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Selling Structured Settlements: Advice from the Experts

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Winning a lawsuit is a great victory. However, after a judgment is obtained at trial, the issue of payment on the judgment still remains. Structured settlements which allow defendants to purchase annuities to pay a judgment in installments over time have become increasingly more common, even in smaller-scale cases under $50,000. This requires that plaintiffs and their lawyers have an understanding of structured settlement agreements as well as the sale of such agreements, in order to protect an individual’s interests in the proceeds of their judgment award.

Considering that a lump sum payout can create tax liability for the payee, one of the most significant benefits of a structured settlement agreement is that the payments are tax free on both the federal and state level. Additionally, attorney's fees can often be reduced, and a steady income over an extended period of time may be a better option to individuals concerned with having to make decisions about money management and investing.

However, there are many issues which need to be considered before entering into a structured settlement agreement. For example, plaintiffs who agree to structured settlement payments may at some point find themselves in circumstances where they need to sell their interest in future payments in order to receive a lump sum to pay for unanticipated expenses.

In most states there are laws restricting the sale of structured settlements, and tax-free structured settlements are also subject to federal restrictions with regards to their sale to third parties. While most lawyers and their clients may not have much knowledge about the sale of structured settlements, some leading experts in the field have offered their guidance for a Structured Settlement Roundtable.

The industry experts interviewed cited the biggest mistakes that plaintiffs make when entering into structured settlement agreements include: “over-structuring” which does not take into account changing circumstances and liquidity needs; not understanding their contractual rights; not understanding state protection statutes; not seeking professional advice; and not soliciting and comparing multiple offers and inquiring about options.

Earl Nesbitt, former Executive Vice President and General Counsel for Settlement Capital Corporation and founding member of the National Association of Settlement Purchasers (NASP), advised that both plaintiffs and their lawyers should “make sure that the underlying settlement documents allow a payee to transfer and assign their future structured settlement payments to a third party in a court – approved transaction completed in accordance with an applicable State Transfer Statute.”

Individuals wishing sell their structured settlement payment rights need to be aware of the legal hurdles they need to jump, since state judges or responsible administrative authorities are typically required to apply a "best interest" test which considers the welfare and support of the sellers' dependents as well.

Furthermore, according to Ohio lawyer Patrick Hindert, a leader within the structured settlement industry and co-author of "Structured Settlements and Periodic Payment Judgments", most state laws governing the sale of structured settlements “require a finding that sellers either have received independent professional advice or have knowingly waived the right to receive it. At least eleven statutes require findings that sellers have in fact received independent professional advice and waivers are not permitted.”

Lastly, the experts interviewed also advised that potential sellers of a structured settlement need to shop around in order to compare their options. One factor to take into consideration is whether a purchaser belongs to the National Association of Settlement Purchasers (NASP), a professional association that promotes best practices among its members and provides industry education.

While business practices and interest/discount rates among purchasers can vary widely, there are ethical settlement purchasing companies to choose from. Terry Taylor, founder of structured settlement firm Plaintiff Structures and lobbyist for structured settlement regulation said that Strategic Capital “talked one of my referrals out of selling his structure before filing for bankruptcy, when I could not convince him to do that.”

While most structured settlement industry experts agree that the sale of structured settlements should be a last resort option, some individuals may find themselves in circumstances that justify or even require it. But lawyers as wells as their clients need to understand the ramifications of these types of transactions before any documents are signed.

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