Comparing traditional structured settlements with re-factored annuities is like comparing apples to oranges. A new investment product is showing up at settlement conferences.  Often referred as “re-factored annuities” or “secondary market annuities,” these are structured settlements that have been sold by an injured party to a factoring company (i.e., Peachtree, J.G. Wentworth), which then pools them and sells the re-packed structures in the secondary market. Tax issues and safety concerns make these investments riskier to injured parties than traditional structured settlements.

Tax Issues
Unlike structured settlements, where principal and interest are tax-free, re-factored annuities are essentially cash investments, just like stocks or corporate bonds. This means they are subject to any applicable federal, state or local taxes. They fall into the category of an after-settlement investment–without the unique tax benefits of a structured annuity or even lump sum payment negotiated during a settlement or mediation hearing.

Injured parties who opt for a re-factored annuity as part of settlement will owe taxes on each periodic payment received. Clients may be enticed by the higher rates of return often offered by a re-factored annuity (typically the main draw for these investments), but when determining the real rate of return after taxes, actual income can be similar to a traditional structure depending on the injured party’s tax bracket.

Safety Concerns
In general, life companies are not allowed to re-direct annuity payments from the factoring company that purchases the annuity to an investor. This means, injured parties who choose a re-factored annuity are receiving their income stream from the factoring company, not the life company (although the life company is still obligated to make the original payments).

Whether the injured party continues to receive the promised payments from a re-factored annuity depends on the factoring company’s financial stability. If the factory company fails, legal questions have arisen as to what happens to the stream of payments to the injured party. Although unlikely, if a life company fails, the injured party may not have protection rights under state guaranty laws. Whereas a structured settlement has multiple layers of protection, re-factored annuities have no safety net and are exposed to the same investment risks as any other market-driven investment.

What’s more, when the original owner of the structured settlement dies, the annuity may be challenged by creditors, ex-spouses, beneficiaries of the annuitant and others. Finally, state insurance regulators are pushing for legislation that would permit life companies to terminate benefits in the event of a change in ownership or assignment. If this legislation is successful, this would eliminate re-factored annuities altogether.

Comparing traditional structured settlements with re-factored annuities is like comparing apples to oranges. Tax obligations, safety worries and legal uncertainties that come with re-factored annuities are typically not what injured parties want or need when seeking long-term financial security for themselves and their families. Pooled re-factored annuity investments should be evaluated thoroughly and vigilantly with full disclosure of their pros and cons to an injured client.

Related posts:

1. U.S. Treasuries Provide Diversification to Structured Settlements
2. 529s vs. Annuities – Comparing Principal Security
3. Buyer Beware: Factoring Companies Use Creative Techniques to Lure Unwary Investors