Important Caveats for Investors in Structured Settlement Payments

Investors seeking stable income may be solicited by and/or heard a sales pitch from investment advisers to invest in structured settlements, or invest in a structured settlement annuities. But all is not what it seems.

The structured settlement investment in such cases is not an annuity. It is a receivable, and may neither be appropriate nor suitable for vulnerable retirees and personal injury victims. 

Here are some things to consider:

When it Comes to The Term "Structured Settlement"...

1. Acquiring other people's Structured Settlement Payment Rights in a Structured Settlement Factoring Transaction,  or in a Subsequent Assignment, is not a Structured Settlement

Note that the structured settlement definition at IRC Section 5891(c)(1), which became effective January 2002, is preceded by the words "for the purposes of this section" (expressly to do with the imposition of an excise tax on structured settlement  factoring  transactions). Despite this limitation  the use of the definition is often expanded by settlement planners, structured settlement brokers, settlement purchasers and industry commentators. Structured settlements had been in existence for over 20 years prior to the enactment of the Victims of Terrorism Tax Relief Act of 2001 (VTTRA), which created IRC Section 5891, ostensibly an attempt to curb structured settlement factoring company abusive business practice. The VTTRA also  provides a regulatory framework for exceptions to the excise tax that would be levied pursuant to the act of Congress and collected by the IRS, in the event a structured settlement factoring transaction does not comply with the applicable state structured settlement protection statute.

2. Investors Should Be Wary of Inaccuracies Used by Promoters of Structured Settlement Investments

Some structured settlement investment promoters and intermediaries solicit investors with the blatant lie that factored structured settlement payment streams are annuities.  This doesn't jive with the definition of annuity under the insurance laws of most states and the statutory accounting pronouncements of the National Association of Insurance Commissioners as well as actions taken to exclude such investments from Life & Health Guaranty Associations in 80% of U.S. states to date and a review of some of the cases that have been litigated, or in ongoing litigation.

Unfortunately the perpetrators of the lie may include certain settlement planners.  On February 25, 2019, a presentation at the annual meeting of the Society of Settlement Planners there was a presentation ominously titled "Dealing With a Secondary Annuity Purchase That Has Gone South".  Lawyers who patronize settlement planners who pitch the lie about these investments to personal injury lawyers or the lawyer's clients should see past the distraction of money such individuals pay to state or national trial lawyer associations.

In its Statutory Issue Paper160, initially relaxed in December 2018 and finalized April 6, 2019, the National Association of Insurance Commissioners  (which knows a little something about annuities) expressly opined that acquired structured settlement payments rights (factored structured settlement payment streams) are neither annuities,  nor insurance products. [ see  NAIC Statutory Issue Paper No. 160 p6  Section 6 Footnote 1 ]

A "secondary market annuity" is not an annuity, period. 

That has not stopped players in the secondary market from falsely calling them annuities.  One California settlement planner, who held and still holds an active California insurance license, even made a declaration under penalty of perjury to a California Court in 2012 as part of an elaborate effort to convince a California Superior Court judge to approve such investments to feed into a Special Needs Trust for a disabled plaintiff using a Qualified Settlement Fund. 

CA Ins Code § 10509.913 (2020)  (a) “Annuity” means an annuity that is an insurance product under California law that is individually solicited, regardless of whether or not the product is classified as an individual or group annuity.

The misuse of the term annuity occurred over and over in the California settlement planner's declaration. The declaration ostensibly was designed to "gin up" the judge by falsely stating there was "no change in funding asset".  Creative?  yes.  False? Yes. The California settlement planner's declaration was found on the internet in 2021. One wonders how many times a similar declaration was used by the California settlement planner in the interim with the same or other judges and how many transactions were approved for disabled plaintiffs or minors under the false assumption an annuity was the investment when it was not.

You would think that if it was an annuity it would appear in the "Kinds of Annuities" section in the California Department of Insurance guide Annuities for Seniors |What You Need to Know

3. Litigation over structured settlement payment rights has seen investor money threatened, or completely lost

A.  Litigation has already concluded in which investors in structured settlement payment rights lost their entire investment , due to a fraud. Robert and Linda Wall invested retirement funds and purchased the structured settlement payment rights on the advice of their Pittsburgh based financial adviser who when deposed  stated the Walls " invested in 5 structured settlement annuities". An intermediary Altium Group, LLC who was sued by the Walls, advertised  "Invest in secondary market annuities...Up to 8% returns with no volatility and unparalleled safety of principal"

 It was a lie.  It was impossible. The Walls were not sold and the Walls did not invest in annuities even though they thought they did. Then disaster struck some time later, when a fraud was discovered in the origination. The Walls sued their financial adviser and the intermediary who did the deal. In the end they lost everything, their investment, the bargained for investment return, the legal fees they had to spend and to add insult to injury they had to pay the legal fees of their adversary under the loser pays clause in their contract.   Robert Wall and Linda Wall v Altium Group, LLC. Civil United States District Court Western Pennsylvania  Action 16-1044

B.  A retiree from Jacksonville Florida had the majority of his thrift savings plan invested in what was labeled a "secondary market annuity".  Worlds collided when it was discovered that the acquired payments were originated from victims of Access Funding and the investment payments ended up being suspended pending the outcome of litigation brought by the Maryland Attorney General. The heartbroken retiree filed a FINRA claim against the financial adviser and one of its former employees and was able to get a small settlement after considerable heartache.

