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Clients Receive More Protection Under Structured Settlements Protection Act


By Michael Geigerman and Kevin Frank
(Kevin Frank is a student at the Washington University School of Law)

Many objections to structured settlements are raised during mediations. One of the problems has now been resolved in a manner that protects the beneficiary. Simply stated, it is now more difficult for the annuitant to sell his/her interest in the structured settlement.

In January, President Bush signed the Victims of Terrorism Relief Act of 2001 (PL 107-134, 2002 HR 2884, 115 Stat 2427) into law. This statute fully incorporated the language of the Structured Settlements Protection Act, creating major tax implications for transactions involving transfers of structured settlements. Such transfers will now be taxed at 40% of the “factoring discount” of the transaction. The factoring discount is the difference between the amount paid to the original holder of the structured settlement and the value of the remaining payments in the settlement.

This extra tax will not be applied if the settlement transfer is approved in advance. Approval guidelines are set forth in the Act, but approval can also be established under applicable state laws. In both Missouri and Illinois, existing state statutes require court approval before sales of structured settlements (RsMo. 407.1062; ILL ST CH 215 S 5/155.34). If proper approval is obtained prior to a transfer, structured settlements can be reassigned without losing their favored tax status. It is also noteworthy that a truly fair exchange would not suffer under this bill, since there would be no factoring discount to be taxed. The purpose of the bill is to prevent owners of the structured settlements from being taken advantage of, not to prevent all transfers.

The Missouri statute is actually more restrictive than the Federal law, since it forbids transfers of structured settlements without court approval, rather than simply imposing a heavy tax. The Missouri statute also forbids any exchange where the purchase price of the structured settlement is less than the fair market value of the remaining payments in the settlement. Approval under the Missouri statute would satisfy the federal requirements and there would be no change in tax treatment.

Illinois’ statute prevents insurance companies from making payments on a structured settlement for a personal injury claim to anyone other than the beneficiary of the settlement without the prior approval of the court. It also forbids the beneficiaries of structured settlements from assigning their payments in any manner without the prior approval of the court. Approval under the Illinois statute would satisfy the federal requirements and there would be no change in tax treatment.


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