FAQ – CLSA Legal

1. QUESTION: What is a structured settlement and what are the characteristics of a structured settlement?

A structured settlement is a financial arrangement involving an insurance company that issues an annuity policy to the payee arising in connection with the resolution of a legal matter or winning a lottery in exchange for a payment of a lump sum. Under that annuity policy, the insurance company makes payments in installments at specified intervals on a guaranteed basis, a life contingent basis, or some combination thereof over a designated period including the annuitant’s life. In exchange for the guarantee of the payment amounts to be paid, the insurance company retains a large percentage of the return on the original amount paid to the insurance company.
Rates of returns paid out on annuities in structured settlements are generally very low. If funds had been invested in other vehicles such as real estate or equities where there is no guarantee, the rate of returns would typically be substantially higher.
Unlike other investment vehicles, funds held in a structured settlement annuity generally cannot be used as collateral and cannot be touched ahead of the scheduled individual payout date absent gaining approval from a Court.
In some situations, a structured settlement may make good sense. However, in many circumstances even when people have been directed to structured settlements they do not make sense. Moreover, when underlying conditions change, while a structured settlement may have been a good idea at some point, it may no longer be so and it makes good sense to explore other options.

2. QUESTION: If I have a structured settlement is it possible to exchange some or all of the future payments for a lump sum?

Yes, it is possible. The Structured Settlement Protection Acts which have been enacted across the country by State Legislatures, regulate the transfer of future payments from structured settlements. Although very similar, these State Laws differ slightly from each other. Generally, to be able to transfer future payments, a recipient must file a petition in a State Court where they reside, and that Court has to determine if the proposed transfer is in the “best interest” of the proposed transferor. Sometimes the annuity company will seek to stop a proposed transfer after a petition has been filed.
An industry has developed in which recipients of structured settlements can transfer rights to all or a portion of future payments to factoring companies under the applicable Structured Settlement Protection Act in exchange for payment of a lump sum. Any such transfer amount paid by a factoring company typically reflects a discount to the payable lump sum taking into consideration the time value of money, and costs and allowing the factoring company to be compensated for its efforts.
Proposals offered from different factoring companies to make transfers including the amount they are willing to pay and future payments that have to be surrendered in exchange for the lump sum may not be identical. Some factoring companies may seek to take unfair advantage of recipients seeking to transfer future payments.
For these reasons, it makes sense to check with more than one factoring company as well as work with an independent professional known as an Independent Professional Advisor or IPA to evaluate any potential transfer and who will provide advice commonly referred to as Independent Professional Advice. As addressed below, the independence, background, and experience are relevant to the selection of an IPA. [SEE QUESTIONS 8 TO 10 FOR INFORMATION REGARDING INDEPENDENT PROFESSIONAL ADVISORS (COMMONLY KNOWN AS AN “IPA” WHO ASSIST OR SOMEONE OFFERING INDEPENDENT PROFESSIONAL ADVICE) WHO ASSIST AND ADVISE ANNUITANTS ENGAGED IN CONSIDERING OR TRYING TO TRANSFER RIGHTS TO FUTURE PAYMENTS IN STRUCTURED SETTLEMENTS.]

3. QUESTION: Is it a good idea to transfer payments from a structured settlement annuity in exchange for a lump sum?:

It depends upon a variety of factors. If the transfer will be in the best interest of the annuitant, the answer is yes. Otherwise no.
Bear in mind, that if an annuitant has a specific need, the funds from a transfer may be the only alternative. In various circumstances, an annuitant is unable to borrow money and could be facing serious problems without access to money in the structured settlement annuity. Similarly, because a structured settlement annuity offers a very low rate of return, an annuitant even paying a large discount may be better off moving the funds into alternative investments where they can achieve a higher rate of return subject to to taking some risk.
Once funds are transferred outside of the structured settlement restrictions on the ability to use the funds for collateral as well as for any other purpose that require Court approval, which are major design characteristics of structured settlement annuities, are eliminated through the transfer. The annuitant is then in control of their funds previously subject to the control features.
It is also possible that the effective cost of capital associated with a transfer from a structured settlement could be less than what a bank would charge assuming the financial institution would even be interested in lending money to the annuitant which in many instances they would be prepared to do.
If rights to payments are for life contingent payments, unless the consumer is alive on the date the payment is payable, the value is zero. Depending upon life expectancy, transferring life contingent payments even heavily discounted could be advantageous to the annuitant.
To summarize, this is a case-by-case analysis. It is best to have professionals evaluate the situation. However, in many circumstances transfers will be beneficial and in the best interest of the annuitant.

4. QUESTION: Are there limitations on how the funds received from a factoring company have to be used and what is defined to be “best Interest”?

Although the language in statutes differs slightly from jurisdiction to jurisdiction, the general standard is the “best interest” standard. The Court has to determine if a proposed transfer is in the best interest of the annuitant. By way of example and not limitation, Courts have determined re-investment into other investment vehicles, purchases of homes and investment property, repairs to homes, starting a business, medical and dental treatment, education and vocational training, purchase of automobiles, resolving debt issues as well as many other purposes satisfy the best interest standard. In the end, the determination is up to the judge presiding over the matter and there is no real definition of “best interest.”

