The Settlement Alliance

The New IRS Private Letter Ruling: What Does it Mean for Claimants Who Want to Structure?

The New IRS Private Letter Ruling: What Does it Mean for Claimants Who Want to Structure?

Sep 16, 2014

Last week, the IRS released a Private Letter Ruling that included a section regarding the entrance of an annuity provider (presumably) into the secondary structured settlement market. This section reads,

Separate from the Qualified Assignment and Release Agreement, Assignee will provide Claimant with a Notice of Hardship Conversion option. The Notice of Hardship Conversion provides that the Assignee will consider a request from Claimant to convert future guaranteed structured settlement payments to an immediate lump sum payment, in certain qualifying hardship circumstances, if the request is approved by a court or applicable administrative authority pursuant to a qualified order under §5891(b)(2).

The qualified hardship circumstances are financial hardship due to medical expenses for handicap accessibility, job loss, loss of home, and the same type of expense for the payee’s dependents. Assignee expressly represents that it reserves the right to decline any hardship conversion request and that it will consider each hardship conversion request on a case-by-case basis. In addition, Assignee represents that it will not allow any hardship conversion in the first year after a qualified assignment.

This could mean big news for the annuity industry. Historically, most annuity providers have not offered factoring (the transfer of the annuity from the claimant to a secondary party in exchange for a lump sum payment). Moreover, for a structured settlement arrangement to qualify for special tax treatment under Internal Revenue Code §130, it must meet certain requirements. In addition to the excerpt above, the PLR goes on to state that the inclusion of a hardship conversion notice will not affect the assignment from qualifying under §130.

Assuming that this PLR was requested by an insurance company (which is likely, as the insurance company would be the “Assignee” referenced in the PLR), there are some points that could make this practice more beneficial for claimants, as opposed to what they might be offered from a factoring company such as J.G. Wentworth or Peachtree Financial:

  • More stringent screening process: The factoring companies prey on those who “want cash now,” caring little about whether cashing in the annuity is in the best interest of the claimant. The language in the PLR indicates a more rigorous process for screening hardship conversion requests, allowing claimants to convert their annuity payments into a lump sum only under certain circumstances, and at the discretion of the annuity provider.
  • More flexibility: The added flexibility of a hardship conversion option could sway decisions for those claimants still on the fence about investing in a structured settlement.

Potential benefits aside, the question remains—if the claimant requests a hardship conversion, will the insurance company provide a more attractive payout than a factoring company? Companies like J.G. Wentworth and Peachtree Financial make their money by purchasing future streams of payments for far less than the sum of their current market value. It is difficult to believe that the same type of practice would not exist within the insurance company.

Working with an experienced structured settlement consultant can help alleviate the need for undoing the structure. Rather than blindly selecting a structured settlement payment schedule recommended by the defense broker, a plaintiff broker can assist the claimant in determining what their anticipated future needs will be, and planning out a payment schedule that can include a combination of both periodic payments and lump sum payments at certain intervals. Educating the claimant up front, regardless of whether they select an insurance company that offers the hardship conversion feature, is the best method of developing a plan that will meet the claimant’s present and future needs.

We are proud to partner with the highest rated structured settlement providers in the industry:

  • American general Life Companies
  • Berkshire Hathaway Structured Settlements
  • MetLife
  • Mutual of Omaha
  • New York Life
  • Pacific Life
  • Prudential