Sale of Settlement Annuities by US Citizens Living Abroad and Acquisition of Payments by International Banks
February 21st, 2017 | By Kathy Manson from Catalina Structured Funding, Inc.
The reassignment of annuity payments on the secondary market is a hot topic that effects both citizens residing in the United States as well as those living abroad. In this article we will address…1) What is the assignment of structured settlement annuity payments by citizens and non-citizens living abroad?
2) How is assignment accomplished; and
3) Who are these payments being re-assigned to?
The answers to these questions and the requisite underwriting of the transactions impact larger international banks that have explored this market including Deutsche Bank, DZ Bank, Credit Suisse as well as domestic banks, annuity issuer and life insurance companies.
What is this Assignment of Annuity Payments by U.S. Citizens and Former U.S. Citizens
Before addressing the process, by which annuity payments are assigned from the original payee to a third party individual or bank, it is important to review what exactly a structured settlement is. In the United States, civil lawsuit are often resolved before the case reaches a judge or jury. When a case is settled by agreement of the parties (as opposed to a judgment by a judge or jury), the parties can agree to pay the money upfront or through a series or single deferred payment in the future.
For example, say injured person (the “Plaintiff”) files suit against the negligent driver (the “Defendant”) of a car that hit him. After the complaint is filed, the Defendant or the Defendant's insurance company approaches the Plaintiff and makes an offer to settle the case. The offer is either a certain amount upfront or periodic monthly payments over time. The payments over time, quite naturally, is for an aggregate larger than the one-time payment upfront. The Plaintiff fond of the idea of periodic payments, but hesitate to rely on the trustworthiness or creditworthiness of the Defendant, agrees to take the deferred payment stream, but only if the Defendant or the Defendant's insurance company agrees to purchase an annuity to fund the payment obligation overtime. The Defendant (and in some cases, the Plaintiff or Plaintiff's counsel) than contacts annuity issuers to determine what terms are available to pay the potential settlement.
The arrangement by which a civil lawsuit is settled in the above referenced matter is referred to in the United States as a “structured settlement”. This mechanism can be utilized to settle cases as wide ranging as a dog bite cases to a significant medical malpractice or product liability lawsuits. In this vein, the financial payout could be for a one time lump sum payment 5, 10, 15 or even 30 years from the date of the settlement or significant monthly payments to compensate for a serious injury. Once the parties agree to terms and the financial terms are locked in and the Plaintiff and Defendant cannot mutually modify them.
Since the financial terms are “locked in” and the parties cannot modify them once the funding mechanism is issued, a secondary market has been created by which the Plaintiff (now the “Payee”) can locate factoring companies that are willing to buy some or all of deferred income for an immediate lump sum. The creation of this marketplace is a natural outgrowth of the process as when one agrees to a specific payment stream for the future, their circumstances may change requiring a need for a lump sum. For example, a 20 year old that agreed to a monthly payment stream may decide 10 years into receiving that stream that he or she would prefer to liquidate some or all of the annuity in order to acquire the funds needed to buy a house.
How is the Assignment Accomplished if an Individual is EXPAT No Longer Living in the United States?
In order to protect the consumer and ensure that the liquidation of deferred income was set up fairly, the U.S. Congress enacted a law that provided that these structured settlement payments could be liquidated if the individual states passed laws that governed the process and ensured that the liquidation was in the best interest of the payee. This law impacts not just current people living in the United States by also a person living in a foreign country. These laws detail disclosure periods, what a judge must find prior to authorization the sale of some or all of the annuity and who must get notice of the proposed transaction.
Generally speaking, the law of the state where a person resides governs. If a recipient of a deferred financial product is no longer living in the United States it is not entirely clear what law governs, but a solid argument could be made that it should be the law where the annuity issuer is domiciled. By way of example, if a person is receiving an annuity from Metropolitan Life Insurance Company and is living abroad, it may be appropriate that the transaction be documented under the laws of the State of New York and filed in New York as the Metropolitan Life Insurance Company is domiciled there.
Who are these Financial Products being Re-Assigned To?
While the payee of the annuity contracts with a factoring company it is rarely the factoring company that “buys” or gets the “assignment” of the income stream. Instead, these factoring companies merely act as brokers and after they agree purchase an income stream they find a willing assignee of the stream and the factoring company agrees to receive a lump sum. In other words, the factoring company accepts a lump sum greater than the amount they agreed to pay the Payee and that difference represents the factoring company's profit.
In the past, most of the buyers/assignees of these re-assigned structured settlement payments were large international institutions including banks like Deutsche Bank, DZ Bank, etc. Nowadays many of these payments are still assigned to large institutions, but a market has arisen whereby private individuals in the United States and abroad have contracted to purchase payments in the secondary market. Regardless of the location or type of “buyer” or “assignee” of the deferred income, the laws of the United States and the state where the Payee or annuity issuer is domiciled controls the process.