Structured Settlements & Annuities

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We group these cash flows together because the devices that generate the payments all operate the same way. In essence payment recipients receive payments (usually monthly) from an annuity created by the payor to fulfill the financial commitment, which is a set amount of money. However, payment recipients can choose to receive the total amount he or she is scheduled to receive in a lump sum payment by selling the payments to a third party. The recipient may also choose to sell a portion of the payments if he does not want to sell all of them.

Structured Settlements

Unlike the other cash flows in this group, structured settlements can be sold only according to highly regulated arrangements. A structured settlement is the result of a lawsuit or insurance claim in which the plaintiff or claimant has received a large award. Together, the insurance company and the plaintiff/claimant agree that the award will be paid out in tax free installments over time. However, if the plaintiff has a need or decides later that he or she would like a lump sum payment, he or she can sell some or all of the payments to a third party if the courts agree that the sale of these payments is in the plaintiff’s best interest. It is the need to obtain court approval of the sale that makes structured settlements different from all the other cash flows in this group.

The structured settlement buyer should confer with an attorney before seeking to sell settlement payments. Once the decision to sell has been made and a buyer has offered to purchase the payments, the seller and buyer will go before the appropriate court to establish that the sale is in the seller’s best interest. The court will rule against the plaintiff in cases where the plaintiff relies on the payments to meet his basic human needs. For instance, if the seller is bedridden or otherwise incapacitated and has no other visible source of income of financial support, the court is likely to rule that the sale is not in the seller’s best interest. In most cases, however, a favorable ruling from the court is the routine outcome. Buyers are not likely to offer to buy payments in cases where it is likely that the courts will rule against the purchase.

All Annuity Arrangements (including Lottery, Contest and Casino winnings)

As is the case with the purchase of installment payments in any cash flow, the payments for these cash flows are discounted. We see this when lottery winners are given the option to take the lottery in installments or in a lump sum payment. The lump sum is usually 50 percent to 60 percent of the face value of the winnings. Again, the discount is based on the time value of money. The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time.

For example, $100 of today’s money invested for one year and earning 5 percent interest will be worth $105 after one year. Therefore, $100 paid now or $105 paid exactly one year from now both have the same value to the recipient. When determining the present value of a likely stream of future income, the annual incomes are discounted and then added together. And that becomes the lump sum payment for future payments.

The frequently asked questions pertain to structured settlements only because of the laws, regulations, and tax issues involved in the purchase of a structured settlement. These same regulations do not pertain to the sale of lottery, contest, and casino winnings.

 

 

Click here to visit our FAQ section on Structured Settlements & Annuities.