by John Darer CLU ChFC CSSC RSP
Structured settlements funded with an annuity issued by John Hancock Life Insurance Company (USA) and John Hancock Life Insurance Company of New York will now offer a security interest consistent with, and within the meaning of Section 130 of the Internal Revenue Code ("IRC").
IRC 130(c)(2) states "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 added)Benefit of secured creditor
Not only is the right to some form of property of benefit to assuring repayment to the secured creditor, but it often guarantees some other rights. One of the major rights that many lenders get is the right to property first, before unsecured creditors get to make any claim.
The terms of the security interest is set forth in a settlement document called the Qualified Assignment Release and Pledge. In essence the annuity contract is delivered to the payee as a form of collateral. In such cases you will see a stamp placed on the front of the annuity contract. The John Hancock language appears below but it is substantially similar to the pledge offered by many other qualified assignment companies offering structured settlements.
"NOTICE: This contract has been delivered to the possession of Claimant for the sole purpose of perfecting a security interest of such person in this contract. Claimant is not the Owner of, and has no ownership rights in, this contract and shall have no right or power to (i) accelerate, defer, increase or decrease any payments due hereunder; (ii) anticipate, sell or absolutely assign, or encumber by any means, regardless of form, any right to receive payments from Assignee, both directly and through its security interest in this contract; or (iii) pledge, collaterally assign, grant any security interest in, or otherwise use any right to receive such payments or security interest in this contract as any form of collateral. Any attempt to transfer this security interest will be void. For more information, please contact the annuity issuer. The Claimant’s exercise of the security interest in this Contract may have tax consequences; consult a tax advisor.
- It should be noted that IRC 130 is a tax code section referring to a tax exclusion that applies to qualified assignment companies. Commonly part of the structured settlement process today, a qualified assignment enables the defendant or its insurer to remove a long term payment obligation from its books and get a tax deduction, while at the same time helping the plaintiff because they do not have be exposed to any long term credit risk of the defendant or its insurer.
- A qualified assignment company is generally a special purpose company that exists to facilitate structured settlement transactions. These companies charge modest fees ranging from $250 to $750 for taking on the assignment. Without the tax exclusion afforded under IRC 130 they would not be able to operate profitably and neither the Defendant, its insurer or plaintiff would be able to benefit.
- The security interest discussed here only applies to structured settlements where there is a qualified assignment.
- Although the tax status of income received by a qualified assignee where there is a security interest has been codified since 1988, not all structured annuity issuers offer a security interest. Of the primary structured annuity issuers, the assignment companies of New York Life and Liberty Life Assurance of Boston do not offer a security interest.
- A security interest is not available for structured attorney fees.
- In some states there may be extra steps needed to perfect a security interest.
- Some companies offer a security interest and a wrap around guarantee from the annuity issuer or other upstream company. One offers a security interest but no secondary guarantee.