Sell Structured Settlement Knowledge Assessment — Questions and Answers

Question 1: What is 'structured settlement funding' sometimes used for by investors?

Issuing new annuity products
Purchasing pools of structured settlement payment rights as an asset class (Correct answer)
Funding class-action lawsuits
Paying court filing fees on behalf of payees

Correct answer: Purchasing pools of structured settlement payment rights as an asset class

Institutional investors and hedge funds purchase pools of structured settlement payment rights as fixed-income investments, attracted by their predictable, tax-advantaged cash flows.

Question 2: What is a 'structured settlement annuity qualified assignment' company (QAC)?

A special-purpose entity that assumes the periodic payment obligation from the defendant under a qualified assignment (Correct answer)
An IRS-registered clearinghouse for structured settlements
A nonprofit that provides legal services to structured settlement payees
A company that buys structured settlement payment rights on the secondary market

Correct answer: A special-purpose entity that assumes the periodic payment obligation from the defendant under a qualified assignment

A QAC is typically a subsidiary of a life insurance company that accepts the assignment of periodic payment obligations from defendants, allowing them to fund them with annuities under IRC Section 130.

Question 3: Which of the following is an example of a legitimate reason courts typically accept for approving a structured settlement transfer?

Purchasing non-essential luxury goods
Paying for necessary home repairs, medical procedures, or clearing high-interest consumer debt (Correct answer)
Funding a high-risk investment strategy
Gifting the lump sum to a third party

Correct answer: Paying for necessary home repairs, medical procedures, or clearing high-interest consumer debt

Courts consistently approve transfers that address genuine necessity — housing, health, or debt relief — where the sale proceeds improve the payee's real financial position.

Question 4: Which of the following would most likely cause a judge to deny a structured settlement transfer petition?

The factoring company is headquartered in another state
The payee is over age 65
The payee plans to invest the lump sum conservatively
The payee has no stated reason for needing the funds and the discount rate is 20% or higher (Correct answer)

Correct answer: The payee has no stated reason for needing the funds and the discount rate is 20% or higher

An extremely high discount rate combined with no compelling reason for the funds signals an exploitative transaction that does not meet the best interest standard.

Question 5: What tax reporting form does a factoring company use to report a structured settlement transfer payment to the IRS?

Form 1099 (typically 1099-MISC or 1099-OTHER) (Correct answer)
Form K-1
Form 1065
Form W-2

Correct answer: Form 1099 (typically 1099-MISC or 1099-OTHER)

Factoring companies typically issue a Form 1099 to report the lump-sum payment made to a payee in a structured settlement transfer, reflecting it as potentially taxable income.

Question 6: Which US state was among the first to enact a Structured Settlement Protection Act?

Texas (Correct answer)
California
Florida
New York

Correct answer: Texas

Texas enacted one of the early SSPAs in the late 1990s, and its model influenced many other states' structured settlement transfer laws.

Question 7: What information must be disclosed to the payee under most state Structured Settlement Protection Acts before a transfer can proceed?

The discount rate, fees, net payment amount, and total value of payments being sold (Correct answer)
The payee's original injury details
The name of the annuity issuer only
Only the lump-sum amount to be paid

Correct answer: The discount rate, fees, net payment amount, and total value of payments being sold

SSPAs require factoring companies to disclose the discount rate, all fees and expenses, the net lump sum the payee will receive, and the total dollar amount of payments being transferred.

Question 8: What is the 'best interest' standard that a judge applies when reviewing a structured settlement transfer petition?

Whether the transfer maximizes the factoring company's return
Whether the transaction complies with IRS rules only
Whether the annuity issuer consents to the transfer
Whether the transfer serves the financial well-being of the payee and any dependents, considering the payee's circumstances and needs (Correct answer)

Correct answer: Whether the transfer serves the financial well-being of the payee and any dependents, considering the payee's circumstances and needs

Judges weigh the payee's financial situation, the purpose of the funds, the needs of dependents, and the fairness of the discount rate to determine if the transfer is in the payee's best interest.

Question 9: What is the 'present value' of a structured settlement payment stream?

The total dollar amount of all future payments added together
The amount the annuity issuer paid to fund the settlement
The current worth of future payments discounted at a given rate (Correct answer)
The court-appraised value of the payments

Correct answer: The current worth of future payments discounted at a given rate

Present value is the current lump-sum equivalent of future payments, calculated by discounting each payment back to today's value using a specified discount rate.

Question 10: After a court issues an order approving a structured settlement transfer, what is typically the next procedural step?

The payee must re-litigate the original injury case
The order is served on the annuity issuer and obligor, who then redirect payments (Correct answer)
The IRS must separately approve the transfer
The factoring company must register the order with FINRA

Correct answer: The order is served on the annuity issuer and obligor, who then redirect payments

Once the court order is entered, certified copies are sent to the annuity issuer and obligor directing them to redirect the sold payments to the factoring company.

Question 11: What must a court find before approving a structured settlement transfer under most SSPAs?

