Sell Structured Settlement Consumer Protections and Rights 1 — Questions and Answers
Question 1: What does IRC Section 5891 impose on factoring companies that purchase structured settlement payments without court approval?
- A 40% excise tax on the transfer amount (Correct answer)
- A 25% penalty on the discount rate applied
- A criminal fine of up to $50,000
- Revocation of their business license
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 2: What is the primary purpose of state Structured Settlement Protection Acts (SSPAs)?
- To set maximum discount rates for all transfers
- To protect sellers by requiring court approval and full financial disclosure (Correct answer)
- To prohibit the sale of structured settlements entirely
- To regulate the investment activities of annuity issuers
Correct answer: To protect sellers by requiring court approval and full financial disclosure
SSPAs protect payees by mandating court approval of transfers and requiring disclosure of key financial terms before any sale is finalized.
Question 3: Which of the following disclosures must factoring companies typically provide to sellers under state SSPAs?
- The company's annual profit margins on similar deals
- The present value of the payments being sold and the net amount offered (Correct answer)
- The identity of all investors who will fund the purchase
- The factoring company's credit rating
Correct answer: The present value of the payments being sold and the net amount offered
SSPAs require disclosure of the present value of the payments and the net advance the seller will receive, enabling the seller to understand what they are giving up.
Question 4: What is a 'cooling-off period' in the context of structured settlement sales?
- The time a court takes to schedule a transfer review hearing
- A window of time after signing during which the seller may cancel the agreement without penalty (Correct answer)
- The delay between court approval and the seller's receipt of funds
- The period a factoring company has to secure an investor
Correct answer: A window of time after signing during which the seller may cancel the agreement without penalty
A cooling-off period gives the seller a specified number of days after signing to rescind the transfer agreement, protecting against hasty or pressured decisions.
Question 5: 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 transfer is in the best interest of the payee and their dependents (Correct answer)
- That the annuity issuer has given written consent to the transfer
- That the original tort defendant has been personally notified
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 6: Which party is typically required to receive independent professional advice before completing a structured settlement transfer?
- The factoring company's underwriting team
- A court-appointed special guardian
- The payee (seller) of the structured settlement (Correct answer)
- The original defendant in the underlying tort case
Correct answer: The payee (seller) of the structured settlement
Many SSPAs require the payee to obtain independent professional advice from an attorney or financial advisor unconnected to the transaction before signing a transfer agreement.
Question 7: What financial information about the transaction must typically be included in the court transfer petition?
- Only the total dollar amount of future payments being sold
- The seller's complete medical history and disability diagnosis
- The discount rate, all fees, and the net amount the seller will receive (Correct answer)
- The factoring company's list of comparable transactions and other clients
Correct answer: The discount rate, all fees, and the net amount the seller will receive
Transfer petitions must disclose the discount rate applied, all fees charged, and the net amount the seller will receive so the court can assess whether the deal is fair.
Sell Structured Settlement Consumer Protections and Rights 1
What does IRC Section 5891 impose on factoring companies that purchase structured settlement payments without court approval?