Can you Be a Secured Creditor With Your Structured Settlement?

by John Darer® CLU ChFC MSSC RSP CLTC

It is absolutely shocking to discover a major blunder on the web site of one of the structured settlement industry veterans in a discussion of financial risk and the availability of secured creditor status with structured settlements:

"From the claimant's perspective, structured settlements are not an acceptable form of settlement unless there is confidence that all future payments will be made in full. This concern arises because of a condition imposed by federal tax law: as a condition to receiving a structured settlement tax-free, the claimant may be no more than a general creditor of the obligor. This means that the claimant is not allowed to improve his creditor rights by taking a security interest in property owned by the obligor. Instead, the claimant receives only a contract right against the obligor. The value of this contract right depends on the obligor's creditworthiness".

Comments

A. The statement about "no more than a general creditor" is not accurate and has not been accurate for more than 2 decades!  At the time of posting, with all but two annuity issuers (New York Life and USAA Life ) a security interest IS available and expressly permitted under Federal tax law. Although not in the Periodic Payment Settlement Act of 1982, IRC §130(c)(2)(D) was amended in 1988 to allow the recipient to be a secured creditor of the funding asset.[ see Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, § 6079, 102 Stat. 3709 (1988)].

B. Have a look at the text of 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

(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).

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. " (emphasis ours)

 

C. Here is an excerpt from the Qualified Assignment Release and Pledge Agreement for the qualified assignment company associated with one of the largest annuity issuers in the United States

"Assignee hereby pledges and grants to each Claimant, unless excluded by the Agreement, a lien on and security interest in all of Assignee's right, title, and interest in the Annuity purchased to fund Assignee's obligations to such Claimant (the "Pledged Annuity") under the Agreement.  The Pledged Annuity secures the obligation of Assignee to make such Periodic Payments." (emphasis ours)

Last updated August 29, 2021