Structured Settlement FAQ’s
1. Does the “independent professional advice” that I seek still have to get paid if the transfer agreement does not got through?
Yes. Whether it’s an attorney, certified public accountant, actuary or other licensed professional; their compensation for rendering independent professional advice is not affected by occurrence or lack of occurrence of a settlement or transfer.
If they were engaged by a claimant or payee to render advice concerning the legal, tax, or financial implications of a structured settlement or a transfer and they are a licensed professional, then they have met the qualifications to get paid, according to law in California.
2. Can the transferee or the Company wanting to buy my structured settlement recommend an attorney or licensed professional to help advise me?
No. The transferee may refer the payee ONLY to a lawyer referral service or agency operated by a state or local bar association and that is it. If they do otherwise, they will be breaking the law in the state of California.
What has happend the past is the transferee (the company buying your structured settlement) will recommend a licensed professional that is on their payroll and/or the payroll of the casualty insurers that is funding the transferee. So claimants never got a straight answer, never got a fair shake at the contract.
3. What is meant by a factoring company?
An agent who buys or sells for a principal on a commission basis without having title to the property. This is your middleman. The factoring company is acting as an agent for a larger company that is a state-insured and approved insurer.
It is not easy for an Insurance Company to get the state approval especially in California. If you went to the California Department of Insurance’s website, you could type in the name or just a couple of letters of a name, and see if the company shows up. If it does, it is a state approved insurer.
4. The factoring company is charging me certain expenses? Is this legal and what are they?
It is legal. The word “expenses” in this context, is clearly explained in the California Code of Regulations. By law, the factoring company can charge you for:
their commission, service charges, application or processing fees, closing costs, filing or administrative charges, legal fees, notary fees and other commissions, fees, costs, and charges that a payee would have to pay to transfer the structured settlement payment rights of a structured settlement agreement or that would be deducted from the gross consideration that would be paid to the payee in connection with the transfer of the structured settlement payment right s of a structured settlement agreement.
By law, the company is supposed to list each expense so you can see, and hopefully your attorney (you should have one at this point) will see too. This list is supposed to show up in the contract itself.
5. Do I have to be living in California to transfer my structured settlement in the state of California?
No. The legal term is “domiciled”, which means whichever state you have a substantial connection with, or consider your permanent residence. This covers people who live in their RV or vehicle and “live” in many states all the time, and who do not ‘claim’ a permanent residence – we got you covered too.
You do not have to be domiciled in California, BUT the structured settlement obligor or annuity issuer has to be domiciled in California.
6. What does the phrase, “structured settlement obligor” mean?
The party that has the continuing periodic payment obligation to the payee under a structured settlement agreement or a qualified assignment agreement. Like MetLife for instance. The defendant purchased an annuity from MetLife in order to compensate you for the personal injury. MetLife would be the obligor.
7. Am I the transferee?
No, not if you’re the one trying to sell your structured settlement payment rights. The transferee is the entity or factoring company that will be receiving your payment rights.
8. Why is the term “transfer” used when I just want to sell my structured settlement?
It’s a legal term. The state of California has defined “transfer” in this instance to mean, “…any sale, assignment, pledge, hypothecation, or other form of alienation or encumbrance made for consideration.” When the term, “alienation” is used here, they mean ” — you — separating from what used to be yours”. “Encumbrance” means you’re unloading what is a burden.
9. I am confused as to what exactly is a “qualified assignment”. And, if I don’t have one, there will be tax liability of 40% to be paid by the transferee. What does this mean?
The government wants you to have a tax break, by not having to pay taxes (for all interested parties) on the transfer of your structured settlement rights. But they cannot give you the tax break, unless you are a “qualified assignment”.
According to the US Code, where they define “qualified assignment” for use in matters like selling your structured settlement so the IRS knows what they mean too:
“…means any assignment of liability to make periodic payments as damages (whether by suit or agreement), or as compensation under any Workman’s Compensation Act, on account of personal injury or sickness…”
Basically, if your structured settlement was generated out of a court mediation or a court suit. Having the status of “qualified assignment” also gives you greater rights than a “general creditor”. You are a creditor with greater rights than a general creditor.