C . A California financial adviser and a British company each invested money in factored structured settlement payment streams that turned out to be originated from a structured settlement of a Pennsylvania minor, who was only 10 years old when somehow a pair of structured settlement factoring companies began to bamboozle  a number of Butler and Beaver County judges over 8 years .The investors' money was in jeopardy. Was still pending at the time of origipublication, but the parties subsequently reached a confidential settlement.

ZACHARY BARBER, JEFFREY BARBER, ADMINISTRATOR OF THE ESTATE OF LINDA LEE JENKINS A/K/A/ LINDA LEE BARBER, DECEASED v. BRUCE STANKO, NORTH HILLS PHARMACY SERVICES, LLC; PACERCHECK, INC.; ET AL APPEAL OF: SEMPRA FINANCE, LLC ("SEMPRA") : IN THE SUPERIOR COURT OF PENNSYLVANIA  No. 615 WDA 2020 Appeal from the Order Entered June 5, 2020 In the Court of Common Pleas of Allegheny County Orphans' Court at No(s): No. 4037 of 2005   See Quashed Appeal of Pinnacle Capital, LLC, Michael Pickett and Habitus Funding   published May 14, 2021 and  Quashed Appeal of Sempra   Finance ,   also published May 14, 2021

D. In 2020,  investors in assigned structured settlement investments originated by Genex Capital, and/or assigned to them by Genex,  found their investments at risk after they attempted to sell and reassign the assigned payment rights to other investors some years later. Genex Capital objected on the basis that such assignments allegedly violated the terms of its Receivables Purchase Agreement, repossessed the payments and assigned them to new investors for consideration.  A number of the original investors sued Genex Capital in an effort to get back their investment.  That litigation remains pending in 2025, is set for trial in June 2025, and further underscores that investors in acquired structured settlements payment rights are buying structured settlement receivables, not structured settlement annuities.

In its answer to Plaintiffs' First Amended Complaint and Counterclaims in ongoing Arizona litigation cited below, dated June 11, 2021, Genex Capital Corporation admitted, in answering paragraph 31, that "one component of its business involves purchasing from payees future structured settlement payments due under structured settlement annuities and assigning to investors  a subset of those rights. .."  (emphasis added)  ( also multiple other references to "subsets of those rights..." Ibid at 13, 53, 56, 89, 109, 126)

Source: Genex Capital Corporation, a Delaware Corporation  v Seeley Capital Management, Inc., a Massachusetts corporation; et al and Related Counterclaim  Richard L. Keefer and Vicki L. Keefer, husband and wife; et al; v Genex Capital Corporation, a Delaware Corporation; et al and Genex Capital Corporation, a  Delaware Corporation, a  Delaware Corporation v Richard L. Keefer and Vicki L. Keefer, husband and wife, Hunmi Pak, a married man; E. Dwayne Walls, a married man; and PANABCO, a partnership  Arizona Superior Court County of Maricopa Case Nos. CV 2020-013796 and CV2020-004958 (Consolidated)  [the pleadings are a matter of public record] 

Important Summary Points of Caution for Investors in Structured Settlement Payment Rights

1. When you buy a legitimate annuity you are buying the actual annuity contract, which is an actual insurance product. 
   
2. When a structured settlement is established as part of the consideration paid for settlement of all claims against the Defendant(s), a legitimate annuity, that is an insurance product, is purchased to fund the obligation of the Defendant, its insurer, or in the event of a qualified assignment, the qualified assignment company.  A premium is paid to the life insurance company that issues the annuity contract.
3. An insurance product can only be sold by appropriately licensed and appointed insurance agents and brokers in accordance with the laws of various states.  There is no equivalent licensing standard for structured settlement factoring industry or the tertiary market which participates in making such investments available to investors.
4. When the originating structured settlement factoring company buys structured settlement payments in a structured settlement factoring transaction they are not buying an annuity, or an insurance product..
5. Furthermore, unless the investor is a "direct designated assignee" in the court order approving the structured settlement transfer, the investor is buying a subset of rights to certain payments  ( see Genex Capital Ibid at 45 in contrast to Ibid at 13, 53, 56, 89, 102, 126).
   
6. Ownership of the actual annuity that is generating the payments is not transferred to the originating structured settlement factoring company.
7. Since the originating structured settlement factoring company is not buying an annuity or an insurance product, just the rights to payments,  it follows that "a subset of those rights" (as Genex Capital Corporation eloquently refers to what investors are actually buying in exchange for their investment), is not an annuity, or an insurance product.
8. Investors in structured settlement payment rights (1) may lack statutory protections in the event of insolvency; (2) are exposed to transactional risks not present in the purchase of legitimate annuities that are insurance products.

These risks contribute to why investments in structured settlement payment rights from other people's structured settlements  ("structured settlement receiavbles") may be unsuitable for many investors, including minors, disabled persons and retirees. 

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Last updated January 1, 2024