by John Darer CLU ChFC MSSC CeFT RSP CLTC
What Does the Qualified Assignment Have to Do With Structured Settlement Secured Creditor?
A. Prior to the inception of Internal Revenue Code Section 130 (IRC 130)
Parties to a structured settlement would settle a case. As part of the consideration paid by the defendant (in exchange for a release), a promise to make future periodic payments was made. The defendant, or its insurer, would typically fund the obligation with a structured settlement annuity.
The annuity would be owned by the defendant, or insurer, and the plaintiff would be no more than a general creditor of the defendant or insurer. The plaintiff was exposed to credit risk that the insurer or defendant holding the periodic payment obligation (and the annuity) would run into difficulty. The possibility existed that a defendant could be in financial jeopardy long after the settlement concluded and that the general creditors of the defendant or insurer could go after the structured annuity which was being carried as an asset on its books.
B. Creation of IRC 130
IRC 130 was created as a result of the Periodic Payment Settlement Act of 1982, enabling the option for the periodic payment obligation to be transferred to a third party "qualified assignment company". A qualified assignment then served two purposes. For the the plaintiff it essentially eliminated the exposure to the credit quality of the defendant or its insurer. For the defendant the "novation" of the claim meant balance sheet relief and a tax write off.
Yet at that time (1983-1988). the structured settlement payee was still a general creditor, only that time of the qualified assignment company.
C. Amendment to IRC 130/ Introduction of Qualified Assignment Release and Pledge Agreement
In 1988, IRC 130 was amended to include language at IRC 130(c) (1)(d) that effectively extended the benefit of IRC 130 to cases where the qualified assignment granted status greater than that of general creditor (i.e. "secured creditor"). Through the use of the so called Qualified Assignment Release and Pledge the path to being a secured party to the qualified funding asset begins. Typically the language in in the QARP will provide for the assignee-debtor to grant " a lien on and security interest in" in the qualified funding asset. The original annuity contract is delivered to the secured party with, among other things, a stamp to that effect. It is important to note that in some states there may be a need for Uniform Commercial Code (UCC) filing. Check with your attorney.
Please refer to the following flow chart which details the typical annuity funded structured settlement transaction. Structured settlements may also be funded with United States Treasury Obligations.
Last updated August 19, 2023