This means, if there is any kind of bankruptcy of the company that is legally obligated to make payments to you, you would be payed off before “general creditors” would be payed off.
The term “qualified assignment” has many contributing elements that define it. Far too many for the scope of this FAQ section. But, for the quick definition, this will suffice.
10. Is my ex-wife considered a dependent in the eyes of the court, when they’re considering my petition to sell my structured settlement?
Only if you’re paying alimony or if you are legally responsible for her. “Dependents” means any minor children, your current spouse and all other family members and other persons for whom the payee is legally obligated to provide support – including alimony.
11. Will I receive payment after I sign the transfer agreement?
No, not immediately after. After you sign the transfer agreement, you will receive, or should receive a statement indicating that the payment will be delayed up to 30 days or more after you sign, so the courts have time to approve it. In that time period, a copy of the transfer agreement will also be sent to the attorney general.
The rules are a little different here if you are not domiciled in California at the time of signing the transfer agreement; best to consult with an attorney.
12. How will all of my notifications regarding the transfer agreements be sent to me? USPS? UPS? Fed Ex? What can I expect?
In California, by law, all notifications will be mailed via the United States Post Office, First-Class mail and will be deposited for mailing NOT LESS than five calendar days prior to the date on which notice is required.
As far as mail goes, (not Periodicals) the Post Office only forwards First-Class mail to a permanent address change for up to 12 months. Then it gets thrown away or Return to Sender. Make sure your current address is on file so you can meet the deadlines.
If there is any doubt that your Postal Carrier might not know your name at an address you believe is your permanent address, find out and clear the matter up by going directly to the Post Office, with your picture ID and documentation that associates you with the address and talk to the Carrier personally. You can do this before 7 a.m. and knock on the closed door and give your address, and that you wish to confer with the Carrier for that route. There should be no reason why you cannot receive this mail in a timely fashion.
13. It’s my money, it’s my contract, it’s my life. Can I voluntarily “waive” a required provision in the transfer agreement?
No. As unfair as it may seem, none of the provisions required by law in the transfer agreement may be waived by the payee.
14. Who is responsible for submitting all of the necessary documents to the Courts and to the Attorney General?
It’s actually to all “interested parties”, and the Courts and the Attorney General. The transferee is responsible. The transferee is the company trying to buy the future payment stream from you.
It’s a lot of paperwork and footwork. The transferee is also responsible to give you the “disclosure notice” which is a document required by law that is given to you before the transfer agreement contract.
15. When am I supposed to receive the “disclosure notice”?
Ten or more days before you (the payee) carry-out and complete the entire transfer agreement. The disclosure notice is like a summary of the transfer agreement. It’s also like a court-ordered “heads-up” to you to make sure you are fully aware of what’s about to happen and what the terms are.
16. What could delay the agreement getting approved?
One example is if the transferee, (company buying the structured settlement future payments), cannot locate all the documents required to be submitted to the courts. One of the documents needs to be to the “attorney of record” that assisted you if within the last 5 years with the initial structured settlement to alert them that this sale or agreement is about to take place.
This attorney is considered an “interested party” in the eyes of the law. With this designation as an “interested party” the lawyer could write objections or approvals to the sale that’s about to take place.
If for some reason, the transferee cannot locate the attorney, and has literally asked you, the payee, about this and STILL cannot locate the attorney of record at that time, then the transferee does not have to submit paperwork from this attorney; but they have to try. That takes time.
17. I’m aware that the transferee is responsible to submit all necessary documents, but what is the time frame? I’m confused. There’s the hearing, some disclosure notice, help!
Not less than 20 days before the scheduled hearing of your petition for approval for the transfer, the transferee has to file with the court and interested parties all required documents.
Not less than 10 days before that, the transferee has to give you a written disclosure statement that is required by law.
You have about a month and a half to two months wait before the hearing. Remember, the transferee has a lot of legwork to do. Your annuity contract could have a nondisclosure provision or a confidentiality clause and if that’s the case, there will be a ANOTHER hearing scheduled to address just that.
