The passage of the Federal Periodic Payment Settlement Act in 1982 signaled the start of the government’s recognition of the need to put into place a system to provide compensation for victims of accident and personal injury and/or damage. The central aspect of this law was the categorization of these payouts as tax exempt. The tax exemption includes interest accrued or capital gains revenue of these amounts.
While this is a federal law, the development of these kinds of funding vehicles was best left to the prerogative of state legislatures. Thus, the foremost structured settlement protection act was passed by the State of Illinois, which was the base for the other states to follow. Formally, the Structured Settlement Protection Act or 215 ILCS 153 has the following major provisions:
a) Sec 5 of the law provides the definitions of terms that are covered in the law, such as ‘Annuity issuer’ and ‘Discounted present value’ among others;
b) Sec 10 of the law states the required disclosures that need be made to the payee or recipient. There is also a time frame where the recipient or payee is required to provide a disclosure statement as to the specifics of the structured settlement;
c) Sec 15 of the law stipulates the transfer of the structured settlement payment rights as well as the limitations to the same;
d) Sec 20 of the law describes the effects of transfer of the rights in structured settlement payment rights. There is first a discussion of the rights and then a description of the said rights.
e) Sec 25 of the law defines the procedure for the approval of transfers of the structured settlement payments;
f) Sec 30 of the law states the general provisions applicable to structured settlements, including the construction of the provisions of the signed agreement;
g) Sec 35 of the law provides for the applicability of any transfer of rights under this law and the structured settlement agreement.
These are the main provisions that are also found in other laws covering structured settlements in other states. The states that have adopted these major provisions from the Illinois law are Alaska, Delaware, Louisiana, Maine, Maryland, Minnesota, North Carolina and Ohio.
Other states, such as California, obligates the purchaser of a structured settlement to pay USD1,500 for independent professional advice in evaluating sale, regardless if the actual transfer occurs in the future. New York, on the other hand, requires that all communication on the transfer of structured settlements need to be done through the US Postal Service and not by email.
The Federal Government, in response to the developments from the State level, codified these changes in the Internal Revenue Code, specifically Section 5891. The following are the two salient features in force now:
a) The Internal Revenue Code requires that all the transfers of structured settlements be approved by the court and complies with the SSPA provisions of the state where it was formalized. There is also a mandate that the transfer is in the best interests of the original recipient as well as their dependents.
b) The Internal Revenue Code imposes a punitive provision of an excise tax valued at 40% of the difference between the full value of the structured settlement and the amount pegged as consideration of the transfer of the structured settlement. This is put in place to penalize those that work outside the industrial norm set by law.