Watching the manager of his apartment house get a barbecue fire going using gasoline instead of normal starting fluid, 8-year-old Daniel was burned over 80 percent of his body when a ball of flames erupted. His father immediately hired a lawyer who obtained a policy limit offer from the apartment’s insurance company — $100,000.
That money was used to purchase a Structured Settlement Annuity from a life insurance company, payments starting at age 18, and running for 50 years, would cover education, future medical care and help improve the quality of Daniel’s life and family-to-be.
Over $600,000 — tax free — would have been received over those 50 years. But one day 23-year-old Daniel saw a TV commercial, “Which said I could get cash now for my structured settlement.”
Substantial Legal Protections Exist Today - But Beware of the Sharks
Within days, all the efforts of his lawyer to create financial security would be at great risk. “I was lied to. They said my settlement didn’t have much value, but agreed to buy part of it. Immature and a lacking guidance, I blew $30,000 in a few weeks,” he told You and the Law.
Years later, Daniel was contacted by another company and asked if he wanted to sell more of his payments, or even all of them. But this time, as a result of laws enacted after 9/11, intended to protect people just like him, any sale of structured settlement payments must be approved by a judge.
Daniel’s attorney told him selling these valuable payments was a terrible idea. He then asked for our opinion and we told him the same thing. Fortunately a superior court judge agreed. The sale was not approved and today he is a grateful father of four children with a secure financial future.
We ran the facts of Daniel’s case by New York attorney, Edward Stone, considered as one of the nation’s leading experts in structured settlements and a friend of this column.
“To combat those types of abuses,” Stone explained, “in 2002 President George W. Bush signed into law the Victims of Terrorism Tax Relief Act, which imposes a punitive tax on anyone who acquires structured settlement payment rights unless:
(1) The transaction is approved in advance by a judge;
(2) Who issues an order finding that the transaction is in the seller’s best interest, taking into account welfare and support needs of the payee’s dependents.
Stone described key protections which sellers now have, and, while state-to-state differences exist, at a minimum a seller is entitled to:
- Full disclosure of all costs and fees, including the discount rate, showing how much of a loss will result from the sale;
- The right to cancel within a pre-determined time frame;
- –The opportunity of having professional advice on the financial advantages or disadvantages of a lump sum payment.
“After selling some of their payments, sellers — like Daniel — are contacted by other companies who engage in Court Scraping. They go to courthouses all over the country, obtain copies of settlement documents and then solicit sellers to buy even more payments.” Stone points out.
“Often, a check arrives in the mail, looking like ‘free” money. But the small print states that by cashing it, you have agreed to sell them all your payments.” The ‘best interest’ standard required by the IRS and state laws doesn’t disappear for a second, third and even fourth transaction but some companies pretend that it doesn’t exist at all. Seller Beware is my best advice,” Stone cautions.
Get another set of eyes before signing
A seller has a clear right to independent professional advice and this can be anyone with common sense and, especially, good financial sense. Ideally, this would include a lawyer or accountant — someone who can help you understand if the transaction is in your best interest.
Stone points out that bad things happen when a seller gives up important rights:
“There are companies which encourage people to give up important rights and advice, and where a lot of the bad things happen. They want sellers to waive independent professional advice, handing them a document which states: ‘I have consulted with independent counsel who has approved my sale of the structured settlement.’ Or, ‘I waive this requirement.’
“Be wary of companies who encourage you not to seek independent professional advice. The slick companies say sign here, waive counsel or you will slow the deal down,” Edward Stone warns, adding, “Don’t be in a rush to sell, ever.”
Sell your payments only for compelling reasons
To Stone’s comments, we add these thoughts:
A structured settlement isn’t free money. The death of a parent or terrible personal injuries led to those payments. Sell them only for the most compelling reasons.