State and Federal Laws and Regulations

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.

States Take the Lead

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:

  • 1998 – Kentucky
  • 1999 – Delaware, Minnesota, Missouri, North Carolina, West Virginia
  • 2000 – Maryland, Ohio, Pennsylvania, Tennessee
  • 2001 – Florida, Idaho, Indiana, Iowa, Massachusetts, Nebraska, New Jersey, Oklahoma, Rhode Island, Virginia, Washington
  • 2002 – Arizona, Mississippi, New York, South Carolina, Utah
  • 2003 – Alaska, Connecticut, Georgia, Illinois, Louisiana, Maine, Nevada, South Dakota, Texas
  • 2004 – Colorado, Illinois
  • 2005 – Arkansas, California, Kansas, Montana, New Mexico,
  • 2006 – Alabama, Hawaii, Michigan, Oregon, Wyoming

Although they may differ slightly from state to state, all of the early SSPAs reflected the same fundamental legislative priorities:

  • 1The factoring company buying the structured settlement is required to disclose to the seller the difference between the value of the settlement payments if the annuity contract is maintained, versus their value if sold.
  • 2The transfer of payments to the buyer is predicated on court approval and based on a judge’s findings that the transfer will serve the best interests of the payee and/or any of his or her dependents. The court must also find that the transfer is necessary to prevent undue financial hardship.
  • 3The buyer must supply the payee with a disclosure statement providing a summary of the agreed-upon terms of the transaction.
  • 4Within a certain time frame, the seller has the right to cancel the sale if they change their mind. The specifics of this “cooling off period” varies from state to state.
  • 5Transfer applicants must identify all “interested parties,” giving them the opportunity to oppose, support or otherwise respond to the proposed transfer, and submit to the court proof that they have been notified.
  • 6The transfer of payments must not contravene any applicable federal or state statute or any court order, judgment or decree.

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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:

  • Alaska
  • North Carolina
  • Delaware
  • Louisiana
  • Maine
  • Maryland
  • Minnesota
  • North Carolina
  • Ohio

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:

  • Alaska
  • Delaware
  • Georgia
  • Kentucky
  • Louisiana
  • Maine
  • Maryland
  • Minnesota
  • Missouri
  • North Carolina

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.

Federal Law Standardizes State Statutes

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:

  • 1It required all transfers of structured settlements to be court approved and in compliance with each state’s SSPA, including the mandate that the transfer be in the best interests of the seller as well as any of his or her family or dependents.
  • 2It imposed an excise tax of 40 percent on the difference between the value of the future payments sold and the amount paid to the person who wanted to sell, on any structured settlement buyer who failed to comply with the required procedures. This punitive tax was a way in which the federal government sought to prevent unscrupulous factoring companies from conducting business outside of accepted industry norms.

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.

Work with Trusted Attorneys and Companies

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.

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