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The Periodic Payment Settlement Act (PPSA) was made law in 1982 by President Ronald Reagan. It was designed to promote the use of structured settlements by providing tax incentives. During this time, it became part of the IRS code. It enables a variety of income types to be not be included in gross income when reporting income tax. There is now legislation in place designed to protect the rights of structured settlement owners. It is known as the Structured Settlement Protection Act (SSPA) and became law in 2002. These are a set of laws that protects structured settlement recipients when it comes to having their long-term regular payout given in a lump sum payment by a third party provider.

Structured Settlements

Structured Settlement 10According to Law Dictionary.org, structured settlements occur when annuities are purchased to make payment after a legal claim is settled. These are funds that will earn interest until they are all paid to an individual legally entitled to receive them. If a person needs to have money for the purchase of a large ticket item or participate in an investment opportunity, their scheduled structured payments may not meet this need. There are companies that will purchase the future payments of an individual’s structured settlement. These companies provide a one-time lump sum cash payment for a percentage of the funds due from a structured settlement. Unfortunately, individuals in the past have often been taken advantage of by dishonest companies. They would pay a fraction of the true value of the settlement amount. There was often no disclosure of hidden fees and other administrative charges. Many people sold all of their future payments and were left with little or no money. This resulted in individuals experiencing financial devastation. States around the country began to enact legislation to prevent this situation from occurring. In 2002, the federal government got involved and passed the SSPA.

Protections

The SSPA was designed to make selling a structured settlement more difficult. One of the main influences for the law was the protection of individuals receiving settlements following the events that occurred on 9/11. According to Settlements.org, it was intended to make certain individuals were aware of the consequences involved with selling their structured settlement for a lump sum payment.

PROFESSIONAL ADVICE

People who are considering selling their structured settlement can get advice from a financial professional concerning everything involved with getting a lump-sum payment.

COURT APPROVAL

Prior to a structured settlement being sold, it has to be approved in a court of law. The judge will decide if the conditions of the sale will benefit the seller. The judge has the authority to prevent such a sale from going forward.

EXCISE TAX

If a sale occurs that doesn’t meet with a court’s approval, it will be subject to a 40 percent excise tax. This will be applied at the time of transfer.

judgemoneyCANCEL SALE

Any individual who is selling their structured settlement has the right to cancel the sale within a specified period of time. The time is determined by the state where the structured settlement recipient resides.

DISCLOSURE

When a person is considering selling their structured settlement, the purchaser must provide them with full disclosure regarding fees or any other expenses associated with the sale. This must be done prior to the sale taking place.

Tax-Free Status

One of the most significant changes brought about by the SSPA was the tax-free status given structured settlement income. According to annuity.org, there is language in the law that confuses many annuitants. The settlement providers are not able to defer, accelerate, decrease or increase the payment amounts at the request of the recipient. Should the distribution change, the funds received from the settlement could lose their tax-free status. When this happens, the recipient would be required to pay taxes on the amount they receive that is different from the settlement amount.