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Definition of Structured Settlement Mischaracterized

"Structured settlement" is defined for tax purposes in IRC Section 5891(c)(1) according to Patrick HIndert TSSG Managing Director and co-author Structured Settlements and Periodic Payment Judgments.  (from a November 2010 Powerpoint posted on the Internet as of 1/14/2011 6pm EST). But is it?

FACT:The definition that appears in IRC 5891(c)(1) is immediately preceded by the notation " for the purpose of this section (i.e. for the purposes of this section only)

FACT: IRC 5891 sets forth a 40% excise tax imposed on purchasers of structured settlement payment rights which is imposed on the factoring discount if court approval is not obtained before structured settlement payment rights are transferred. To wit...

IRC 5891(a) Imposition of tax

"There is hereby imposed on any person who acquires directly or indirectly structured settlement payment rights in a structured settlement factoring transaction a tax equal to 40 percent of the factoring discount as determined under subsection (c)(4) with respect to such factoring transaction".

Hindert's assertion appears to be based on the following with respect to the definition of  "structured settlement" at IRC 5891(c)(1)

1. It is a definition
2. It does appear in the Internal Revenue Code
3. It is the only definition of "structured settlement" that appears in the Internal Reveneue Code, despite the express disclaimer of what the definition is exclusive to.
4. The internal Revenue Code is the main body of domestic statutory tax law of the United States of America.

Once again, the definition of structured settlement that appears there is clearly denoted to be for that section only. Had it been intended to be a general definition there would have been no disclaimer. Moreover, there are financial transactions or products currently referred to as "structured settlements" that do not fall within the expressly limited definition that appears at IRC 5891 (C)(1).

8 years ago Hindert, by way of the SSP, attempted to sell an illogical mischaracteriziaton of IRC 5891(c)(2) of the Internal Revenue Code as granting an absolute right for plaintiffs to receive structured settlement payments, as opposed to payment rights that are created by way of the structured settlement (that are eligible to be transferred with tax preference, subject to certain conditions, by virtue of IRC 5891). Whether or not the former is a meritorious outcome is not the subject of this debate.

As you can see from the structured settlement flow chart below, the rights to receive payments under a structured settlement are created in step 1, when the plaintiff releases the Defendant/Insurer or Qualified Settlement Fund Trustee in exchange for a promise to make future periodiic payments. Without the consideration being for periodic payments there would be no obligation to make such payments and therefore step 2 cannot occur, since there are no payment rights created and there would be no payment obligation to transfer to the qualified assignee.

 

 

 

Structured Settlement Liquidity | Can You Sell Structured Settlement?

by Structured Settlement Watchdog®

To highlight the issue let's start with an adaptation of the classic courtroom interchange between Lieutenant Lionel Caffey and Colonel Nathan Jessup from "A Few Good Men":

Structured Settlement Website: You Want Answers?

Plaintiff: I think I'm Entitled

Structured Settlement Website: You Want Answers?

Plaintiff Attorney: I want the Truth!

Structured Settlement Website: You Can't Handle the Truth!

A structured settlement industry website presents the following as facts:

"Can I restructure my payments into a lump sum? THEN ANSWERS

Again, the federal law that assures the payments you receive are on a tax-free basis, also prohibits converting your payments into a lump sum."

The series of Q&As on the websites also provides further inaccuracy:

"...the federal law designed to provide these benefits to you on an income tax-free basis also prohibits you from assigning or encumbering them".

Comments

1. A structured settlement is generally considered to be a series of periodic payments, although some structured settlements may be a single lump sum.
2. The proper phrasing of the question should be "May a structured settlement, or part of a structured settlement, be commuted, or reduced to a lump sum payment?
3. Federal law DOES NOT prohibit the transfer or sale of your right to receive periodic payments from a structured settlement for a cash lump sum.
4. A body of Federal and state laws govern what is known as a structured settlement factoring transaction.
5. In enacting the Victims of TerrorismTax Relief Act of 2001, which created Internal Revenue Code Section 5891 , Congress expressly acknowledged the existence of "structured settlement factoring transactions" by defining such term at IRC 5891(c)(3)(A) and establishing requirements for the purchaser to avoid an onerous 40% excise tax on the "factoring discount" in such transactions.
6.  Such requirements include that the transfer of structured settlement payment rights be approved in advance in a qualified order. that is issued—
   (i) under the authority of an applicable State statute by an applicable State court, or
   (ii) by the responsible administrative authority (if any) which has exclusive jurisdiction over the underlying action or proceeding which was resolved by means of the structured settlement.(see IRC 5891(b)(2)(A) and (B)
7. The United States Internal Revenue Code defines the term “structured settlement factoring transaction” as a transfer of structured settlement payment rights (including portions of structured settlement payments) made for consideration by means of sale, assignment, pledge, or other form of encumbrance or alienation for consideration.

