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Introduction The Stock Market is inherently riskyCDs are paying low interest ratesMoney Market Accounts aren’t much betterGovernment Bonds also have low returnsIn today’s uncertain environment, what can one do?A new approach has emerged as a high yield, lowrisk alternative:Structured Settlements
Definitions Settlement The resolution of a dispute (Lawsuit) broughtby one party (Claimant) against another(Defendant), either as mutually agreed upon bythe parties involved, or as ordered by a court.For our purposes, we are discussing CashSettlements, the awarding of a sum of moneyto the Claimant.
Definitions Lump Sum Settlement The Claimant agrees to accept a singlecash payment to satisfy the terms of asettlement.Structured Settlement (SS) The Claimant agrees to take periodicpayments over a specified period of time tosatisfy the terms of a settlement, usually inthe form of an annuity.
Definitions SS Payment Rights Practically speaking, the future paymentsthat make up a SS.SS Factoring Transaction A transaction wherein future payments to aClaimant with a Structured Settlement aretransferred to another entity. The Claimanttypically receives a Lump Sum Paymentand a revised Structured Settlement.
Definitions Factoring Company (FC) An entity that purchases StructuredSettlement Payment Rights from claimants inexchange for cash and new, alteredStructured Settlements.
Lawsuit Example:Incident to Settlement Car strikes pedestrian (Plaintiff/Claimant)Driver (Defendant) makes insurance claimInjured pedestrian (Claimant) seeks legal counselSuit filed in Court (not shown)Parties negotiateSettlement reached either by agreement or trialPlaintiff &DefendantDefendantInsuranceCompanyPlaintiffCar strikespedestrianAttorneyseek lement AgreementNegotiated SuccessfullyJudgmentSettlement
Two Types of SettlementsA one-time payment. Once paid, aLump Sum Settlement is complete.DefendantPlaintiff/ClaimantMost Settlements combine aLump Sum Payment and aStructured Settlement.TimeThe scheduling of SSpayments can vary,as well as the amountof each payment, butboth are fixed by theSettlement contract.PaymentsPlaintiff/Claimant
Pros & Cons ofStructured Settlements For the Claimant Steady, guaranteed cash flow Helps planning for future expensesPayments not taxable as incomePayment amounts cannot be changedTerm of the agreement cannot be changedFuture payments are not easily made.liquid to provide current cash flow Most banks will not accept such income.streams as collateral for loans
What If?New Home CollegeCredit CrunchClaimant’s circumstanceschange, requiring fast cash ConstructionLoanTransportation Claimant needs cash quickly ClaimantJob lossIncome not sufficient to meetcurrent cash flow needs Illness or disability of a familymemberVehicle purchasePurchase of a new home
Obtaining Additional Cash From aStructured Settlement Claimant brings existing Structured Settlementto a Factoring Company to explore options Factoring Company proposes acash payment and a reducedStructured mentReducedStructuredSettlementLump SumPayment(A Factoring Transaction)Structured SettlementFactoring Transaction
“Restructuring” aStructured Settlement To protect the Claimant, a court must approvethe SS Factoring Transaction (Lump Sum Paymentplus NEW SS) as being in the legal “Best Interest”of the Claimant*Lump Sum is paid to the Claimant* Most states have enactedProposed ructured Settlement ProtectionActs (SSPA’s) to protectclaimants against unscrupulousFC’s. A typical SSPA requiresspecific disclosures by the FC tothe Claimant, as well as courtapproval of the transaction.
