by John Darer® CLU ChFC CSSC
At the creation of a structured settlement that includes a qualified assignment, the proper memorialization of the sequence of events is critical to the long term tax treatment of the structured settlement payments in the plaintiff's recovery. Defense counsel need to be aware that proper memorialization is also in the defense interest to assure a novation is achieved. Plaintiff and defense counsel alike need to be alert that the settlement documents accurately reflect the transaction.
The sequence of events is as follows:
- Parties negotiate a settlement, the consideration for which includes an obligation to make future periodic payments.
- The obligation to make the future periodic payments is assigned to a qualified assignment company pursuant to the qualified assignment under Internal Revenue Code 130(c).
- A qualified funding asset is purchased by the qualified assignment company pursuant to IRC 130(d). Most often the qualified funding asset is a structured settlement annuity. As part of the qualified assignment process the defendant, or its insurer pays money to the qualified assignment company which the qualified assignment company uses to purchase the annuity.
From time to time we see documents which show a cash sum amount as consideration, or documents which relate a sequence of events which suggest inaccurately that the defendants first purchase an annuity and then assign ownership of the annuity as part of the qualified assignment process. NOT ACCURATE!