Selling Your Structured Settlement Payments?
The primary argument in favor of structured settlements was that they guaranteed a person who is disabled as the result of an accident a consistent long-term tax free income.
Recognition in the United States
Senator Max Baucus of Montana was an original sponsor of the Periodic Payment Settlement Tax Act of 1982. The sum and substance of the act granted a tax-free status to damages paid to an injury victim in periodic payments over time. Additional guidance was provided to insurance companies for when they would be involved in these structured settlements.
The problem for plaintiffs
Nobody can predict the future with any degree of certainty. The financial condition of a plaintiff receiving a structured settlement can change quickly and drastically, and because of that, there were concerns involving the liquidity of structured settlements — in other words, some people recognized the problem of having a settlement taking years to fully pay.
A new industry was born a few years later that provided liquidity in the form of a lump sum payment in return for part or all of the periodic payments. These companies would buy the structured settlements in exchange for a one-time payment the recipient could use to pay medical bills, pay off debt, go back to college, buy or repair the family car, put a down payment on a new house, or use in other ways to improve their financial situation.
In response to ethical complaints involving certain members of this industry, Senators Baucus and Grassley authored further legislation governing structured settlements. With this legislation, congress passed a de facto regulatory measure that imposed an excise tax on anybody buying a structured settlement.
To avoid that tax when buying a structured settlement, the purchaser is required to obtain a court order from the state court where the settlement agreement was entered into. The purchase is also required to be consistent with the applicable state statute. Most states didn’t have statutes addressing this at the time the Baucus-Grassley legislation was passed. Forty-six states have now enacted appropriate legislation addressing structured settlements. Pursuant to federal law, the state court judge is required to find that the sale of a structured settlement operates in the best interests of the seller, taking into account the welfare and support of any dependents he or she might have.
Individuals with long-term disabilities or health problems resulting from the negligence of another party are given a periodic stream of income through structured settlements. The legislation sponsored by Senators Baucus and Grassley is intended to preserve that income and protect it from dissipation, while also retaining its tax-free status. Their legislation prompted the states to take a very close look at structured settlements and enact their own legislation.
As a result of that legislation, the sale of structured settlements in most states is highly regulated — even though, at times, a larger lump sum of cash is more helpful for an individual’s financial well-being than years of predictable, but smaller, monthly payments.