18. What exactly are the necessary documents?
- A copy of the transferee’s current petition and any other prior petition, whether approved or withdrawn, that was filed with the court.
- A copy of the proposed transfer agreement and a copy of the form used for disclosure.
- A copy of the “disclosure notice” with signatures and dates (the dates are important on this document, they have to reflect a proper time frame).
- A listing of each of your (payee’s) dependents, together with each dependent’s age
- A copy of your annuity contract
- A copy of the underlying structured settlement agreement, if available
- Proof that all interested parties have received copies of all of this too.
If any qualified “interested parties” want to write a letter “for or against” this transfer – or just to respond – , those documents will be necessary too. And there’s a specific time frame for this to happen.
And there is the document that needs to be sent to the “attorney of record” of the original settlement if it was within the last 5 years prior to the transfer agreement proposed date.
19. What exactly is meant by “effective equivalent interest rate”?
With respect to a transfer of structured settlement payment rights, means the annualized rate of interest on the net advance amount, calculated by treating the transferred structured settlement payments as if they were installment payments on a loan, with each payment applied first to accrued unpaid interest and then to principal.
20. What is the exact legal wording supposed to be in the transfer agreement?
This is important to know. It has everything to do with the total net amount you will be receiving. By law, the transferee has to break down what your effective equivalent interest rate is and why:
“YOU WILL BE PAYING THE EQUIVALENT OF AN INTEREST RATE OF ___% PER YEAR.
Based on the net amount that you will receive from us and the amounts and timing of the structured settlement payments that you are transferring to us, if the transferred structured settlement payments were installment payments on a loan, with each payment applied first to accrued unpaid interest to us of ___% per year, assuming funding on the effective date of transfer.”
The quotient (expressed as a percentage) is obtained by dividing the net payment amount by the discounted present value of the payments.
Structured Settlement Transfer FAQ’s
1. What is a structured settlement?
It’s a financial or insurance arrangement, defined by Internal Revenue Code as periodic payments; a claimant accepts to resolve a personal injury tort claim (a situation where a person’s behavior has unfairly caused someone else to suffer loss or harm. A tort is not necessarily an illegal act, it just allows someone to recover the loss or harm) or to compromise a statutory periodic payment obligation, like winning the lottery.
2. What is the difference between Qualified Settlement Fund and a non-Qualified Settlement Fund?
A qualified settlement fund is defined as a type of Trust that falls under state law, whose purpose is to resolve any and all claims resulting from an event, and that is court approved, and always will be court approved and monitored.
A non-Qualified Settlement Fund is not court approved and could be subject to being taxed.
3. What is a structured settlement transfer?
The act of transferring the rights of an annuity’s future payment stream that were won as a structured settlement, to a company in exchange for a lump sum of money.
4. Why should I sell my income stream?
People find themselves in situations where a lump sum of cash is required: paying taxes, settling debts, getting a divorce, illnesses, paying for college tuition, buying a home or opening a business. Whatever the reason, more and more people are choosing to take a lump sum of cash today over waiting for future dollars while inflation eats them away.
5. Is selling my future payments legal?
Absolutely. Not only is it completely legal, but the IRS gives tax incentives to encourage the re-sale of structured settlements. Corporate America and wealthy individuals have been buying and selling contracts and income streams to improve their cash flow and meet their financial obligations for years. However, this knowledge has been a well-kept secret from the general public and not until recently has been recognized and defined by state and federal law.
6. Does the company that buys my payment stream need to be FDIC insured?
No. And the fact that they are not should not scare you away. As a matter of fact, the casualty insurer that will eventually pay for your lump sum of money through the company that will buy your payment stream, will probably NOT be FDIC insured either.
7. What happens if the casualty insurer that initially funded my structured settlement goes bankrupt before I cash in my annuity or before they are done paying my annuity?
These companies in this type of situation are usually protected by what is called a State Guarantee Fund through the Department of Insurance of each state. Those funds usually guarantee up to 80% and not to exceed $350,000 for each contract of the original payment amount, should a casualty insurer go bankrupt in the state of California.
