Recent History Of Fixed Rate Structured Settlement Annuities
A fixed rate structured settlement annuity is often created in connection with the settlement of a personal injury lawsuit. In a typical transaction, the defendant and plaintiff reach a settlement which provides for the plaintiff to receive periodic payments over a period of time.
The use of structured settlements
has risen dramatically in the past twenty years. Previously, claimants
were presented with the option of an immediate cash settlement, which
created significant tax related burdens, and did not always address the
long term needs of the plaintiff. Structured settlement growth is most
attributable to the favorable federal income tax treatment that such
settlements received as a result of the 1982 amendment of the Internal
Revenue Code. These amendments approved a structure under which personal
injury tort claimants could receive periodic payments over a term of
years in settlement of their claim from insurance companies and
assignment companies. These amendments confirmed that the personal
injury tort plaintiff could receive the periodic payments under a
structured settlement on a tax-free basis, including the ability to
receive the “inside build-up” value or gain in investment value over the
life of the payments. The Internal Revenue Code was also amended by
adding new Section 130, which provided substantial tax clarity to
insurance companies that establish “qualified” structured settlements
and led to the creation of assignment companies that were affiliated
with the insurance companies that issued the annuities.
The most significant downside for a plaintiff with a structured
settlement comes from its inherent inflexibility. In ways unforeseen at
the settlement table, the plaintiff’s financial needs often change over
time resulting in a demand for liquidity options. Beginning in the late
1980s, a few small specialty finance companies started meeting post
settlement liquidity demands by offering new flexibility for structured
settlement payees through a lump sum cash payment to the plaintiff in
return for some or all of the rights to the plaintiff’s structured
settlement payments. During the late 1980s and early 1990s, certain
legal and tax issues surrounding settlement transactions limited the
growth of the assigned structured settlement market.
Federal legislation
In 2001, Congress passed H.R. 2884, which was promptly signed into law
by the President. This legislation enacted Internal Revenue Code Section
5891 effective July 1, 2002 which largely eliminated the remaining
material tax issues associated with the purchase and sale of Structured
Settlements. Through a punitive excise tax penalty imposed on the
Structured Settlement purchaser, Code Section 5891 created the de facto
regulatory paradigm for the industry. To avoid the excise tax penalty, a
state court, in accordance with a qualified state statute, must approve
all structured settlement transactions. Qualified state statutes call
for certain baseline findings, including a requirement that the transfer
is in the best interest of the seller taking into account the welfare
and support of any dependents. In response, many states enacted statutes
regulating structured settlement transfers in accordance with this
mandate.
Post-2002
Today, virtually all transfers are completed through a court order
process. As of January 15, 2009, 46 states have transfer laws in place
regulating the transfer process. Of these states, 41 are based in whole
or in part on the model state law (“Model Act”) enacted by the National
Conference of Insurance Legislators. In cases when the state law
predates the Model Act, they are substantially similar. Most state
transfer laws contain the following similar provisions:
- Pre-contract disclosures to be made to the seller concerning the essentials of the transaction.
- Notices to be issued to certain interested parties.
- An admonition to the seller to seek professional advice concerning the proposed transfer.
- A court approval of the transfer, including a finding that it is
in the best interest of seller, taking into account the welfare and
support of any dependents.
No comments :
Post a Comment