by John Darer® CLU ChFC CSSC RSP
If you have been involved in a settlement that includes the placement of a structured settlement annuity, you've most likely run into the "issue "of the reversionary paragraph (9 or 12) of Qualified Assignment documents which, on occasion, concerns some defense counsel. Generally (and informally stated for the purpose of this post) this paragraph says something to the effect that if the Settlement Agreement is terminated by a final non appealable decision by a court of competent jurisdiction, or in the event that Section 130(c) of the Internal Revenue Code isn't satisfied, then this Agreement (the Qualified Assignment) shall terminate and the "qualified funding asset" (the annuity) shall revert to the Assignor.
A qualified assignment under IRC Section 130(c) is designed to take on future periodic payments for damages that qualify under IRC 104(a)(1) and IRC 104(a)(2). This paragraph is designed to protect the qualified assignee against some "sneaky S.O.B." who tries to get creative and include elements of damages in a structured settlement that do not qualify** (e.g. punitive damages**) thereby exposing the qualified assignee's tax exclusion under IRC 130(c). Normally the interest earned by corporate ownership of an annuity is taxable. If you are a participant in a structured settlement why should you care?
Before there were qualified assignments, defendants (or insurers of defendants) would actually enter into structured settlements and own the annuities as an invested asset. If the defendant or defendant's insurer was willing to own the annuity that scenario exposed the plaintiff to the financial condition of the defendant or defendant's insurer as a general creditor. For a defendant or insurer in that scenario, even funding the structured settlement with an annuity issuer of the highest quality would require it to continue to carry the contingent liability on its books. Moreover, it would have to record the investment earnings on that annuity as income. The timing of the defendant or defendant's insurer tax deduction for the cost of the structure was also subject to debate. Enter a solution that has been a benefit to all parties since 1983, IRC Section 130!
IRC 130 (c) Qualified assignment
For purposes of this section, the term “qualified assignment” means any assignment of a liability to make periodic payments as damages (whether by suit or agreement), or as compensation under any workmen’s compensation act, on account of personal injury or sickness (in a case involving physical injury or physical sickness)—
(1) if the assignee assumes such liability from a person who is a party to the suit or agreement, or the workmen’s compensation claim, and
(A) such periodic payments are fixed and determinable as to amount and time of payment,
(B) such periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments,
(C) the assignee’s obligation on account of the personal injuries or sickness is no greater than the obligation of the person who assigned the liability, and
(D) such periodic payments are excludable from the gross income of the recipient under paragraph (1) or (2) of section 104 (a).
The determination for purposes of this chapter of when the recipient is treated as having received any payment with respect to which there has been a qualified assignment shall be made without regard to any provision of such assignment which grants the recipient rights as a creditor greater than those of a general creditor.
If these are the requirements of IRC 130(c)
why are some attorneys "getting their knickers in a twist" over the language of paragraphs 9 (or in some cases 12) of the typical qualified assignment documents? Stated informally, the new model documents do little to assuage the perception that somehow, some way, the assignee is going to come back and "screw" the defendant or defendant's insurer. The new model documents break the paragraph into two parts even though the paragraph is titled "Failure of IRC 130(c)". The first part deals with "if the Settlement Agreement is terminated by a final non appealable decison by a court of competent jurisdiction" and the second part actually deals with failure of IRC 130(c).
With respect to part 1, if the Settlement Agreement is declared terminated then there is no settlement- was no settlement. If there is-was no settlement then there can be no qualifed assignment because according to IRC 130(c)(2)(c) "the assignee’s obligation on account of the personal injuries or sickness is no greater than the obligation of the person who assigned the liability" The defendant or defendant's insurer is due money back right? So annuity issuers and assignees why not separate this paragraph out of the standard qualified assignment documentation and make it more clear.
With respect to part 2, the part that clearly deals with if there is a failure satisfaction of IRC 130(c), this is the area that seems to be the most concerning. Even after supplying copies of IRC 130(c) and showing that there is little likelihood of not satisfying it some attorneys will say "if you or "they" are so sure why does it have to be in there.?..Remove it". Setting aside the "sneaky son of a bitch" factor that concerns the assignee I'm inclined to agree with them. So what can we do to make things move more smoothly on this issue?
Suppose that the failure of IRC 130(c) language in the qualified assignment document was replaced by a warranty that states something to the effect that the damages being assigned, or taken on, do not include punitive damages and category of damages that the assignee is not wiling to take on? Wouldn't this firewall the "sneaky son of a bitch"? The parties then know that a breach of contract claim for the assignee is the remedy. Since they've made the warranty up front it removes the unknown factor that confounds some in today's documents.
Food for thought... any comments and suggestions on how this mousetrap can be improved are welcome!