the inflexible nature of structured settlement payments could prove a serious problem. Other uses for a lump sum payment might include:
- Education costs
- Home Repairs
- Vehicle purchase or repairs
- Health and medical needs
- Home purchase
Structured Settlement Factoring Services Appear
In response to the widely-felt problem of inflexible structured settlement payments, new kinds of factoring services appeared in the market. Traditionally, factoring companies bought future payments due to a business, such as accounts receivable, and paid immediate cash. Some firms began to offer factoring services to annuitants, buying out their structured settlement payment rights and paying them immediate cash.
Initially, insurance companies were hostile to this new development. They were not being notified of the assignment of their payments, and feared that factoring might affect the favorable tax treatment of annuities.
Legislation regularized the assignment of the right to structured settlement payments. Provided the transaction is made in a transparent manner and was in the best interests of the annuitant, the law imposes no tax penalties on the sale of structured settlements.
To qualify for tax advantages, the sale of structured settlement transaction requires (i) disclosure of the details of the transaction to the seller, (ii) giving notice to specific interested parties, and (iii) court approval to the transfer. Some states have also made it mandatory for the annuitant to discuss the transaction with his or her attorney. State mandated time frames set limits for the various stages of the sales transaction. Before approving the transaction, a court determines whether the transaction is in the best interests of the annuitant.