8. What is the “disclosure notice” that has to do with me selling my structured settlement? Why is this so important?
This is now required by law. At least ten (10) days before you sign any contract, you should get a “disclosure notice” in the mail from the company who is trying to buy your future payment stream in exchange for a lump sum of money.
“Disclosure notice” means this company HAS to reveal ALL of the terms to the contract in plain English to you in enough time so you can read them over. Elements such as: how much you are selling for how much in exchange? What the discounted present value of those future payments is, in exchange for what you are getting.
What the percentage rate was when used in calculating these amounts, that the company will cover up to $1500 for you to get independent legal advice, that you should also contact a tax person about any possible concerns, that you need court approval, that you may cancel this contract at any time and how to cancel and what to do if you think you’ve been treated unfairly.
This disclosure notice will be typed out in larger than normal font size to get your attention and some phrases will be bold-faced typed enclosed in attention-getting boxes.
9. What can’t the transfer agreement have in it? What should I look out for?
By law, the transfer agreement CANNOT CONTAIN items that:
- waives your right to sue or not
- changes your jurisdiction
- releases the company from taking responsibility if they make a mistake
- waives benefits or rights granted by law with respect to garnishment of wages
- indicate this contract is confidential or proprietary, belonging to the buyer
- says you have to pay for their lawyer fees
- says you have to pay for their tax liability
- or pay for their brokerage fees (they might try to deduct this fee from the purchase price-be careful!)
- changes your domicile state
- changes the controlling law that pertains to where you are domiciled
- that gives you some kind of transfer with a security interest or collateral interest that exceeds that actual dollar amount of what’s being transferred.
- locks you into doing business with ONLY them
- that make all the rules invalid
These rules are found in the California Code of Insurance. They are there now, because this was how the consumer was getting ripped off in the past.
10. Where do I file my petition for court approval to sell my structured settlement?
Your county’s court house, Probate division. You or hopefully your lawyer will also be sending a copy of your petition for approval, a copy of the written disclosure statement, a copy of the transfer agreement itself, a copy of the annuity contract, any qualified assignment agreement, the underlying structured settlement agreement, or any order approving the structured settlement, a copy and proof of notice to the interested parties and a verified statement from you stating that all of the conditions have been met according to the law – all of this to the Attorney General, as well as the county judge with whom you are working, in order to get approval.
If there is a lawyer working on your behalf, he/she will make this happen for you.
11. Will the Attorney General charge me for their services?
They may charge a reasonable fee, and if so, you will be responsible for paying.
12. What exactly do the courts mean when they say, “The transfer is in the best interest of the payee, taking into account the welfare and support of the payee’s dependent’s” when considering my petition for approval?
The courts are trying to look into your future to see if selling your future payments now, will be like shooting yourself in the foot for your future. They take a look at your your employment, or if you are unemployable; whether or not you currently and if you will have your own health insurance and if you have other mandatory payments like alimony and child support. In other words, can you afford to do this?
They will take a look as to why you need to do this now. Is it for a morally sound reason? Is it to invest in crime?
As far as your dependents go, the courts will look to see how many you have, how old they are and if they are special needs, what the college plans are or are not and how their mental and physical health is.
13. The courts won’t sign off on my transfer unless I have been informed in writing by the factoring company to go see a lawyer. Could you explain what’s going on here?
You can either see a lawyer, independent of the factoring company, (or not) regarding this matter. The courts STRONGLY recommend you do. If you choose not to, you have to state this in writing that you are waiving your right to do so.
If you choose to, the factoring company will pay up to $1500 to consult the lawyer of your choice regarding this matter, and the courts want to know if you knew about this.
14. I have consulted with a couple other attorney’s regarding selling my structured settlement. I keep hearing about how other laws might “contravene” with my transfer, or other court orders or government authorities, what is meant by this?
If you have previously entered into contract with another agency that would make the current sale of your future payments illegal, or if you have tried to get court approval before and were denied for certain specific legal reasons, it could have an affect on trying to get court approval now.
