Sell Structured Settlement Consumer Protections and Rights 2 — Questions and Answers
Question 1: Under most state SSPAs, which parties must be notified when a structured settlement transfer petition is filed with the court?
- 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
- The seller's attorney and the seller's financial advisor 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 2: If a structured settlement transfer receives a qualified court order, how does IRC Section 5891 treat the transaction?
- The 40% excise tax still applies but at a reduced rate of 20%
- The 40% excise tax does not apply to the transfer (Correct answer)
- The tax obligation shifts from the factoring company to the seller
- The tax is deferred until the future payments would have been received
Correct answer: The 40% excise tax does not apply to the transfer
IRC Section 5891 exempts transfers that receive a qualified court order from the 40% excise tax, directly incentivizing factoring companies to seek proper court approval.
Question 3: What does 'independent professional advice' mean under most SSPAs?
- Advice provided by the factoring company's in-house legal counsel
- Guidance from a licensed attorney or financial advisor with no connection to the transaction (Correct answer)
- Information included in the required transfer disclosure document
- Advice from a government-appointed consumer protection advocate
Correct answer: Guidance from a licensed attorney or financial advisor with no connection to the transaction
Independent professional advice must come from a qualified professional who has no financial interest in or connection to the transfer, ensuring the seller receives truly unbiased guidance.
Question 4: A seller signs a structured settlement transfer agreement but then changes their mind within the statutory period. What right do most SSPAs give the seller?
- No right to cancel once a valid agreement has been signed
- The right to rescind the agreement within a specified cooling-off period (Correct answer)
- The right to cancel only if the court has not yet been petitioned
- The right to reduce the amount sold but not cancel the entire agreement
Correct answer: The right to rescind the agreement within a specified cooling-off period
Most SSPAs include a mandatory rescission period allowing sellers to cancel the agreement within a set number of days after signing without facing any penalty.
Question 5: What is the typical role of the annuity issuer during a structured settlement transfer process?
- The annuity issuer has sole authority to approve or deny all transfers
- The annuity issuer must be notified and may provide acknowledgment of the transfer (Correct answer)
- The annuity issuer sets the discount rate applied to the transfer
- The annuity issuer plays no role whatsoever in the transfer process
Correct answer: The annuity issuer must be notified and may provide acknowledgment of the transfer
Annuity issuers do not approve or deny transfers, but they must be notified of the pending transfer and typically provide an acknowledgment for administrative purposes.
Question 6: Which consumer protection concern was the primary motivation behind the passage of SSPAs in most states?
- Excessive delays in the court approval process
- Factoring companies charging unfair discount rates and providing insufficient disclosures (Correct answer)
- Annuity issuers refusing to honor their structured settlement payment obligations
- Government agencies improperly seizing structured settlement funds
Correct answer: Factoring companies charging unfair discount rates and providing insufficient disclosures
SSPAs were enacted largely in response to factoring companies that applied steep discount rates and provided minimal disclosures, leaving uninformed sellers with far less than the fair value of their payments.
Question 7: Under federal law (IRC Section 104), how are structured settlement payments treated for the original injured payee?
- Taxable as ordinary income in the year each payment is received
- Excluded from gross income and therefore tax-exempt (Correct answer)
- Taxable only to the extent payments exceed the original settlement principal
- Subject to capital gains tax when the payment rights are transferred
Correct answer: Excluded from gross income and therefore tax-exempt
IRC Section 104 excludes structured settlement payments from the gross income of the original injured payee, preserving the full intended value of the personal injury compensation.
Sell Structured Settlement Consumer Protections and Rights 2
Under most state SSPAs, which parties must be notified when a structured settlement transfer petition is filed with the court?