How The Trust Works With Secondary Market Annuities

Secondary Market Annuities Business TrustOur wholesale company DCF Exchange has a unique transfer process for Secondary Market Annuities in which a business trust is the named buyer for court assignment purposes.  Our internal investor partners own the payments while they are in the trust, and DCF Exchange buys the payment stream from the trust and assigns its interest in the Secondary Market Annuities we sell to the end buyer at the closing transaction.

This process is different than the way we used to do business, and differs from how some other brokers of SMA’s operate.

But recently, I have addressed several questions about how Trusts work from both agents and clients alike, so I thought it would be useful to detail those answers here as well.

A Trust by the Wikipedia definition is:

“In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a settlor, who transfers some or all of his or her property to a trustee. The trustee holds that property for the trust’s beneficiaries. Trusts have developed since Roman times and have become one of the most important innovations in property law.”

When applied to our Secondary Market Annuities business, the business trust purchases SMA receivables.  These are held for the Trust beneficiary for a period of time, which may be just moments or a few weeks.

When a case is assigned out of the trust to an investor, the trust no longer has any ownership of or rights to that payment stream.  It is irrevocably assigned to you.  Any actions of the trust or even its dissolution in the future have no effect on that asset as the asset has irrevocably been assigned to you.

The use of a trust combined with payment servicing is primarily because of the quirkiness and rigidity of the Court ordered reassignment process.  In the ‘Old way’ of transferring payments were only able to be assigned once.  The reason is, simply, insurance company intransigence.  The carriers have no right to block the transfer of a payment stream, however for all practical purposes they make it difficult and very expensive.  Relying on the Court to rule, and only accepting the name and address as shown in the Court order, is one of the ways they make our life, well, interesting…

But the new process of transfer makes things easier- When the asset is transferred to the trust and payments are serviced, the trust can then re-assign to you, and you can re-assign to others, and payment servicing handles the change of recipient of the payments seamlessly.  There is no need to involve the insurance carrier and be subjected to their onerous requirements and stonewalling for clerical issues like address changes or heirs.  The payment servicing company handles that by being the constant recipient of the payment, and easily facilitates address changes or heirs and assigns for our clients.

But back to the trust for a moment- It’s critically important to realize that the flow of payments to you once transferred by the trust can not be affected by any subsequent actions of the trust.  They’re no longer trust assets, and once sold, are yours.

We got a few questions from a client by email recently, and our answers below may help others in their understanding.

Hi Than,

Looks like the court order is to transfer the payment to DCF.

DCF reassigns the payment to me via payment servicer.

My concern is what happens if something happens to you guys?

What level of protection do I have if you guys run into bankruptcy?

Is my payment stream only as good, safe as you guys are in business?

Regards, BA


 Allow me to detail our answers about the transfer of Secondary Market Annuities payments:

“Looks like the court order is to transfer the payment to DCF.”

Here’s the Key Correction- Payments are transferred to DCF Business Trust.  The Trust exists solely to administer assets, and administers them for a relatively short period of time while it is in stock.  Payments are NOT assigned to DCF Exchange.

 “DCF reassigns the payment to me via payment servicer.”

The payments are made by the Carrier to ‘DCF business Trust, C/O (Payment Servicer) and when the payment stream is assigned to you, the Trust no longer has any rights to the payment stream.  The payment servicer can still receive the check payable to “DCF Business Trust” but pursuant to the Absolute Assignment by DCF Trust to you, it makes the payments to you because they are your payments.

We have used this structure before in certain life contingent cases where a Trust receives the payments for you and administers certain functions related to the case.  We also modeled how the major institutional players in the market, like JG Wentworth, structure their securitized bond offerings, and they too use this same fundamental structure.

“My concern is what happens if something happens to you guys?”

DCF Exchange LLC has ownership of the payments only instantaneously, at the point of closing when we acquire from the Trust and simultaneously re-assign to you.  Subsequent actions by DCF or an agent has no effect on the payments, either while in inventory or after sale, because we do not own them.

 Furthermore, other actions of the DCF Business Trust have no bearing on your payments because you are not becoming a beneficiary of the DCF Business Trust with your purchase.  None of our cases depend on any other case for performance.  All interest in the case is transferred to you, so whatever happens to that Trust in the future is likewise of no consequence, because it’s not involved once the case is sold via the Assignment.

“What level of protection do I have if you guys run into bankruptcy?”

When we sell the payments from Business Trust to you via the assignment, they are no longer an asset of the Trust.  So if DCF Exchange or were to go bankrupt, the SMA itself never was an asset of ours, nor could it be brought into any BK proceeding.

Furthermore, a Trust can not, by definition, go out of business, because it is not IN business to begin with.  It’s merely there to hold the asset for a short period of time, and once sold to you via the Irrevocable Assignment, it’s no longer an asset held by the Trust.

“Is my payment stream only as good, safe as you guys are in business?”

No- your payment stream 10-20-30 years in the future is completely secure and whether we are in business or not has no bearing on the payments.  We don’t own it after it’s sold to you. 

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