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