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 by selling the structured settlement. In due course of time due to some personal needs or urgent family needs, if this person wishes to sell off his 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.
Precautions to take while Selling of a Structured Settlement
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. If he still wishes to part with this tax-free option for the lump sum amount to fund his urgent financial needs, the claimant must take the fallowing precautions very seriously in order to avoid getting duped by receiving lesser money than the settlement could have fetched:
- Be very sure of why you would want to sell your settlement agreement. 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 have pay off a large debt due for repayment or may have to pay for someone’s medical or educational needs, may want to either start up his own enterprise or invest his money somewhere. But 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. Besides, the selling a tax-free settlement for acquiring any asset that either depreciates in value or does not promise to offer assured returns would be a very poor financial decision that must be avoided to keep losses at bay.
- It is very important that the claimant thoroughly weighs the pros and cons of selling his structured settlement before deciding whether he would sell the whole settlement agreement or just a part of it because his net returns would vary as the tax laws would no longer apply on the lump sum amount he invests after selling his settlement. 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 (the total compensation amount is $ 2, 00,000). Now, this claimant 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.
- Have complete knowledge of the authenticity of the company that deals in structured settlements and from whom you wish to get quotes for your settlement. There may be different companies ready to offer you different quotes. Always compare all the quotations for the maximum return on sale of your settlement, not to forget, that each company would definitely keep a profit margin for itself. Also, the company may charge fees for its services which should also be added up as a cost of selling the settlement.
- The claimant must keep himself safe from getting trapped by false advertisements or claims of any entity that offers full amount lump sum payment for the total value of settlement agreement. It is not possible and no company would to it in reality. It must be kept in mind that selling structured settlement means agreeing upon the advance lump sum amount which would be less than the total value of your aggregate future payments due for receipt.
- 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.
- The claimant must always seek to get his transferring the right of future receipt of money to the company, authorized by the courts judge stating the reasons for the same. 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.
It is always wise to involve an attorney for the process of selling a structured settlement to avoid getting into any legal hassles later. The cost of hiring a lawyer would save the other costs if the claimant is fooled by false claims of the factoring company. This the claimant must be very sure about selling his tax-free settlement and must proceed only in accordance with legal rules laid down under the laws of his respective state.