WARNING

• A sell structured settlement factoring transaction IS NOT recommended UNLESS you have a well defined essential need and have exhausted all other sources to raise cash.

• Speak to a credentialed financial professional well versed in structured settlements andyour lawyer for guidance.

• The lawyer handling a structured settlement transfer petition works for the settlement purchaser.
• Read the disclosure carefully and do not waive independent professional advice
  

 

 

 

 

 

Scott Rothstein Structured Settlement Investment Fraud

by John Darer CLU ChFC CSSC RSP

The following press release was issued today by the FBI and IRS:

"The Miami Division of the Federal Bureau of Investigation (FBI) and the Miami Field Office of the Internal Revenue Service (IRS) are seeking information from individuals who have invested in the Rothstein Structured Settlement Investment (RSSI) or from individuals who have information that would be helpful to the investigation. To facilitate information gathering, the FBI has established a dedicated e-mail address and an informational telephone line 1-800-CALL-FBI, "Rothstein Option."

Details of the investigation cannot be discussed at this time, as the investigation is ongoing. However, the FBI and IRS are seeking to identify victims and to obtain any information to determine the extent of any potential fraud.

In an effort to determine the scope of the matter and the amount of losses that may be involved, investigators are requesting that individuals provide:

• Basic contact information (name, address, telephone numbers, e-mail address.)
• Amount of investments/losses with the Rothstein Structured Settlement Investment.
• Whether you can verify your investments by providing the most recent statements.
• Any additional information that may be helpful.

Information may be provided via dedicated e-mail address [email protected] or to informational telephone line 1-800-CALL-FBI, “Rothstein Option” (1-800-225-5324.) If you have investigative information that may aid the criminal investigation, you may also submit it via email or telephone. For those who would like to return funds received from Rothstein please call the 1-800 number and someone will get back with you with specific instructions on how to return the funds.

Hard copy documentation may be mailed to:

FBI Victim Assistance Program
Rothstein Investment
16320 NW 2nd Avenue
Miami, Florida 33169"

Comments

1. Earlier today the FBI representative said that Rothstein scam losses could top $1billion. 10 days ago the number was $50-$100 million. Needless to say it's looking like Scott Rothstein is going to go away for a very long time.
2. It is a pity that the IRS has chosen not to caption the words "structured settlement", given that a portion of the snake oil that Rothstein was allegedly peddling had to do with the sale or purchase of alleged interest in structured settlement payment rights.
3. It is a pity that the IRS in endorsing this press release has chosen to ignore what is set forth as a definition of structured settlement in 5891(C)(1) of the Internal Revenue Code.
4. It is a pity that the IRS has chosen to ignore the definition of structured settlement factoring transaction set forth in 5891(C)(3) of the Internal Revenue Code.
5. Scott Rothstein is the scumbag's poster child. Scott Rothstein represents everything that is the antithesis to what the many honorable structured settlement consultants, registered settlement planners and sudden money financial advisors work to accomplish for their clients every day. It is therefore, patently unfair that the words "structured settlement" are not appropriately captioned to denote that what Rothstein's scam involved putative "structured settlements" or alleged "structured settlements" but apparently weren't structured settlements.
6. I can't help but gloat a little about the irony dripping from cash now pusher factoring firm named Structured Settlement Investments, LP. I've long felt that the name of the company was misleading. Now, while there is no evidence of the company's involvement with Rothstein, the company's label is forever stained by the FBI and IRS label of the Rothstein scam as "structured settlement investment".

Lori Forthmann | If You're A Part TImer And You Know It Clap Your Hands

by Structured Settlement Watchdog

Lori Forthmann of Los Angeles, CA incorrectly states in a presentation posted online that the "preferential tax treatment for those injured in personal injury and workers compensation case is now a government benefit guaranteed by IRC 5891", as if it the latter were true and just happened.

If Ms. Forthmann had actually read IRC 5891 or was adequately informed, she'd know that at IRC 5891(c)(1)(A) (i) and (ii) that the income tax exclusion for damages in personal injury compensation (long standing for more than 70 years*)  is in IRC 104(a)(2). The exclusion for compensation for workers' compensation is also  long standing in IRC 104(a)(1). IRC 5891 has only been effective for 7 years and its purpose is to impose an excise tax, with certain exceptions therein stated. Those exceptions apply to structured settlement factoring transactions where the rights to receive structured settlement payments are transferred.

