Structured Settlements and Re-Factored Annuities – Too Risky?

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Published: 31st October 2012
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In an earlier post, we talked about the primary and secondary structured settlement markets and how they work. Now, let’s explore an emerging trend in the structured settlement industry.

There’s a new use for structured settlements from the secondary market that’s becoming popular. Re-factored annuities are structured settlement payments from the primary market that have been sold by the original payee to a factoring company. The factoring company then sells the payments to a third party buyer who package it and re-sells it as a factored secondary market structure to a plaintiff who is settling a personal injury case. Re-factored annuities have gained attention because they can produce rates of return higher than what is currently being paid in the primary market.

Factored structured settlements are not the same as primary structures, and plaintiffs and their advisors should be aware of what the differences are.
Tax Matters and Structured Settlements

While primary structured settlements offer some significant tax advantages, such as tax-free principal and interest payments, re-factored annuities do not carry these benefits. They’re considered to be regular investments and will be subject to federal, state and local taxes. Factored annuities may offer a higher return to buyers; however, it’s important to calculate the actual return after taxes when making comparisons to other structures.
Transaction Risk in Factored Transactions

Factored transactions are the result of a series of purchase and sale transactions, from the original plaintiff as the seller to the new plaintiff as the buyer. This series of steps adds an element of “transactional” risk that, while minimal, should be considered by the final buyer. This risk is why it’s important to deal with a reputable and knowledgeable factoring company when buying factored transactions.

Primary structured settlements are set up directly between the annuity issuer and payee, so there is a direct contract between the insurance company and the annuitant. This direct connection has none of the transactional risk of the factored transactions.
Creditor Protection in Structured Settlements

Primary structured settlements are shielded from creditors in accordance with their statutory protections. Even in bankruptcy proceedings, they are usually considered an exempt asset and cannot be accessed by creditors. Once a structured settlement goes through the series of purchase and sale transactions to become a re-factored annuity, it loses this protection. It then becomes like any other investment and is open to the rights and claims of creditors, bankruptcy trustees and other claimants.
Strategic Capital –Knowledgeable Guidance

We believe that primary structured settlements are a valuable and useful investment to protect annuitants and meet their primary financial needs. We also believe that those structures should stay in place as long as they are beneficial to the client. But, when their circumstances change, we want to help our clients and their advisors make informed decisions about whether or not to sell structured settlement payments.

We do that by taking the time to talk with a client and understand their needs, and then help them understand the differences in the options available to them. We help our clients choose wisely among the different ways to meet their financial needs to give them the most benefit. When it comes to helping clients decide how to balance their present and future financial needs, we rely on our experience as a leading factoring company with knowledge and sound judgment to guide them.

We’ve been helping our clients since 1994, and intend to keep doing just that. Find out more by sending a message to Info@StrategicCapital.com or calling toll free: 1-866-256-0088.

Ric Perez is our Vice-President who oversees clients in the west and Cam Mears is our Vice President who oversees clients in the east. Ric can be reached directly at ric.perez@strategiccapital.com or 1-866-821-6108 and Cam can be reached directly at cam.mears@strategiccapital.com or 1-866-241-6111.

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