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Federal legislation

In January 2002, Congress accepted Mr. Mikrut’s suggestion and changed tax law to make a statement about sales of structured settlement payments. It decided that the IRS would be able to impose a 40% tax on any difference between the value of the future payments sold and the amount paid to the person who wanted to sell. The sole exception was where the sale was approved by a Court under certain conditions. IRS Code section 5891 became effective in July 2002.

In 2001, Congress passed HR 2884, signed into law by the President in 2002 and effective July 1, 2002, codified at Internal Revenue Code § 5891.[10] Through a punitive excise tax penalty, this has created the de facto regulatory paradigm for the factoring industry. In essence, to avoid the excise tax penalty, IRC 5891 requires that all structured settlement factoring transactions be approved by a state court, in accordance with a qualified state statute. Qualified state statutes must make certain baseline findings, including that the transfer is in the best interest of the seller, taking into account the welfare and support of any dependents. In response, many states enacted statutes regulating structured settlement transfers in accord with this mandate.

Post-2002

Today, all transfers are completed through a court order process. As of November 11, 2008, 46 states(Map). have transfer laws in place regulating the transfer process. Of these, 41 are based in whole or in part on the model state law enacted by NCOIL, the National Conference of Insurance Legislators (or, in cases when the state law predates the model act, they are substantially similar).

Most state transfer laws contain similar provisions, as follows: (1) pre-contract disclosures to be made to the seller concerning the essentials of the transaction; (2) notice to certain interested parties; (3) an admonition to seek professional advice concerning the proposed transfer; and (4) court approval of the transfer, including a finding that it is in the best interest of seller, taking into account the welfare and support of any dependents.