Lori Forthmann, who is neither a member of the National Structured Settlement Trade Association nor the Society of Settlement Planners (according to their websites), but states she is part of Delta Group,  has also incorrectly stated the following among the advantages of using structured settlements to self insured companies:

"Secure the release of liability and assign future obligations to a highly rated and secure assignment company".

Let's see, shall we?

• Allstate Life  non rated shell qualified assignee, guaranteed by annuity issuer

• American General Life Insurance Company, non rated shell qualified assignee guaranteed by up stream holding company

• John Hancock Life Insurance Company, non rated shell qualified assignee guaranteed by annuity issuer

• New York Life Insurance Company, highly rated insurance company as qualified assignee, guaranteed by annuity issuer

• Pacific Life and Annuity Company, non rated shell qualified assignment company, guaranteed by holding company

• The Prudential Insurance Company of America, non rated shell qualified assignment company guaranteed by annuity issuer. For non qualified cases the non rated non qualified assignment company is subject to a guarantee or agreement to pay from the parent holding company.

• Hartford Life Insurance Company, non rated special purpose company guaranteed by annuity issuer and up stream holding company

• Liberty Life Assurance of Boston, non rated qualified assignment company backed by annuity issuer

• Insurance companies that issue structured settlement annuities

Unless Ms. Forthmann was speaking solely about New York Life (and that is doubtful), her statement is false. None of the shell companies are rated.

The structured settlement, settlement planning, litigation recovery management space IS NOT for part timers. Is it not a reasonable expectation of those that seek financial advice for those that dispense the advice to be financially literate in the subject matter?

Footnote:

*Internal Revenue Code of 1939 §22(b)(5) cite in Taxation of Damages Awards and Settlement Payments  Author: Robert W. Wood, published by Tax Institute, San Francisco, CA. also "from its infancy, the Internal Revenue Code has contained an exclusion from taxable income for damages received on account of personal injuries." from Brent B. Nicholson Albany Law Review September 22, 1997 "Recent developments concerning taxation of damages under Section 104(a)(2) of the Internal Revenue Code"

Secured Creditor v Qualified Assignment Structured Settlement

by John Darer CLU ChFC MSSC CeFT RSP CLTC

What Does the Qualified Assignment Have to Do With Structured Settlement Secured Creditor?

A. Prior to the inception of Internal Revenue Code Section 130 (IRC 130) 

Parties to a structured settlement would settle a case. As part of the consideration paid by the defendant (in exchange for a release), a promise to make future periodic payments was made. The defendant, or its insurer, would typically fund the obligation with a structured settlement annuity. 

The annuity would be owned by the defendant, or insurer, and the plaintiff would be no more than a general creditor of the defendant or insurer. The plaintiff was exposed to credit risk that the insurer or defendant holding the periodic payment obligation (and the annuity) would run into difficulty. The possibility existed that a defendant could be in financial jeopardy long after the settlement concluded and that the general creditors of the defendant or insurer could go after the structured annuity which was being carried as an asset on its books.

B. Creation of IRC 130

IRC 130 was created as a result of the Periodic Payment Settlement Act of 1982, enabling the option for the periodic payment obligation to be transferred to a third party "qualified assignment company". A qualified assignment then served two purposes. For the the plaintiff it essentially eliminated the exposure to the credit quality of the defendant or its insurer. For the defendant the "novation" of the claim meant balance sheet relief and a tax write off.

Yet at that time (1983-1988). the structured settlement payee was still a general creditor,  only that time of the qualified assignment company.

C.  Amendment to IRC 130/ Introduction of Qualified Assignment Release and Pledge Agreement

In 1988, IRC 130 was amended to include language at IRC 130(c) (1)(d) that effectively extended the benefit of IRC 130 to cases where the qualified assignment granted status greater than that of general creditor (i.e. "secured creditor"). Through the use of the so called Qualified Assignment Release and Pledge the path to being a secured party to the qualified funding asset begins. Typically the language in in the QARP will provide for the assignee-debtor to grant  " a lien on and security interest in" in the qualified funding asset. The original annuity contract is delivered to the secured party with, among other things, a stamp to that effect. It is important to note that in some states there may be a need for Uniform Commercial Code (UCC) filing. Check with your attorney.

Please refer to the following flow chart which details the typical annuity funded structured settlement transaction. Structured settlements may also be funded with United States Treasury Obligations.

How Structured Settlements Work | Structured Settlements Explained (4structures.com)

Last updated August 19, 2023