by John Darer® CLU CFC MSSC RSP CLTC
My response ot the question in the title of today’s blog wthat was posed on Ask.Com on the date was first published. The answer is Yes and No.
A 2009 IRS Private Letter Ruling (200918001) issued to Symetra Assigned Benefits Service Company (SABSCO) demonstrated that, under specific conditions, a “restructured settlement” can be achieved through a structured settlement factoring transaction.
Briefly,
- Claimant needed funds to purchase a home and pay for education costs, contacted SABSCO about factoring the a specific lump sum payable to her.
- SABSCO and Claimant entered into a factoring transaction (“Factoring Transaction”) pursuant to which SABSCO agreed to pay to Claimant an initial lump sum payment on a certain date; and subsequent payments beginning on two future dates;
- Claimant uses cash method of accounting;
- Each of the payments that were made or to be made under the Agreement were excludable under former IRC 104(a)(2);
- SABSCO’s assumption of Defendant’s obligations was a qualified assignment pursuant to IRC 130
- The Agreement was not readily saleable when claimant and SABSCO entered into the factoring transaction;
- The aggregate amount of payments made by SABSCO pursuant to the factoring transaction does not exceed the amount being factored;
- The factoring transaction is structured settlement factoring transaction described in IRC 5891(b)(1) and is valid under applicable state laws.
In its discussion, the IRS reasoned:
As a result of the factoring agreement, Claimant has received an initial lump sum payment and has and will receive two subsequent payments, on defined dates, for her right to receive the lump sum being factored, thereby closing the transaction as to that portion of SABSCO’s periodic payment obligation.
Consequently the IRS concluded, if the Agreement was not readily saleable, and the Claimant uses the cash method of accounting, Claimant’s receipt of SABSCO’s initial payment and subsequent payments ” results in income of the same character as would have been received absent the factoring agreement”Cf. § 1.83-7(a).
My May 7, 2009 write up on the PLR 200918001, along with a downloadable copy of the PLR.
- It is important to recognize that restructured settlements frequently entail significant expenses.
- The lump sum or series of payments must first be discounted to present value before the restructuring process begins.
- This discounting is typically done at a rate of 11-13% or even higher, significantly affecting the final amount.
- If you don’t really need the cash right now, consider delaying the purchase or finding another source of capital instead.
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