There is a booming trade in Secondary Market Annuities (SMA’s). We’re not talking about viaticals or life settlements- rather, a Secondary Market Annuity (SMA) is a payment stream that stems generally from the settlement of a legal dispute that results in the wining party receiving a structured settlement paying compensation over a period of time.
Where Payments Come From:
There are several Types Of Secondary Market Annuity Payments, but here we will stick to Structured Settlements.
In a case that settles using a structured settlement, the liability for the future payments may be retained by the losing party, or it may be shifted to a third party. However in both situations, an annuity is purchased from a top-tier carrier to fund the future payment obligations that the winning party negotiated and is entitled to.
The annuity may be owned by the losing party, or by the third party, however all the payment stream is payable to the winning party as a payee. The payee does not own the asset, rather it owns the right to receive the payment stream.
Selling Structured Settlement Annuities
Now we all know that times change, and often, payees decide they may need a lump sum now rather than the long payout they agreed to in the original settlement. A bustling and competitive business exists to purchase structured settlement payments for cash now. These payment originators, or ‘factoring companies’, compete to get sellers to sell their payments. As theirs is a capital intensive business of buying payments, they require constant inflows of funding to stay in business.
This is where secondary market annuities originate. Individual investors are now able to buy these existing payment streams at yields that far exceed comparable period certain fixed annuity products available in the market today.
Beware- factoring companies are solely in business for themselves and have no duty to protect an end investor. You wouldn’t buy a house without title insurance, would you? Likewise, it’s critical that investors use a competent broker who works with a reputable source of supply and is experienced in the business, who understands the process and uses extensive legal review, to ensure things are done right.
Transferring A Secondary Market Annuity Payment Stream
In a traditional annuity purchase, the asset is a contract with the insurance company. The investor is usually owner AND payee/beneficiary of that contract.
In a structured settlement, the Owner is generally a Qualified Settlement Fund or the defendant in the original settlement. The initial payee is the winner of the settlement. They do not own the asset, but rather have the rights to receive the payments.
A “Secondary Market Annuity” is created when a new investor seeks to buy an existing payment stream. For a new investor to become the payee of an existing payment stream, the terms of the original settlement are changed to re-assign the rights to receive the payments to the new party. Ownership remains the same, but the right to receive some or all of the payments may be assigned to a new party.
Wether the original settlement is the result of some sort of Court ordered settlement or a private settlement outside of court, a change in the terms of the settlement to change the payee requires that a Court of competent jurisdiction be involved. See our discussion of The Legalities Of Transfer.
The Role Of The Court In Structured Settlement Annuity Transfers
Let’s be clear- the Court’s role is NOT to judge the validity of the transfer or in any way guarantee the transfer- the Court simply is in a position to rule if the transfer is in the payees best interest. The Court Order is just one of several key pieces.
Lets look at an example. A plaintiff lost their ability to work in a car accident, and received a lifetime monthly payout in compensation, and has a gambling problem. Years later, if the payee seeks to sell their payments, the Court may rule to not allow the sale, on the grounds that the original payee may blow the lump sum of cash and end up on public support systems. It’s not in the payees interest to have the lump sum and not the income.
Now even if the case above was approved, the Court offers no judgement or guarantees if the payee has other claims to the payment, and doesn’t even check if they actually have the payment in the first place! The payee may have sold it privately to pay gambling debts years ago, and the Court would not know.
Knowing that the Court is just one of many step, a proper assignment requires these other summarized items to be complete:
Summarized Steps In A Transfer
Any one thing done improperly can interfere with a new payee receiving the payments. And there are a wide range of ways to make the documents appear to be complete, but still have deficiencies.
Remembering that an originator is in business for themselves to get a deal done, it’s key here to recognize the value a highly experienced reviewer or intermediary party with skin in the game provides. Indeed, it is critical to protect an end investor.