An attorney recently called me with a concern about his client. He was about to settle a big case for his client — and he was worried because his client was a spendthrift. The attorney’s concern was that giving the client a lump sum of cash would result in the client quickly dissipating the money.
The attorney asked whether a structured settlement would help spread out the receipt of the settlement funds so that his client would not spend it too quickly.
However, this attorney had also seen the advertisements on late-night TV with singing Vikings proclaiming that anyone with an annuity should get their “cash now.” These companies often take advantage of individuals, and the individuals end up with pennies on the dollar.
In short, this attorney was asking us this question: “I like the idea of a long-term payment stream for my client, but how do I protect my client from the “cash now” factoring companies?”
Before sharing our favorite approach to solving this attorney’s concern, let’s take a look at legislation that was designed to protect individuals from “cash now” companies — but that, in practice, doesn’t provide significant protection.
Internal Revenue Code Section 5891
Anytime an individual wants to factor (sell) future structured settlement annuity payment rights, the Internal Revenue Code Section 5891 mandates that the transaction be approved by a court. These “Structured Settlement Protection Acts” are a fairly recent development in the law — and they provide some level of protection against the most predatory of companies.
However, most judges don’t review the details of the proposal thoroughly and don’t understand the underlying financial transaction. As a result, most factoring transactions are rubber-stamped by the judges and are approved will little resistance.
As a result, while the Structured Settlement Protection Acts add some administrative burden to the factoring companies, it does not sufficiently protect clients from the greedy “cash now” companies.
Our Solution: Set Up the Annuity to Pay Directly Into a Trust
Now, back to the attorney’s question: When an annuity is a good fit for a client, how can we protect the client from “cash now” companies?
Our favorite solution to this problem is to have the annuity payments paid directly into a basic settlement protection trust. Using this approach, the annuity payments that are paid into the settlement protection trust are then sent to the client.
Here’s the result: the client still receives the monthly payments from the structured settlement annuity. If he or she sees a “cash now” commercial and suddenly decides to go sell the future payments to a factoring company, the client won’t be able to go through with the transaction? Why? Because the client is not the payee or owner of the annuity. The trust is the owner and payee of the annuity.
Further, for the annuity stream to be factored, the trustee would have to agree to that transaction. The trustee is not likely to do that unless there is a good reason to factor that future payment stream.
If you have a case where an annuity seems to be a good idea, but you’re worried about your client succumbing to a “cash now” commercial in the future, give us a call. We can set up a simple settlement protection trust for that client’s structured settlement payment stream.
This approach won’t much additional cost, but it will protect your client from making unwise decisions with their settlement money.