by John Darer CLU ChFC MSSC RSP CLTC
16th Century English philosopher and statesman Francis Bacon once said " The ill and unfit choice of words wonderfully obstructs the understanding".
In a move that is possibly in preparation for its sale, American General Life Companies LLC is sending letters to American General Life annuitants who were placed with it as part of its short lived non qualified assignment program using American International Assurance Company (Bermuda), Ltd. The letters sent October 2, 2008 inform the annuitants that:
"American International Assurance Company (Bermuda), Ltd ("AIAC") was inadvertently named as the assignee of certain obligations in your settlement documents. As a result AIAC was also inadvertently designated as owner of Annuity Contract Number XXXXXX which was purchased to make periodic payments under the settlement documents. American General Annuity Service Corporation ("AGASC") is the appropriate assignee of the obligations set forth in XXXXXXXX v YYYYYYYYYY. AGASC is also the appropriate owner and payee of the Annuity Contract XXXXXX which was purchased to make periodic payments on your behalf. (AGASC has been named the payee of the annuty to reflect the intent and language contained in the Settlement Agreement and Release and Non Qualified Assignment and Release. (AGASC will continue to request that AGL make the payments directly to you).
AGASC is a subsidiary of AGL. AGL guarantees all of AGASC's obligations, including the obligation to make periodic payments under the Non Qualified Assignment.
Please note that the Boards of Directors of AGASC and AGL have taken appropriate actions acknowledging that AGASC is the assignee under the Non Qualified Assignment and Release in the case entitled XXXXXXX v YYYYYY and owner of the Annuity Contract XXXXXXX. A certification from the corporate secretary of AGASC is enclosed".
The letter was distributed without the knowledge of (or alert to) the brokers who placed the annuities. Given that the AIAC program WAS marketed by AIG/American General to brokers using AIAC as the assignee, this author takes exception to the use of the word "inadvertently" and the "inadvertent" decision not to notify brokers about such letters. By its definition the word "inadvertently" suggests "non duly attentive" or "an unintentional lack of care". But by whom? Inasmuch as some annuitants are calling their brokers it would have been helpful to at least have a "heads up".
The AIAC non qualified assignment program was marketed by AIG/American General in 2003 as an alternative to similar non qualified assignment programs offered through Liberty Life Assurance Company of Boston and Allstate Life Insurance Company. The AIG/American General program was notable in that it used a Bermuda based non qualified assignment company, while the others used a Barbados domicile for the non qualified assignee. A later entrant to the business of non qualified assignments, Prudential Financial, also uses a Barbados non qualified assignee.
A Non qualified assignment is a periodic payment settlement mechanism used as an alternative in the resolution of litigation or disputes that do not involve personal physical injury or physical sickness, or are not part of a workers compensation settlement. A non qualified assignment is sometimes referred to as a non qualified structured settlement or tax deferred structured settlement.
The absence of the IRC 130 tax exclusion makes it less desirable for US corporate entities to own non qualified periodic payment obligations because they must pay taxes on the annuity income before it is paid out to the plaintiff/obligee. What is known as the "non-natural person rule", in IRC Section 72(u), provides that if an annuity contract is held by a person who is not a natural person (e.g., a corporation) the annuity is not treated as an annuity contract for tax purposes. This means that the income on the contract is treated as ordinary income to the holder of the annuity contract (the corporation). Essentially, if the non-natural person rule applies, the annuity holder (corporation) loses the income tax deferral on the interest earned inside the annuity contract and must include this amount in income each year. An exception to the non-natural person rule states that an annuity contract held by a trust or other entity as an agent for a natural person is considered to be held by a natural person (see IRS Private Letter Rulings 9120024 and 9316018).
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