Law sets procedures for settlement transfers

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Wisconsin has joined 48 other states that have laws in place intended in part to prevent the beneficiaries of structured settlements from having to pay excise taxes when they sell their future payments in return for upfront cash.

A law signed by Gov. Scott Walker on Wednesday establishes a series of procedures and definitions aimed at ensuring Wisconsin has a uniform system governing the transfer of structured settlements. Many settlement recipients, rather than collect money from a structured settlement over time, now choose to sell their future payments in return for a lump sum.

Advocates of such transactions say they can be a good way to raise money quickly to pay medical bills and similar expenses. An entire industry has been built up around the purchase of structured settlements.

The trouble, though, is that the transactions are subject to a 40 percent excise tax unless they are approved by a judge. Although Wisconsin judges now can and do give their assent to the transactions, there is no uniform set of rules governing how courts should proceed.

The new law is an attempt at rectifying the situation by putting in place a number of legal standards, many of them at least similar to those called for by model legislation circulated by the National Structured Settlements Trade Association and the National Association of Settlement Purchasers. With Walker’s signature on the legislation Wednesday, Wisconsin now not only defines various terms that are related to settlement transfers but also requires prospective purchasers to first make certain disclosures and establishes standards for the judicial review of the transactions.

The disclosure requirements come in response to the fact that structured settlements are often sold for less than their “face value” – that is, what the total amount of future payments would come to over time. Under the new law, a transfer cannot take place unless the seller is first told the difference between what he will be receiving from the lump sum and what he would otherwise be getting if he decided to collect all future settlement payments.

Also, a seller will have to be informed of any fees that will result from the transfer and will have to receive a statement advising him to seek out independent financial advice. A judge may not approve a transfer without first deciding that the transaction is in the best interest of the seller and his dependents.

The court can also take into consideration: the terms of the proposed transfer and whether the seller understands those terms; the seller’s physical and mental health and general financial situation; and whether the seller owes taxes, child-support payments or criminal penalties.

Other parts of the law govern the venue where someone who wishes to transfer a structured settlement should initiate the action. In general, a seller must start in the county where he lives. An amendment stipulates that if the seller is not a Wisconsin resident, the action can begin in the county where the settlement provider has its principal office or in any court that approved the settlement.

Another amendment concerns sellers who choose to initiate a transfer without having obtained independent financial advice. Under the change, the seller can embark on the transaction only after indicating in writing that he knowingly waived his opportunity to get the advice. Follow @TDR_WLJDan