Is This Lump-Sum Offer for Future Benefits Ethical?

Q. For 10 years my aunt has received monthly checks from a structured settlement after she was partially disabled in a car accident. The payments are a major part of her income, and she has few other assets besides her home.

Now she has been approached by a smooth-talking salesman offering a lump sum to buy the remaining 20 years of payments. She is tempted by the deal, thinking she can use some of the money to make repairs to her home and help a young relative with tuition, while gradually drawing down the rest to live on. Problem is, she’s not sophisticated about money, and as best I can tell, she’s being offered less than 20% of what I calculate to be the present value of the total she would get over the next 20 years. Is this ethical? How can I protect her from a bad decision?

A. There is nothing unethical about offering to buy your aunt’s future income stream for a fair lump sum, but this deal sounds suspect. I’m concerned that the salesman is trying to buy all her future payments, with a risk that she will go through the funds too soon. Most structured-settlement sales involve the transfer of only a portion of future payments. Worse, a lump-sum offer of less than 20% of the present value is a bad deal. Discounting the value of two decades of future payments would set the present value at about 40% to 50% of the total of those payments. Various factors rightly reduce a fair offer below that level, but nowhere close to the stingy offer your aunt is considering.

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Tell your aunt that she can sell just a portion of her future payments, giving her some liquidity now but leaving most of her guaranteed income intact. Insist that she consult an impartial attorney (recommended by someone other than the purchaser) and get a financial planner’s opinion. Solicit competitive bids from two or three reputable buyers to negotiate a fair offer that delivers a higher portion of the present value. Most states require a judge to certify that agreements like this are in the best interest of the seller, but some judges approve appallingly bad contracts. Your aunt deserves better.

Have a money-and-ethics question you’d like answered in this column? Write to editor in chief Knight Kiplinger at ethics@kiplinger.com.