That the transfer financially benefits the factoring company's investors
That the original tort defendant has been personally notified
That the annuity issuer has given written consent to the transfer
That the transfer is in the best interest of the payee and their dependents (Correct answer)

Correct answer: That the transfer is in the best interest of the payee and their dependents

Courts must affirmatively find that the transfer serves the payee's best interest, considering their financial situation and the welfare of any dependents before granting approval.

Question 12: If market interest rates rise significantly, how does this generally affect lump-sum offers for structured settlement payments?

Offers increase because future payments become more valuable
Offers are unaffected by market interest rates
Offers increase to attract more sellers
Offers decrease because higher discount rates lower the present value calculations (Correct answer)

Correct answer: Offers decrease because higher discount rates lower the present value calculations

Rising market interest rates lead buyers to apply higher discount rates, reducing the calculated present value and therefore the lump-sum offer to the payee.

Question 13: Under a typical SSPA, the court approving a transfer must find that the transfer is:

In the best interest of the payee, taking into account the welfare of dependents (Correct answer)
Consistent with IRS guidelines
Approved by the original defendant's insurer
Profitable for the factoring company

Correct answer: In the best interest of the payee, taking into account the welfare of dependents

The 'best interest' standard is the central test courts apply under SSPAs — the judge must find the transfer serves the payee's and dependents' financial interests.

Question 14: What information is typically included in a structured settlement transfer petition filed with the court?

The original injury settlement agreement only
The annuity issuer's investment portfolio
Only the lump sum amount to be paid
The full terms of the transfer, disclosure statement, payee's financial circumstances, and reason for needing funds (Correct answer)

Correct answer: The full terms of the transfer, disclosure statement, payee's financial circumstances, and reason for needing funds

A complete transfer petition includes the purchase agreement, required disclosures, financial details of the payee, the stated reason for needing the funds, and proof that notice was given to all parties.

Question 15: If a structured settlement includes interest earned on delayed payments, how is that interest treated for federal taxes?

Taxable as ordinary income because it represents investment return rather than injury compensation (Correct answer)
Taxable only if interest exceeds $1,500 per year
Tax-deferred until the final payment is received
Tax-free under Section 104

Correct answer: Taxable as ordinary income because it represents investment return rather than injury compensation

Interest accrued within or on structured settlement payments is taxable as ordinary income because Section 104 only excludes the compensatory component, not investment earnings.

Question 16: Under most state SSPAs, which parties must be notified when a structured settlement transfer petition is filed with the court?

The seller's attorney and the seller's financial advisor only
Only the seller and the factoring company
The annuity issuer, the original defendant or liability insurer, and other interested parties (Correct answer)
The IRS and state tax authorities only

Correct answer: The annuity issuer, the original defendant or liability insurer, and other interested parties

Most SSPAs require notice to all interested parties — including the annuity issuer, the original defendant or insurer, and any government benefit agencies — to give them opportunity to object.

Question 17: As of 2024, approximately how many US states have enacted their own Structured Settlement Protection Acts?

About 10 states
About 25 states
Nearly all 50 states (48+) (Correct answer)
Only federal law applies — no state laws exist

Correct answer: Nearly all 50 states (48+)

Nearly all US states (48 or more) have adopted SSPAs, creating a near-universal state-law framework requiring court approval for transfers.

Question 18: Structured settlement payments for physical injury are exempt from federal income tax under which IRC section?

IRC Section 104(a)(2) (Correct answer)
IRC Section 72
IRC Section 130
IRC Section 5891

Correct answer: IRC Section 104(a)(2)

IRC Section 104(a)(2) specifically provides the income tax exclusion for amounts received through a lawsuit, settlement, or judgment on account of personal physical injury or physical sickness.

Question 19: What is a 'qualified assignment' in the context of structured settlements?

The payee selling payments to a factoring company
A broker certification credential
A court order approving the original settlement
A tax-free mechanism where the defendant assigns the payment obligation to a third-party assignee company (Correct answer)

Correct answer: A tax-free mechanism where the defendant assigns the payment obligation to a third-party assignee company

A qualified assignment under IRC Section 130 allows the defendant to transfer the periodic payment obligation to a third-party assignee (typically an insurance subsidiary) on a tax-free basis.

Question 20: Which factor does NOT typically affect the lump-sum amount a payee receives for their structured settlement?

Current market interest rates
The dollar amount and frequency of payments
The original defendant's name (Correct answer)
The remaining term of the payments

Correct answer: The original defendant's name

The defendant's identity has no bearing on the valuation — the lump-sum offer is driven by payment size, timing, duration, and the prevailing discount rate.

Question 21: What is the tax basis of a structured settlement payee's payment rights for purposes of calculating gain on a sale?

Zero, because the payments were received tax-free (Correct answer)
The annuity purchase price paid by the defendant's insurer
The original settlement amount paid by the defendant
The total present value of all future payments at the time of sale

Correct answer: Zero, because the payments were received tax-free

Because the periodic payments are received tax-free under Section 104, the payee's tax basis in the payment rights is generally zero, meaning the entire lump sum from a sale may be a taxable gain.

