Let's Be Careful Out There
One of my favorite TV shows from the 80s, or ever really, was “Hill Street Blues.” If you're old enough to remember it, you may recall Sgt. Esterhaus at the end of each day’s briefing sternly but grandfatherly telling all the cops "let's be careful out there." As we all try to figure out how the current “Wall Street Blues” will shake out, I think this is sound advice, particularly for people who have structured settlements or are contemplating entering into structured settlements.
Hysteria and panic are generally bad bases for making financial decisions. All indications are that the backbone of the American insurance industry remains strong and stable. Effective state insurance laws that closely regulate the type and diversity of assets that insurers can hold (that back-up the insurance obligations) are working. Consider for instance the largest and most prominent insurance company, AIG. Headlines scream that AIG is “in trouble” and so forth. Read further and you will see, almost mentioned in passing, that the insurance business units at AIG, particularly the life insurance companies, seem to be sound. The fact that potential buyers are clamoring for AIG’s insurance lines should tell us all something.
The insurance business is unique. In our otherwise generally laissez-faire economy, insurance is excruciatingly and minutely controlled by state regulators. Details concerning what can be sold and to whom, and how payment obligations and risks are planned for and capitalized are all subject to strict rules and review. By all accounts at this point, the system is working, even at AIG.
Some insurers have failed in the past to be sure. But to echo remarks made by Messrs. Darer and Cravenho, these are few and far between. The largest “failure” that I know of is Executive Life of New York (ELNY). In 1991 ELNY was taken over by the State of New York and has been in “rehabilitation” ever since. To date, all policies have been paying as planned. Recent news was made when regulators from New York determined that there might be a shortfall in 12-15 years unless corrective action is taken now. Let me summarize: This “failed” insurer has been able to pay 100% of its obligations for the past 17 years, and while ELNY is likely to need its own bailout/rescue from New York regulators, it appears that individual payees of ELNY structured settlement annuities should fair well in the ultimate resolution of this company. To be sure, the projected shortfall needs to be addressed, and I think it will be, but individual payees should take comfort from this example of a “failure.”
AIG is not only one of the largest insurers, but is one of the largest structured settlement annuity issuers. Structured settlements remain a very viable and useful means of settling personal injury lawsuits, providing long-term financial security for tort victims. Predictable and reliable monthly or yearly tax-free income is a great boon for these former plaintiffs and their families, and all indications are that nothing in this current economic turmoil will diminish those benefits. Structured settlement recipients and their advisors should think twice about trying to “dump” this asset in the face of generally bad economic news. The “best interest” standard given in the federal tax code and in most state transfer laws still applies, and a decision to liquidate all of one’s future structured settlement payments in a factoring transaction because of bad news in the press is probably a bad one. Moreover, liquidating solely because of fear and uncertainty relative to the financial circumstances of AIG or any other annuity issuer would likely not meet the best interest standard required for court approval of a transfer.
However, if a structured settlement recipient does have a real need to sell future payments, structured settlement factoring companies can help. But, in this and all things, “let’s be careful out there.”
If you would like to discuss this or any other matter, please contact me at mbracy@setcap.com. I welcome comments to this and all articles, either here on the blog, or privately to me via email or phone.
Don’t Mess With Taxes: Inaccuracies Abound in Structured Settlement Reporting
I don’t know what it is about structured settlements and structured settlement factoring, but for some reason blatant inaccuracies seem more prevalent than truth in reporting on these topics. Personally I don’t think the facts are all that hard to get right, but maybe I’ve just been around too long.
The latest entry in the bad reporting category to catch my eye was Tim Grant’s piece in the Pittsburgh Post-Gazette, confusingly titled “Structured Settlements Of Money Take Away Risks Of Lump-Sum Payments” (first appearing in the Post-Gazette on June 25, 2008). You can read Mr. Grant’s article here.
Lest anyone should think I am picking on Mr. Grant, you should know that I sent him a personal email on June 25, 2008, which is copied below. Hearing nothing in response, I sent a letter to the editor of the Post-Gazette on June 30, 2008. Again, nothing (and my letter was not, to my knowledge, published). Is this willful blindness or something more sinister at work here?
Although Mr. Grant’s article is replete with error, one whopper stands out:
“Unlike lump sum settlements, payments from structured settlements are income tax free and the benefits are guaranteed for life by insurance companies.”
Many ill-informed commentators get confused about the tax treatment of structured settlement payments and factoring transaction lump sums. Breaking Mr. Grant’s assertion down to a simple form, he says that payments from structured settlements are income tax free (true), while lump sum payments are not (false). Lump sum payments in settlement of personal injury damages are income tax free under Internal Revenue Code 104(a)(2). Further, lump sums received from a factoring transaction are also income tax free, as was clarified over nine years ago by IRS Private Letter Ruling 1999-36030, and more recently by IRC 5891.
Manufactured confusion about taxes has long been used to scare people away from factoring. The bottom line is that income tax is not an issue to be concerned about, whether you are taking a lump sum in settlement of a personal injury claim at settlement, accepting payments over time in a structured settlement, or selling some or all of your future structured settlement payments.
The full text of my letter to Tim Grant:
Mr. Grant:
I read with interest your story about structured settlements. I did, however, find some inaccuracies in the story of which you should be aware.
First, you state that “Unlike lump sum settlements, payments from structured settlements are income tax free and the benefits are guaranteed for life by insurance companies.” This sentence actually contains two inaccurate assertions: (1) that lump sum settlements are not tax free, and (2) the implication that all structured settlements are guaranteed for life. On the first point, under Internal Revenue Code § 104, all personal injury damage payments are excluded from income tax. This is true irrespective of whether the payment is a lump sum or received over time in a structured settlement [see IRC 104(a)(2)]. The second point, that structured settlement payments are guaranteed for life, is true in some circumstances but not all. Sometimes the payments are guaranteed for a time certain (for instance, 20 years), and then for the life of the payee thereafter, but this is not always the case. Many structured settlements are for a certain number of years only.
Finally, your story is replete with statements about the structured settlement payee’s inability to convert all or part of the future payments into either a present lump sum or to take a loan against the future payments. This is simply untrue. Forty-six states (including Pennsylvania) have structured settlement transfer laws which allow people, under some circumstances and with court approval, to sell future structured settlement payments, or to use the payments as collateral for a loan (see, e.g., the Pennsylvania Structured Settlement Protection Act, 40 P.S. 4001 et seq.).
I am general counsel to a company that provides such liquidity options to structured settlement recipients when needed. As your story accurately r