What Happens to the OriginalStructured Settlement? The Structured Settlement PaymentRights purchased by the FactoringCompany can be sold to investorssuch as: Hedge FundsPension FundsIndividualsFactoringCompanyPurchased SSPayment RightsInvestor
Example: Original and“Restructured” SettlementOriginal StructuredSettlement“Restructured” After 2 YearsFactoring Co. 5K/yrX 20 yrsPortion of SSSold to FC 10K/yrX 22 yrs 40KLump SumClaimantInsuranceCompanyInsuranceCompany 5K/yrX 20 yrsClaimant
InvestorBuys SS Payment RightsInvestorSS Payment Rights 5K/yr X 20 yrs 50K PaymentInvestor purchases SSPayment Rights from theFactoring CompanyPeriodic payments fromInsurance Company areredirected to the InvestorFactoring CompanyInsuranceCompany
How Factoring CompaniesMake MoneyValue Structured Settlement PaymentRights to establish a purchase price Purchase SS Payment Rights fromclaimants at a discount Resell these Payment Rights toinvestors at a profit
Win-Win-Win Claimants obtain the immediate liquiditythey are seeking, and can still benefit froma Structured SettlementFactoring companies realize a profit byselling the purchased Payment RightsInvestors are guaranteed a high rate ofreturn with very minimal risk
About the Market 6 Billion in Structured Settlements arepurchased annuallyThe present market value of all StructuredSettlements is approximately 100 BillionClaimants sell about 2 Billion of theseStructured Settlements to investorsthrough Factoring Companies each year
Investment Security These purchases carry very little risk becausepayments originate from highly rated LifeInsurance CompaniesPayments from the insurance companies arebackstopped by State Guarantee Funds Guarantees are generally limited to 300,000 per caseGuarantees vary, based on the venue of the lawsuitDepending on state laws, payments areprotected from most creditors because they areannuity payments**Exceptions: State and Federal tax authorities, divorcing spouses, and anycreditors’ claims existing before the contracts are purchased.
Grosnick Financial’s Role Grosnick Financial brings experience andexpertise to bear evaluating these opportunitiesfor investorsGrosnick Financial acts as an intermediary,assisting investors who wish to participate in thisarenaGrosnick Financial works with investors and theiradvisors to integrate these transactions intotheir overall financial planNothing in this presentation should be construed as legal or tax advice.Parties should confer with their professional advisors.
Investment Ideas forStructured Settlements Implement strategies such asgrandparent gifting to allowplanning for future college needsCreate mortgage loans to realizeadditional cash flowAchieve legacy planning by usingpayments to purchase life insurance
Who Else Can Benefit IRAs and Qualified Retirement Plans Obtain safe, low risk investments with a highInternal Rate of Return (IRR)Charitable Institutions Receive a guaranteed income for a specificperiod of time, facilitating planning andreducing fundraising anxiety in slow economictimes
What’s the Bottom Line? Rates of Return on Structured Settlementsshould be at least DOUBLE those ofinstruments considered to be the safestinvestment options: Bank Certificates of DepositGovernment BondsAnnuities purchased directly from LifeInsurance Companies
What’s the Bottom Line? Internal Rates of Return (IRR) 5% to 7% should be expected. Payments include principal and interest* At the end of the payment period, theinvestor has received back all of his/herinvestment*In essence, this is the exact opposite of a mortgage, where a borroweris given a lump sum of money and repays it over a period of time.
Example: Investment 145,000 IRR 5.5% Taxable InterestAssumptions Investment date1/1/2012 Interest accruesmonthly from1/1/2012 Values rounded tonearest dollar Consult your TaxProfessional aboutthe timing andcalculation oftaxable income.Qualified RetirementPlans do not incurcurrent taxableincome.Year1234PeriodicInvestmentPayments 145,000End of YearBalance 14,031 137,91314,031 131,11614,031 123,94614,031 116,382Calculated AsA DebtInstrumentA PeriodCertainAnnuity 6,9447,2356,8616,467 3644,364789101112131415Totals 145,000 210,467 65,467 65,467
Settlement "Restructuring" a Structured Settlement To protect the Claimant, a court must approve the SS Factoring Transaction (Lump Sum Payment plus NEW SS) as being in the legal "Best Interest" of the Claimant* Lump Sum is paid to the Claimant *Most states have enacted Structured Settlement Protection Acts (SSPA's) to protect
