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Hardship Commutation
Current and future interests of the annuitant should be fully considered before borrowing against future annuity payments.
Hardship Commutation
Current and future interests of the annuitant should be fully considered before borrowing against future annuity payments.

At ROBINYOUNG & COMPANY, we strategically and carefully design a flexible settlement plan that meets the ongoing and anticipated future needs of our clients. However, despite this careful planning, life sometimes changes in ways that could not have been predicted at the time of the settlement.

Occasionally, circumstances arise which require an annuitant to need immediate access to cash to cover financial or medical emergencies or other needs. If the annuitant has already spent their upfront cash (the portion of the settlement that was not put into a structured settlement annuity), he or she may need to liquidate some future annuity payments.

Structured Settlement Terms per IRC 5891

Due to tax laws, which provide for tax-free income status and security, the structured settlement cannot be accelerated, deferred, increased or decreased, sold, mortgaged, assigned, pledged, hypothecated, or otherwise transferred or encumbered, either directly or indirectly, by the annuitant unless such sale, assignment, pledge, hypothecation, or other transfer or encumbrance has been approved in advance in a “qualified order” as outlined in Section 5891(b)(2) of the Internal Revenue Code of 1986, as amended (a “Qualified Order”) and approved by a court of competent jurisdiction and otherwise complies with applicable state law, including without limitation any and all applicable state structured settlement protection statutes.

Life Company/Assignee

In light of the federal tax law created by H.R. 2884, Section 5891(b)(2) of the Internal Revenue Code of 1986 and related state legislation, in certain circumstances where a financial or medical emergency qualifies and meets court approval, some life insurance companies will consider permitting a Hardship Commutation to liquidate an immediate lump sum in exchange for the rights to future guaranteed structured settlement payments.

In this event, while remaining consistent with applicable federal and state statutes, these life insurance companies work with the annuitant to permit Hardship Commutations only as reviewed and approved by a court of competent jurisdiction.

Factoring Companies

In the event that a specific life insurance company does not work directly with annuitants in this regard, an alternative is to seek a third party factoring company. With court approval and following federal and state statutes, the annuitant may qualify to assign all or a portion of their remaining future guaranteed structured settlement payments in return for an immediate lump sum based on the present value of the assigned cash flows.

While selling future guaranteed structured settlement payments may sound reasonable, the immediate lump sums these third party factoring companies offer are often heavily discounted and come with high service fees and expenses. This leaves the annuitant with a reduced benefit and little or no future income to rely on, which offsets the original intent of the settlement plan.

Most recently, in an article written February 3, 2008 in the Providence Journal, Judge Vogel refused to allow a 28-year-old Rhode Island mother to sell a portion of her structured settlement payments, to a factoring comany, for a 60 percent discount off present value.

Making an Informed Decision

At ROBINYOUNG & COMPANY, we advise our clients to seriously consider the disadvantages and risks involved in factoring a structured settlement annuity. However, if an annuitant decides to move forward with this transaction, it is critical that ROBINYOUNG & COMPANY are involved to help determine whether the sale will meet the “best interests” test of the court.

Prior to approval, the court will review the financial implications of changing a structured settlement, including:

  • Costs, fees, and charges
  • Discount rates
  • Penalties
  • Discounted present values of the payments
  • Legal and tax implications of the transfer

Learn more by contacting ROBINYOUNG & COMPANY.

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