15. I am getting cold feet and I don’t think I want to sell my structured settlement, but I have already entered into contract with a factoring company. Do I have to go through with it?
No. You can cancel at any time in writing up until the court approves the contract. You will get notice of when that date would be. Don’t feel pressured to go through with it, just because you’ve engaged the factoring company for a few months over this. It’s your decision and the courts don’t want to pressure you either.
16. What is meant by, “…the courts will consider the totality of the circumstances…”?
The courts will take a look at your age, mental capacity, your legal knowledge, and apparent maturity level. If you’re a little too clueless and show no signs of possibly understanding all of your rights and responsibilities, the court could deny the transfer, they’ve done it before.
Part of the “totality” is also taking a look at why you want to do the transfer. Is it for reckless use of easy money? Is it for a well planned event, like a new home or college tuition?
The courts will also look at your current financial situation – are you desperate? Are you and your family facing a hardship situation? Does your track record show you can handle the responsibility of a large sum of money all at once? And how will your financial situation be in the future if this transfer didn’t happen? Where would you be economically? Are you able to pull yourself out of an economic slump, if you’re in one? Independent of this transfer?
A big issue when considering the “totality” is whether or not you will need medical equipment in the future because of the injury sustained from the personal injury claim in the first place. If so what kind? Major? A new $35,000 power wheelchair? Or just medical check ups? If you sell your future payments now, how would you be able to afford this equipment if needed?
Maybe you’re not going to need medical equipment in the future, but the personal injury has rendered you unemployable, how are you going to take care of yourself in the future if you sell your payments now? If your plan is to get on welfare after you burn through your money, the courts will definitely deny the transfer.
These are most of the considerations by the courts when looking at the “totality” of your circumstances.
17. Will the lawyer that initially handled my settlement be told that I am selling the settlement?
Yes, but only if it is within five years from the date of the transfer you are trying to make now. This will take place before the agreement. This ensures plaintiffs are adequately protected, fully informed and acting in their own best interest.
This disclosure is part of a revision to the structured settlement transfer laws in the state of California that took place in 2009.
18. I have a structured settlement and I am worried that the issuing life insurance company is going bankrupt.
In California, companies offering structured settlements must be first approved by the California Department of Insurance. The department evaluates the insurance carrier’s solvency and whether the carrier complies with California regulations. Carriers are also subject to mandatory annual audits and other financial compliance requirements.
By regulation, all annuity reserves must have assets that are equal to or exceed the corresponding payment obligations. Your existing structured settlement is one of those payment obligations.
In addition, the assets supporting these reserves may not be removed from the insurance company. Reserve sufficiency is mandatory and is frequently monitored by state legislators and auditors. State insurance commissioners have developed these regulations to preserve the ability to meet maturing obligations as they come due of general accounts in which assets are held so that contractual obligations to policyholders (you) are met. These general accounts support only the obligations of the insurance companies-and not the obligations of a parent company or other subsidiaries.
19. What is “present value” and how is it figured out when calculating the sale of my structured settlement?
Present value would be like trying to figure out what a ten dollar bill today – in 2012 – would be worth in 20, 50 or 100 years from now.
In order to obtain the present value, or “discounted” present value, the Factoring Company utilizes the most recently published applicable federal rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service.
For February of 2012 it has been published as 1.4%. (scroll ALL they way down and it’s at the VERY END of this document).
But we’re not done. The purchase price payable to you will be less than the present value of the future payments because the discount rate of your transaction will be greater than the rate utilized by the IRS.
This is where it gets sticky. The Factoring Company factors in it’s own arbitrary rate as well, so they will be sure to make a profit too, and this is perfectly legal. How much this rate is and how it comes to be is purely subjective and what a good lawyer fights to keep low on your behalf.
20. What happens to my structured settlement payments if I die?
This is a common question. Before the end of an guarantee period, any remaining payments due, including any certain or guaranteed lump sum payment(s), will be made as they come due to your beneficiaries of your estate as applicable.
But beware: structured settlement payments to a named beneficiary do bypass probate — but could be subject to the calculation of the decedent’s gross estate when determining if there is any estate tax liability.