Structured Settlement is the legal arrangement of 1983 which is a unique form of settlement between two parties – the claimant who files a lawsuit against the other party, the defendant, for an injury claim or the workers compensation etc. in a structured way of receiving it in installments rather than as a lump sum amount. It is beneficial to both parties but the recipient need not remain bounded with the contractual payments for time agreed upon. This is the option of selling the structured settlement. But before analyzing whether it is a good or a bad decision, it is important to briefly understand what selling of a Structured Settlement is and how it is done.
Selling of a Structured Settlement
Structured Settlement is the special form of compensation amount that consists of one part of the amount paid to the claimant initially and the other part of the larger amount which is paid out to that party through installments instead of paying the whole compensation as a lump sum like – a smaller annual amount for first 5 years or a larger amount per year for next 15 years etc. In due course of time due to some personal needs or urgent family needs, if this person wishes to sell off hi structured settlement, he can do so in return for a flat rate now and by giving up their right to receipt of future time bound payments.
To understand it, consider an example. For instance, a claimant agrees to the settlement wherein he may wish to be given $ 10,000 yearly for first 5 years and $ 15,000 for remaining 10 years (given the total compensation amount is $ 2,00,000). The claimant can also choose to have no payments for few initial years and fixed annual installments thereafter to fund retirement needs. Now, this claimant may decide to get rid of the structured settlement in return for discounted lump sum money now. He can sell the whole or even a part of the structured settlement. If he sells the whole of the structured settlement at once, he gets a very large lump sum and can use to fund his needs. If he chooses to sell only a part then he receives lump sum discounted money for that part but continues to receive the annual payment for the rest of the settlement which continues to be tax free. It is important to keep in mind throughout that Structured Settlement is a source of a guaranteed income stream with the freedom to spend the money as per the claimant’s desires. Thus after deciding to sell off a structured settlement the basic process is as follows:
- Decide whether you wish to sell the whole settlement agreement or just a part of it.
- Contact a company that deals in structured settlements and get quotes for your settlement.
- Agree upon the advance lump sum amount which would be less than the total value of your aggregate future payments due for receipt.
- Get the transaction of transferring the right of future receipt of money to the company, authorized by the courts judge stating your reasons for the same.
- Receive your settlement payments amount in lump sum from the company.
Why would one Sell a Structured Settlement?
There are many reasons why someone would sell off their structured settlement. It would usually happen when the recipient finds his financial needs pressing enough for him to even give up a tax free option of receiving settlement money in installments. The person may be tired up as a debtor to pay off a large sum due for repayment; he may be in urgent need to fund someone’s medical or educational needs. The person may also want to either start up his own enterprise or may wish to invest in some lucrative opportunity. In order to meet any of these needs, he may need to fund himself by selling off his settlement, for which he would have to approach nay of the investment companies that could buy it from him and help him complete the entire legal process of transferring the right to future payments in return for present discounted payment in lump sum.
Legal aspects related to Selling of a Structured Settlement
Having understood how and why the structured settlement is sold it would be equally enlightening to have a look at the legal aspects related to selling off a settlement.
- The law permits that the claimant does not need to be forever stuck with the agreed upon mode of receiving payments. He has the option of selling his structured settlement right to receiving money in installments to another insurance company or some cooperation that deals in structured settlements in return for the huge lump sum amount, slightly discounted, to suit his urgent financial needs.
- The Internal Revenue Service Code Section 104(a)(2)assures that the settlement payments received by the claimant from the contract are tax-free and even the interest rate received on this amount are free of all taxes. Moreover, the interest payable on the settlement amount is also tax-free. But once the settlement is sold off for a lump sum amount in return, investment of that amount anywhere would not be tax-free any longer.
- Since the whole process is done legally, it is now a law that needs the factoring company, which is buying the settlement from the claimant, must mention explicitly about any previous sales of the structured settlement with complete details of the same. This law is the New York’s Structured Settlement Protection Act effective from January 1, 2011.
- For someone who has never handled too large an amount at once, chances are that the person might lose that lump-sum money due to his poor financial knowledge and bad financial choices. Thus the claimant has to provide ample justified and legally acknowledge reasons to the judge for effecting the transaction of selling the structured settlement.
Structured settlement is a great way to receive a continuous stream of tax free money and should only be sold when absolutely required.