Structured Settlements Legal Framework and Court Approval 1 — Questions and Answers
Question 1: What is the Structured Settlement Protection Act (SSPA)?
- A federal law that bans the sale of structured settlement payment rights
- State laws requiring court approval before a claimant can transfer structured settlement payment rights to a factoring company (Correct answer)
- A federal law regulating annuity pricing
- A law requiring all settlements to be structured
Correct answer: State laws requiring court approval before a claimant can transfer structured settlement payment rights to a factoring company
SSPAs are state statutes (enacted in all 50 states and DC) that require judicial approval of any transfer of structured settlement payment rights to protect claimants from unfair factoring transactions.
Question 2: What standard must a court apply when approving a structured settlement transfer under most state SSPAs?
- The transfer must yield the highest present value for the claimant
- The transfer must be in the best interest of the payee, considering the welfare of dependents (Correct answer)
- The transfer must be approved by the original defendant
- The transfer must be reviewed by the state insurance commissioner
Correct answer: The transfer must be in the best interest of the payee, considering the welfare of dependents
State SSPAs require courts to find that the transfer is in the best interest of the structured settlement payee, taking into account the payee's financial needs and the welfare of any dependents.
Question 3: Under IRC §5891, what federal excise tax is imposed on factoring companies that purchase structured settlement payment rights without court approval?
- 5%
- 10%
- 25%
- 40% (Correct answer)
Correct answer: 40%
IRC §5891 imposes a 40% excise tax on the factoring discount amount for any transfer of structured settlement payment rights that does not comply with the applicable state SSPA and obtain court approval.
Question 4: Which of the following is required to be disclosed to a structured settlement payee before a transfer agreement is signed under most SSPAs?
- The payee's full medical history
- The discounted present value being offered and the effective discount rate (annual percentage rate) (Correct answer)
- The life insurer's internal rate assumptions
- The defendant's current net worth
Correct answer: The discounted present value being offered and the effective discount rate (annual percentage rate)
State SSPAs mandate pre-contract disclosures to the payee including the gross advance amount, the present value of payments being sold, and the effective annual discount rate so the payee understands the true cost.
Question 5: What is the typical waiting period required between the disclosure statement and the signing of a transfer agreement under SSPAs?
- No waiting period is required
- 3 business days
- At least 3 days but commonly 3–10 business days depending on the state (Correct answer)
- 30 calendar days
Correct answer: At least 3 days but commonly 3–10 business days depending on the state
Most SSPAs require a waiting period (often 3 business days, sometimes longer) between the mandatory disclosure and the payee signing the transfer agreement, allowing time for reflection and independent advice.
Question 6: Which of the following parties must typically be notified when a structured settlement payee seeks court approval to transfer payment rights?
- Only the factoring company and the payee
- The annuity issuer, the qualified assignee, and any other interested parties identified in the settlement documents (Correct answer)
- Only the original defendant
- Only the state insurance commissioner
Correct answer: The annuity issuer, the qualified assignee, and any other interested parties identified in the settlement documents
SSPA procedures require advance notification to all interested parties — including the annuity issuer and qualified assignee — so they can object if the transfer would violate the settlement terms.
Structured Settlements Legal Framework and Court Approval 1
What is the Structured Settlement Protection Act (SSPA)?