by John Darer® CLU ChFC MSSC RSP CLTC
Interesting article by California lawyer Eugene Ahtirski about purchasing recycled annuities.
Ahtirski, who provides independent professional advice to investors in structured settlement payment rights, acknowledges that the tertiary structured settlement market is highly unregulated and operates mainly on private transactions Ahtirski states that firms are largely free to make their own production distribution (insurance products) and pricing decisions, and individuals depend largely on themselves for economic security.
In his August 18, 2014 post "Purchasing Recycled Annuities" Ahtirski states that " by the time a structured settlement payment stream reaches the tertiary market, chances are you’ve lost the “specialized state guaranty funds” backing, unless you can meet the 60 day requirement [IRC Section 130(d)] that maintains the annuity as a qualified funding asset, thereby protecting the “annuity” from being taxed upon your purchase" [emphasis added] . He later cites a section of the California Insurance Code.
Can participants in the structured settlement secondary and tertiary markets selectively apply the California Insurance Code?
California Insurance Code section 1067.17 “Use of existence of association for purpose of sales, solicitation, or inducement to purchase insurance; summary document; disclaimer; contracts not covered by association”(a) No person, including an insurer, agent, or affiliate of an insurer shall make, publish, disseminate, circulate, or place before the public, or cause directly or indirectly, to be made, published, disseminated, circulated, or placed before the public, in any newspaper, magazine, or other publication, or in the form of a notice, circular, pamphlet, letter, or poster, or over any radio station or television station, or in any other way, any advertisement, announcement, or statement, written or oral, which uses the existence of the California Life and Health Insurance Guarantee Association for the purpose of sales, solicitation, or inducement to purchase any form of insurance covered by the California Life and Health Insurance Guarantee Association Act. Provided, however, that this section shall not apply to the California Life and Health Insurance Guarantee Association or any other entity which does not sell or solicit insurance...."
Upon information and belief, many individuals or entities who make a market of recycled structured settlements are not licensed to sell insurance. The secondary/tertiary market for structured settlements has long received a free ride on licensing from legislators. Members of the structured settlement secondary and tertiary markets have exploited and prospered from a regulatory gap across the country.
How is annuity defined under the California Insurance Code?
10509.913. (a) unambigiously says that "Annuity" means an annuity that is an insurance product under California law that is individually solicited, whether the product is classified as an individual or group annuity.[emphasis added]
While Mr. Ahtirski refers to structured settlement payment streams as annuities, he then captionates "annuity" in an apparent admission that structured settlement payment streams purchased in the tertiary market are not annuities.
Yet Ahtirski refers to the products distributed by actors in the structured settlement tertiary market as insurance products, without captionating the term "insurance products".
The Illusory Specialized Guaranty Funds" connection to IRC 130 (d)
Then Ahtirsky implies that investors in recycled structured settlement "have lost the 'specialized guaranteed funds' backing unless you can meet the 60 day requirement in IRC 130(d) that maintains that an annuity as a qualified funding asset. thereby protecting the 'annuity' from being taxed on your purchase'. Notably Ahtirski uses both annuity and "annuity" in the same sentence.
What Does IRC 130 say about a Qualified Funding Asset?
IRC 130 is the section of the tax code that bestows a tax exclusion to the qualified assignment company for the amount received for agreeing to a qualified assignment, provided that certain conditions are met.
IRC 130(d) deals with qualified funding assets. Pursuant to IRC 130(d)(4) such qualified funding assets must be purchased not more than 60 days before the date of the qualified assignmentand not later than 60 days after the date of such assignment. Here's the full text of IRC 130(d):
(d) Qualified funding asset
For purposes of this section, the term "qualified funding asset" means any annuity contract issued by a company licensed to do business as an insurance company under the laws of any State, or any obligation of the United States, if (1) such annuity contract or obligation is used by the assignee to fund periodic payments under any qualified assignment, (2) the periods of the payments under the annuity contract or obligation are reasonably related to the periodic payments under the qualified assignment, and the amount of any such payment under the contract or obligation does not exceed the periodic payment to which it relates, (3) such annuity contract or obligation is designated by the taxpayer (in such manner as the Secretary shall by regulations prescribe) as being taken into account under this section with respect to such qualified assignment, and (4) such annuity contract or obligation is purchased by the taxpayer not more than 60 days before the date of the qualified assignment and not later than 60 days after the date of such assignment. IRC Section 130.
If a structured settlement payment stream in the tertiary market, being sold to investors as a recycled annuity, is not an insurance product, not an insurance contract, not an annuity issued by a company licensed to do business as an insurance company under the laws of any state, then it follows that it does not qualify under IRC 130(d) as a qualified funding asset as we sit here today.
If a structured settlement payment stream in the tertiary market sold to investors is an annuity, is an insurance product as Ahtirski seems to say could apply, then are those who are distributing such products that do not hold insurance licenses violating the law?
IRC 130(d) is unambiguous as to the application of the term annuity as well as obligation. There is no mention of "annuity".
There does not appear to be any evidence that the purchase of structured settlement payment streams in the tertiary market entitles the purchaser of the "derivative" to the same state guaranty fund protection afforded the original annuitant.
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