5. QUESTION: What is the procedure for transfers?

ANSWER: Although there are differences based upon applicable State Law, the process begins with the annuitant or the trustee signing a contract with a factoring company to exchange the right to receive future payments for a lump sum. This contract along with a document referred to as a “Disclosure Statement” together with a petition is filed with a Court in the jurisdiction where the annuitant lives. The Disclosure Statement whose content varies based upon State Law, summarizes important terms of the proposed transfer.
The filing has to specify the payments to be transferred, the amount to be paid, and how the funds paid will be applied. There are various notice requirements regarding proceedings and the annuity company has the right to object to any proposed transfer. The Court then must decide if it deems the proposed transfer to be in the “best interest” of the annuitant. If yes, the petition is approved, if no, it is denied. The final determination is up to the Court. Depending upon the jurisdiction and a variety of factors from filing of the petition until a final decision could take several months.
While many petitions are approved, sometimes Courts do not approve petitions. There is no limit on the number of times petitions can be filed or limitations on the amount of payments that can be transferred. Generally, it is better not to do multiple transactions since there are costs factored into the pricing.
Different judges can reach different conclusions if a proposal meets the best interest standard. Each will be influenced by their own beliefs and the jurisdiction in which they preside. If a petition is denied sometimes the proposal can be restructured and then approved as restructured. This may require a new filing or a modification of an existing filing.

6. QUESTION: If I transfer payments and reinvest the funds in equity or real estate in the long run will I lose money?

ANSWER: The answer is going to depend on many different considerations. In many instances, the answer is no and the annuitant will be better off by making the transfer. Keep in mind, the rate of return on annuities is very low. In contrast, the annualized historical rate of return over the last 50 years on equity and real estate is in the range of 10% which is substantially higher than the rate of return paid on structured settlement annuities. While there have been periods where rates of return on equities and real estate have been less than the annualized historical average, or even negative, over the long run the rates of return on real estate and equities have averaged out around 10% and beat the rate of return on typical structured settlement annuities by a wide margin.
Even though a recipient will give up a guaranteed feature, in many instances the recipient will be much better off financially by reinvesting than by allowing funds to remain in a structured settlement annuity. Unless the focus is on the short run and/or there is very low or no risk tolerance, there may be better alternatives than a structured settlement annuity.
Once funds have been transferred restrictions on the ability to use money without Court approval and the ability to pledge funds as collateral no longer exist. There is a value to this freedom which is often overlooked and difficult to value. While there may have been a benefit to these restrictions at one time, things change over time and unless funds are transferred out, the restrictions never go away. Structured settlement annuities remain static and do not change to meet new circumstances. In addition, while funds are held in a structured settlement annuity if an annuitant tries to transfer funds, the annuity company can try to prevent a transfer from taking place and applying funds. Once funds are out of the annuity, the annuity company cannot challenge how those funds can be applied.
If future payments in a structured settlement are life contingent, depending upon mortality, some of those payments may never get paid. Transferring those life contingent payments guarantees the annuitant will realize value albeit at a lower amount.
It is advisable to consult with a professional who can determine what the alternative return would be as well as any associated risks.

7. QUESTION: What is a discount rate?

ANSWER: The discount rate is the equivalent of an interest rate if a proposed transfer transaction were re-characterized as a loan. Comparison of discount rates is one way to compare proposals from different factoring companies.

8. QUESTION: Should I work with a person or company who claims they will shop around to obtain the most money for a fixed fee or a percentage of the increase in the purchase price?

ANSWER: Generally no. Many of those services are scams and likely violate applicable law. A good Independent Professional Advisor IPA should be able to handle this function without the need to work with such a person or company. Some of these contractors could be getting kickbacks from specific factoring companies as well.

9. QUESTION: Are all factoring companies legitimate?

ANSWER: No. Many factoring companies are legitimate, offer a service, and are trying to help consumers. There are however, factoring companies that are not legitimate and who will try to convince an annuitant they should transfer payments with them when no real need exists or lure an unsuspecting annuitant away from a legitimate company and a a genuine offer. Bear in mind, that unless a factoring company has provided a contract with a Disclosure Statement, there is no offer. Talk is cheap and unless there is a genuine offer that includes a contract and a Disclosure Statement, there is no offer.

10. QUESTION: If I have signed a contract with a factoring company, can I cancel and possibly switch and work with a different factoring company?

ANSWER: Practically speaking, until a Court grants a petition it is generally possible to terminate and not make the transfer or switch and do business with a different factoring company. Keep in mind, once a petition is filed, other factoring companies may inundate annuitants with calls, texts, and emails and even show up at the door of an annuitant claiming the annuitant should not move forward with a proposed transaction and they will do better. This may or may not be true. If an annuitant has an IPA, all of these contacts can be forwarded to the IPA who can evaluate and advise the annuitant and reduce what could be harassing contacts. A good IPA will take the stress out of the equation.
If an annuitant elects to discontinue doing business with a company that has filed a petition on their behalf, it is best to dismiss the petition before doing anything else. An IPA should be able to help with the dismissal process.
Bear in mind, that once a petition is dismissed, if an annuitant wants to transfer to another factoring company, the process has to start all over again from the beginning and it could take many months depending on a variety of factors. Even if it means potentially receiving more money for the same payments the delay could have other ramifications. Consider, that unless an alternative offer covers the transfer of identical payments, even if an alternative offer will pay a larger amount, it still could be inferior because the annuitant is not giving up the same payments. An IPA can help analyze all of the options.

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