Structured Settlement Factoring History Pre- 2002
Before 2002 and the enactment of IRC 5891, which became effective on July 1, 2002, only a portion of states regulated the transfer of structured settlement payments, while others chose not to. The states that did regulate the factoring process before 2002 generally followed the current standads mandated in IRC 5891. Many of the transferrs between 1988- 2002 were not court ordered.
Process Pre-2002
After negotiating the terms of the transaction, a formal purchase contract was provided to the annuitant, effecting an assignment of the subject payments upon closing. Part of this assignment process also included the grant of a security interest in the structured settlement payments, to secure performance of the seller’s obligations. Filing a public lien based on that security agreement created notice of this assignment and interest.
Unlike todays standards the life insurance company who provided the structured settlement annuity was not notified of the transfer, because of arguments by the insurance industry against factoring and transfer companies. Many annuity issuers were concerned that factoring transactions, which were not contemplated when Congress enacted IRC 130, might terminate the tax arrangements of the structured settlement.
Structured Settlement Factoring History Post-2002
Today all structured settlement factoring transactions are completed through a court order process. State governments in 46 states of January 25th, 2008 have regulations in place to control the transfer of payment rights on structured settlements.
Most transfer laws in each state contain similar provisions, such as the following:
- pre-contract disclosures to be made to the seller concerning the essentials of the transaction
- notice to certain interested parties (e.g. life insurance company)
- an admonition to seek professional advice concerning the proposed transfer
- court approval of the transfer, including a finding that it is in the best interest of the annuitant, taking into account the welfare and support of any dependents.