by John Darer
Proper structured settlement documentation is necessary to assure that the objectives of settling parties are met and to achieve Structure Zen™.
A qualified assignment is an important component of a structured settlement transaction. As part of its operation, the future periodic payment obligation to the payee is assigned to a qualified assignment company (with some exceptions, generally a special purpose company which is a subsidiary of the annuity issuer). Qualified assignments enable a Defendant, Insurer or Qualified Settlement Fund to achieve a complete novation of the future periodic payment claim established by suit or agreement, through a substitution of obligors.
In order of operation in the structured settlement process, first a periodic payment obligation is established in the Settlement Agreement and Release. The assignee then takes on the obligation by way of the qualified assignment agreement and subsequently acquires a "qualified funding asset" which, in accordance with IRC 130(d), can be an annuity or an obligation of the United States government. The purchase is made with funds it receives from the Defendant, Defendants Insurer or Trustee/ Adminstrator of a Qualified Settlement Fund. The qualified assignment company directs the annuity issuer or trust company holding the US treasury obligations to make payments to the payee. If you would like to see a flow chart showing how a structured settlement works please click here
All qualified assignment agreements contain a "Failure to Satisfy IRC Section 130(c)" unwind clause, which on occasion I've playfully referred to as the "Sneaky S.O.B. clause". The purpose of the clause is to protect the qualified assignment company from taking on an assignment that does not meet the criteria of IRC Section 130(c) and thereby jeopardize the assignment company's tax status. Needless to say the clause is necessary, for example, as a deterrent to overly optimistic attempts to characterize some atypical cases as physical injury. The tax exemption to qualified assignment companies provided under IRC 130 is what makes the majority of structured setlements possible in 2013, as it has since 1983, when the Periodic Payment Settlement Act of 1982 was signed into law by President Ronald Reagan.
This clause has from time to time given some defense lawyers "twisted blood" . An unwind of the qualified assignment might actually hurt the payee as well, particularly if a qualified assignment release and pledge agreement has been used to give the payee a security interet in the annuity. Such a security interest would not apply if there was an unwind. To help attorneys work through this issue when it arises, 4structures.com LLC President John Darer has created a short video on Qualified Assignment Paragraph 9 and the criteria required to satisfy IRC 130(c).