STRUCTURED SETTLEMENTS
A structured settlement is an agreement to take payments over time rather than in a lump sum. Many personal injury and wrongful death lawsuits are settled using a structured settlement. The claimant receives payments over time, from an annuity, tax free. Favorable tax treatment is awarded to property and casualty insurers who use structured settlements to settle claims due to a 1982 amendment to the tax code that caused explosive growth of the structured settlement industry in the 1980’s.
By the mid to late 1990’s, an industry had been created where companies purchased these streams of payments from annuitants, giving the annuitants access to lump sums of money that were not previously accessible under their structured settlements. In 2002, the enactment of IRC Section 5891 created a legal process for secondary market transactions involving court-ordered transfers with a stiff tax penalty imposed for transfers made without court approval. With Wisconsin’s enactment of a structured settlement protection statute in November 2015, there are now 49 states with laws in place regulating the secondary or factoring market.
The failed rehabilitation of Executive Life Insurance Company of New York and the cuts to over 1500 structured settlement annuitants of up to 66% of their “guaranteed” payments had a negative impact on secondary market transfers. The Executive Life failed rehabilitation demonstrated that the creditworthiness of the annuity issuers and annuity owners is more important than ever. The insurance industry is premised upon the ability of the companies to live up to the promises they make and this failed rehabilitation and others that may be looming on the horizon have damaged both the primary and secondary structured settlement markets and the ripple effects from this will be felt for years to come.
Subsequent litigation involving Access Funding and its alleged predatory business practices involving victims of lead paint poisoning put a damper on investor enthusiasm for these payment streams that are known as secondary market annuities.
Stone Capital Assets provides consulting services for investors and companies in the structured settlement market.