Question 22: What is a 'structured settlement annuity secondary market'?

The market in which factoring companies and investors trade previously issued structured settlement payment rights (Correct answer)
A stock exchange for annuity products
The original market where annuities are first sold to defendants
A government marketplace for structured settlement transfers

Correct answer: The market in which factoring companies and investors trade previously issued structured settlement payment rights

The secondary market consists of factoring companies and institutional buyers that purchase existing structured settlement payment rights from original payees, providing liquidity.

Question 23: Which type of structured settlement payments CANNOT typically be sold or transferred?

Fixed monthly payments
Guaranteed annuity payments
Workers' compensation settlement payments in most states (Correct answer)
Deferred lump-sum payments

Correct answer: Workers' compensation settlement payments in most states

Workers' compensation structured settlement payments are generally exempt from transfer laws and cannot be sold in most US states.

Question 24: How does the remaining term of payments affect the lump-sum offer from a factoring company?

Remaining term has no effect on the offer
Longer remaining terms result in greater discounting because payments further in the future are worth less today (Correct answer)
Longer remaining terms always result in higher offers
Shorter remaining terms always result in lower offers

Correct answer: Longer remaining terms result in greater discounting because payments further in the future are worth less today

Payments that are further in the future are discounted more heavily because of compounding time value calculations, reducing the total present value.

Question 25: What does IRC Section 5891 impose on factoring companies that purchase structured settlement payments without court approval?

Revocation of their business license
A criminal fine of up to $50,000
A 25% penalty on the discount rate applied
A 40% excise tax on the transfer amount (Correct answer)

Correct answer: A 40% excise tax on the transfer amount

IRC Section 5891 imposes a 40% excise tax on factoring companies that complete a structured settlement transfer without obtaining a qualified court order, deterring unapproved deals.

Question 26: The Periodic Payment Settlement Act of 1982 did which of the following?

Created a federal registry for structured settlements
Required all lawsuits to use structured settlements
Provided federal tax incentives encouraging the use of structured settlements (Correct answer)
Banned lump-sum lawsuit payments

Correct answer: Provided federal tax incentives encouraging the use of structured settlements

The Periodic Payment Settlement Act of 1982 codified federal tax exclusions for structured settlement payments, making them attractive as a settlement tool.

Question 27: What is the best way for a payee to protect themselves from predatory structured settlement purchasing practices?

Accept the highest nominal lump sum offered without reviewing the discount rate
Get independent legal advice, compare multiple quotes, and ensure the full required disclosures are provided (Correct answer)
Only work with companies that advertise on national television
Sign quickly to lock in the offer before it expires

Correct answer: Get independent legal advice, compare multiple quotes, and ensure the full required disclosures are provided

Independent advice, competitive bidding, and careful review of all required disclosures together form the strongest defense against exploitative terms in a structured settlement sale.

Question 28: What is the consequence if a structured settlement transfer is completed WITHOUT a qualifying court order?

The payee must return the lump sum immediately
The factoring company owes a 40% federal excise tax under IRC Section 5891 (Correct answer)
The transfer is valid but subject to a late fee
The annuity issuer cancels all future payments

Correct answer: The factoring company owes a 40% federal excise tax under IRC Section 5891

IRC Section 5891 imposes a 40% excise tax on transfers that do not obtain a qualifying court order, effectively making non-court-approved transfers financially unviable.

Question 29: Which financial instrument is typically used to fund a structured settlement?

Certificate of deposit
Municipal bond
Money market fund
Annuity contract (Correct answer)

Correct answer: Annuity contract

An annuity purchased from a life insurance company is the standard funding mechanism for structured settlements, guaranteeing the periodic payments.

Question 30: What does the term 'net lump sum' mean in a structured settlement transfer?

The total face value of all payments being sold
The lump sum the payee actually receives after all fees, commissions, and court costs are deducted (Correct answer)
The before-tax value of the lump sum
The amount the annuity issuer returns to the factoring company

Correct answer: The lump sum the payee actually receives after all fees, commissions, and court costs are deducted

The net lump sum is the actual cash the payee receives in hand after subtracting all fees, closing costs, and attorney fees from the gross present value the factoring company calculated.

Question 31: Why does a higher discount rate result in a lower lump-sum offer to the payee?

Higher rates require larger cash reserves from the factoring company
A higher discount rate reduces the calculated present value of future payments more aggressively (Correct answer)
Higher discount rates increase annuity issuer costs
Higher rates mean more court fees are charged

Correct answer: A higher discount rate reduces the calculated present value of future payments more aggressively

The discount rate is subtracted from future payment values to calculate today's worth — a higher rate means each future payment is discounted more steeply, producing a lower lump sum.

Sell Structured Settlement Knowledge Assessment

This assessment tests knowledge of the structured settlement selling (factoring) process, covering legal requirements, court approval under state Structured Settlement Protection Acts, financial considerations, buyer pricing and discount rates, and federal tax implications for payees transferring payment rights.

Questions

35 min

Time Limit

70%

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