Selling a Structured Settlement

If you have a structured settlement, you may have been approached by a company interested in purchasing your settlement, or may be curious about selling your settlement in return for a lump sum buyout. About two thirds of states have enacted laws which restict the sale of structured settlements, and tax-free structured settlements are also subject to federal restrictions on their sale to a third party. Also, some insurance companies will not assign or transfer annuities to third parties, to discourage the sale of structured settlements. As a consequence, depending upon where you live and the terms of your annuities, it may not be possible for you to sell your settlement.

Keep in mind that companies which buy structured settlements intend to profit from their purchase, and sometimes their offers may seem quite low. You may benefit from approaching more than one company in relation to the sale of your settlement, to make sure that you obtain the highest payoff. You also want to be sure that the company which wants to buy your settlement is established, well-funded, and reputable - you don’t want a fly-by-night outfit to obtain the rights to your annuities but to disappear or go bankrupt before paying you the buyout money. You may have to go to court to get a judge to approve the buyout. It is usually a good idea to consult with a lawyer before entering into an agreement to sell your settlement.

A structured sale is a special type of installment sale pursuant to the Internal Revenue Code.[1] Installment sales permit sellers to defer recognition of gains on the sale of a business or real estate to the tax year in which the related sale proceeds are received. Structured sales allow the seller of an asset to pay taxes over time while having the payments guaranteed by a high credit quality alternate obligor, who accepts assignment of the buyers periodic payment obligation. Transactions can currently be done as small as $100,000.
In a structured sale, rather than the buyer paying the installments, the buyer pays cash, some of which is used as consideration for a third party assignment company to accept the payment obligation. The assignment company then purchases an annuity from a life insurance company with high financial ratings from A. M. Best. Case law and administrative precedents support recognition of the original contract terms after a substitution of obligors.[2] In addition, a properly handled transaction will avoid issues with constructive receipt and economic benefit.
While negotiating the installment payments, the seller is free to design payment streams with a great deal of flexibility. Each installment payment to the seller has three components: deferred return of basis, deferred capital gain, and ordinary income earned on the money in the annuity. Under the doctrine of constructive receipt, with a properly documented structured sale, no taxable event is recognized unless a payment is actually received. Taxation is the same as if the buyer were making installment payments directly.
Structured sales are an alternative to a section 1031 exchange, which defers recognition of capital gain, but forces the seller to continue holding some form of property. Structured sales work well for sellers who want to create a continuing stream of income without management worries. Retiring business owners and downsizing homeowners are examples of sellers who can benefit.
The structured sale must be documented, and money must be handled in such a way that the ultimate recipient is not treated as having constructive received the payment prior to the time it is actually paid. For the buyer, there is no difference from a traditional cash-and-title-now deal, except for additional paperwork. Because of tax advantages to the seller, structuring the sale might, however, make the buyer's offer more attractive. Because the buyer has paid in full, the buyer gets full title at time of closing.
There are no direct fees to the buyer or seller to employ the structured sale strategy. The structured settlement specialist who implements the transaction is paid directly by the life insurance company that writes the annuity.
The internal rate of return is comparable to long term high quality debt instruments.
Allstate Life was the originator of the structured sale concept and until recently was the only structured settlement annuity company whose product was available for the structured sale transaction. Prudential has begun to use its non-qualified assignment product on a limited basis.