Before we get into how, and where, to get cash by selling a structured settlements annuity, let us first consider what structured settlements annuities are, what benefits you get by keeping the annuity and under what situations it might be advisable to sell it off for a lump sum amount.
A structured settle
ments annuity provides a steady income stream to the injury victim or his family. Congress has waived taxes on these payments ( IRC Section 130 ). Thus, by opting for a tax free annuity instead of a lump sum payment, the beneficiaries can end up receiving a higher payout. It can also be advantageous to the paying organization, since they would essentially be making a lump sum payment to buy an annuity for the victim. Thus, the victim receives the higher payout in a stream of payments, the paying party ends up paying less than what is actually paid out, and annuities are a highly profitable product for insurance companies. Has to be a catch, right?
The catch kicks in when the beneficiaries go one step further and sell off the annuity, along with the rights to receive a stream of payments, to a financial organization in return for a lump sum amount. This would only make sense if they were to receive a bigger lump sum than what they would have received from the original payer of the annuity lump sum. For example, an employer pays out $250,000 to buy a deferred variable annuity for an injured employee, who then manages to enhance the cash value of the annuity within a short period and then sells it off for $350,000.
Please note that the intention to waive taxes on these payments was meant to provide encouragement to the injured party to accept structured settlements over an expanded period, rather than accepting a lump sum. By turning that intent on its head and selling off the annuity for a lump sum, you jump through a loophole in the tax code to receive a lump sum without paying the tax on it.
The dispute arises from the root question of who owns the annuity and the right to decide how it should be paid out The company who initially paid out the lump sum to buy the annuity, the insurance company who is liable to make the payments or the beneficiary who is supposed to receive the payments? Now, by bringing in a third party to buy the annuity from you, you introduce one more player. The IRS also has an interest, since they provided the tax break for an extended series of payouts, not a lump sum. Thus, you have five parties with a strong interest in this transaction. And this question is being hotly debated in courts and state legislatures, with states applying their own riders to the transaction, and myriad regulations being imposed. A court order is now essential to complete the sale of a structured settlements annuity.
There is a proliferation of ‘consultants’ and financial firms offering to buy structured settlements annuities. Knowing a good deal about annuities, what is legal and what crosses the line, and finding a trustworthy institution who wants to buy the annuity can help you make an informed and hassle free decision.
FAQ for selling a structured settlements annuity:
- Are you allowed to sell structured settlements to a third party? Ans: Yes, you are. Technically, you do not own the annuity, but you have an interest in future payouts from the annuity. Even if the contract forbids a transfer, you can get the original funding company to modify the contract to allow you to sell.
- Is it possible to sell part of it, while still keeping the option of reduced payouts in future? Ans: Yes. You can arrange to sell off a part of your settlement, while keeping the rest as a balance for a deferred income stream.
- Is a court order necessary to complete this transaction? Ans: Yes. However, buyers of structured settlements annuities have everything ready for this, and they will get the requisite court order which allows you to transfer your payments to them, in return for an agreed upon lump sum payment.
Accepting cash for a structured settlements annuity is a financial decision which needs to be taken after careful consideration of the expected benefits and discussion with family and financial advisors. It should be done as a last resort, faced with an immediate requirement or emergency, and not as an investment decision.