by John Darer® CLU ChFC MSSC RSP CLTC
If a structured settlement buyer has given you financial advice to sell your structured settlement and place all or part of the proceeds into mutual funds, I am interested in speaking with you about your experience and obtaining copies of any sales literature that you may have been given.
Representatives of structured settlement buyers may be providing unlicensed and potentially harmful financial advice.
Giving up the safety, security and guarantees of a structured settlement for a discounted price and then placing it in an investment that is going to bounce around may not be appropriate in its face. But there is an additional element to the suitability issue that you need to be aware of, the potential tax trap.
Mutual funds try to qualify as a so-called "regulated investment company" under the Internal Revenue Code, so that they can "pass through" their income and gains to shareholders without having to pay taxes at the fund level on the dividends and capital gains they realize. This avoids a "double taxation" on that income – taxation at both the fund and shareholder level. To qualify as a regulated investment company for those purposes, the fund must pay out at least 90% of the income and gains it realizes for its tax year. In addition, to avoid penalty federal excise taxes at the fund level, each calendar year a fund must pay out 98% of its calendar year income and 98% of its capital gains realized through October 31st of each year.
The December 2013 issue of Franklin Prosperity points out " if you buy into a (mutual) fund just before a large distribution, the fund's value falls by the amount of the distribution. You would also trigger an immediate tax consequence on after-tax dollars" Franklin refers to December as a "danger period" for the tax trap.
So, to recap…
- Sell your structured settlement Discount!
- Invest the discounted sale proceeds of your structured settlement in a mutual fund in November or December ? Discount!
- Effect of immediate tax consequence Discount!
- You win "shopper of the year award" Are you kidding? How much do you have to earn just to break even?
I mean no disrespect to Progressive, but you'll enjoy the above if you recite the first 3 of the above 4 points aloud with your "discount" with your most exuberant Flo from Progressive accent.