Qualified Assignments, Does The Horse Come Before The Cart, Or The Cart Before The Horse?

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!

For purposes of IRC 130(c), 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

(2) if—

(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).

For a link to the text of IRC 130(c) click here