Each state has its own set of laws about selling structured settlements and annuities. A lot of state regulations are identical, however, some differ which can make the process unique for some sellers.
Structured settlements grew in popularity over the past several decades as one of the most efficient and equitable ways to compensate accident and personal injury victims for pain and suffering. Congress further encouraged their use by passing the 1982 Federal Periodic Payment Settlement Act, which made structured settlement revenue free from income taxes at the federal, state and local levels. This includes income from the accrual of any interest or capital gains earned on the settlements’ underlying funding vehicles, which most often are annuity contracts sold by insurance companies.
As structured settlements became more numerous, a secondary market arose in order to service those recipients who wanted to convert their long-term payments into up-front cash. These structured settlement buyers, also known as factoring companies, initially operated in an unregulated environment, sometimes taking advantage of uninformed and eager sellers. In some cases, factoring companies bought settlements on the cheap, while in others, they bought the entirety of a seller’s future income stream, leaving individuals financially vulnerable when their lump-sum payments ran out.
In response to these problems, state legislatures, as well as organizations created by the country’s structured settlement companies themselves, notably the National Structured Settlement Trade Association and the National Association of Settlement Purchasers, worked together to promulgate laws to protect “payees” (as the sellers were now known), while providing clear and consistent standards for the transferring of structured settlements in the secondary market. Today, federal and state laws have successfully driven the dishonest players from this now thriving and well-regulated industry.
Over the years, a number of states have enacted their own version so of the Structured Settlement Protection Act, with many legislatures basing their statutes on a model created by the National Conference of Insurance Legislators (NCOIL).
In total, there are 47 states with their own regulations:
Although they may differ slightly from state to state, all of the early SSPAs reflected the same fundamental legislative priorities:
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Although similar in construction, some variances in the laws do exist. For example, some SSPAs require that a settlement buyer merely recommend that a payee seek outside professional advice before entering into a transfer agreement, while the following states make it mandatory, unless specifically waived by the payee:
In California, a structured settlement buyer is further obligated either to pay for, or reimburse a seller up to $1,500, for independent, professional advice, whether or not a transfer subsequently occurs.
New York requires much of the contractual communication between secondary buyer and seller be done by U.S. Postal Service and not by email. (This can delay the process for residents of New York.)
Certain states also require beneficiaries of the annuity or structured settlement be notified of the sale:
Due to the variances in the laws, the busyness of certain court systems and the states with no laws on the subject, the selling process is easier in some states than in others. Talk with your buyer for their professional opinion to determine where it’s best for you to file your sale in court.
In 2002, the federal government sought to codify existing state legislation. Congress amended the Internal Revenue Code’s Section 5891 with two important provisions that further clarified industry rules:
The federal government’s involvement had the effect of ratifying all of the various states’ SSPAs already in force. This prodded the remaining states without their own SSPA to get on the bandwagon. Since 2002, all but two passed their own versions of the federal law. Vermont, the most recent convert, approved its legislation in 2012.
Today, only New Hampshire, Wisconsin and Washington, D.C., do not have Structured Settlement Protection Acts. But that gap is hardly limiting. If you happen to live in any of these three jurisdictions, you can sell your structured settlement in the state in which the insurance company which makes the payments is located.
Individuals considering selling a structured settlement should investigate the laws of their state. At the same time, it is always advisable to enlist the help of a trusted and knowledgeable attorney or financial advisor, one with experience in the buying and selling of structured settlements.
Finally, potential sellers should also seek to work with a reputable factoring company – one with a reliable and credible history of protecting the long-term interests of its clients.