Difference in Ownership Between Entering Into A Structured Settlement and Buying An Annuity

by John Darer® CLU ChFC MSSC RSP CLTC

How does entering into a structured settlement differ from buying an annuity for retirement or long term savings?

There's quite a "big" difference between a plaintiff entering into a structured settlement and  a consumer buying an annuity

What Happens When You Buy an Annuity?

In most cases

• You are the applicant
• You are the owner
• You sign the annuity application
• Income is tax deferred and taxed on a last in first out  (LIFO) basis of accounting.

What Happens When You Enter Into A Structured Settlement?

When you enter into a structured settlement, a structured settlement annuity is most often purchased as a "qualified funding asset" to fund a future periodic payment obligation created in the settlement agreement for your case.

• You are not the applicant. The applicant is generally the qualified assignment company. In some cases it may be the Defendant or the Defendant's insurance company.
• The annuity application is signed by the applicant, generally the qualified assignment company. In some cases, where there is no qualified assignment  (or non qualified assignment) , it may be the Defendant or the Defendant's insurance company
• You are not the owner of the annuity. The owner of the structured settlement annuity is generally the qualified assignment company. In some cases it may be the Defendant or the Defendant's insurance company.
• The annuity is not issued to you, however you are the measuring life and you, or a trust for your benefit, is the recipient of structured settlement payments funded by the annuity.  Your contractual right to receive payments ("structured settlement payment rights") is established in the Settlement Agreement and Release

Why the Difference?

1. When you buy an annuity as an investment you are generally funding it with after tax dollars.
2. There are significant tax benefits to structured settlements that are afforded by compliance with the requirements of the Internal Revenue Code. For example, one aspect of compliance is that you cannot take your settlement in cash and then get a structured settlement.  You cannot be in constructive or actual receipt of the structured settlement funding amount.
   
3. Some may argue that if you do a qualified settlement fund, you can take the settlement in cash and still do a structured settlement, but that is not really true. The use of a qualified settlement fund is an intermediate step in the settlement process. The plaintiff still does not have the cash.  If a structured settlement is entered into the QSF takes the place of the defendant or insurer in the release that create s the future e periodic payment obligation..

So you can imagine my disappointment when I found this on the website of a structured settlement firm in the primary market that should know better

"Structured settlement brokers are ...responsible for issuing the annuity policy to the plaintiff".    -website of veteran structured settlement firm on "what to expect from a structured settlement broker".

1. Structured settlement brokers do not issue annuity policies. Annuity polices are issued by life insurance companies
2. When a structured settlement annuity is issued it is not issued "to the plaintiff", it is issued to the qualified assignment company, defendant or defendant's insurer.

Consumers deserve to receive accurate information about structured settlements.

Last updated September 18, 2023