Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and John Darer Reviews

Do Structured Settlement Payments Have to Be Equal Payments?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Whether Structured Settlement Payments Have to be Equal (or Substantially Equal) Depends on the Nature of Claim and the Settlement Planning Solution being used

The substantially equal payment requirement applies in situations where:

- There is a non-qualified assignment where a periodic payment obligation is assigned to a U.S. domestic assignment company.
- An immediate annuity is utilized as the funding asset.

What are Non Qualified Structured Settlements and Non Qualified Assignments for Tax Deferral (4structures.com)

IRC Section 72(u) was added as part of the Tax Reform Act of 1986.

• An annuity contract owned by a non-natural person is not considered an annuity contract for tax purposes  IRC §72(u)(1)(A)
• The income on the contract for any taxable year of the policyholder shall be treated as ordinary income received or accrued by the owner during such taxable year   IRC 72(u)(1)(B) and also cited in a presenation to the United States Senate Committee on Finance May 24, 2016 JCX 45-16 (May 20, 2016) "By contrast to the treatment of life insurance contracts, if a deferred annuity contract is held by a corporation or by any other person that is not a natural person, the income on the contract is treated as income accrued by the contract owner and is subject to current taxation. The contract is not treated as an annuity contract".

IRC 72(u)(4) Notable Exceptions to Ownership of Annuity by Non Natural Person

This subsection shall not apply to any annuity contract which—

(A) is acquired by the estate of a decedent by reason of the death of the decedent,

(B) is held under a plan described in section 401(a) or 403(a), under a program described in section 403(b), or under an individual retirement plan,

 

(C) is a qualified funding asset (as defined in IRC 130(d), but without regard to whether there is a qualified assignment),  What is a Qualified Assignment? (4structures.com)

 

(D) is purchased by an employer upon the termination of a plan described in section 401(a) or 403(a) and is held by the employer until all amounts under such contract are distributed to the employee for whom such contract was purchased or the employee's beneficiary, or

 

(E) is an immediate annuity.

IRC 72(u)(4) (C) and (E) are germane to structured settlements

A 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  Subject to IRC 130(d).

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.

Types of Structured Settlement Payments | Structured Settlement Payment Options (4structures.com)

What is an Immediate Annuity under IRC 72(u)(4)(E)?

For purposes of this subsection, the Code says the term "immediate annuity" means an annuity—

A. which is purchased with a single premium or annuity consideration,

B, the annuity starting date (as defined in subsection (c)(4)) of which commences no later than 1 year from the date of the purchase of the annuity, and

C. which provides for a series of substantially equal periodic payments (to be made not less frequently than annually) during the annuity period

So there you have it. That's where the equal payments (or subtantially equal payments) comes from.

Why Doesn't IRC 72(u) apply to annuities owned by a Qualified Assignment Company?

Because there is an express exception made in IRC 72(u)(3)(C) for an annuity that is a Qualified Funding Asset under IRC 130(d)

Non Qualified Assignment Solutions with Domestic Assignment Company Where IRC 72(u) Applies

• Corebridge subsidiaries American General Life Insurance Company and United States Life Insurance Company in the City of New York through their appointed brokers, where an annuity is used to fund an obligation to make periodic payments.  Note that the same product providers offers an alternative niche domestic solution using a funding agreement (in lieu of an annuity) as a work around for where a deferral is desired without going to an offshore assignment company.
• Metropolitan Tower Life Insurance Company (MetLife) 

Last updated August 8, 2024

 

 

 

 

Minneapolis Star Tribune Takes on the Structured Settlement Secondary Market in Blistering Expose

by John Darer CLU ChFC MSSC CeFT RSP CLTC

The Minneapolis Star Tribune has published an important and impactful expose of the structured settlement secondary market and bares its untreated festering sores

The second installment of four parts was published this week as the culmination of a two year effort by the Star Tribune team. The Star Tribune explores the data and presents it in a meaningful way. In four installments they focus on The Sellers, The Judges, The Buyers and The Guardians. 

A festering sore is the best way to describe structured settlement buyer business practices

Although 50 states and the District of Columbia have enacted Structured Settlement Protection Acts, the Star Tribune found that "judges are often hampered by doubts and vague laws. They say that the final, often reluctant arbiter in settlement buyout cases are given little information about sellers and few rules on companies seeking to buy".

Indeed, while a number of participants that I've spoken with would be willing to have a licensing standard, there is no licensing standard or regulator of sales practices in any state, unlike other financial services. Two states Maryland and Louisiana require transferees to be registered, but that isn't nearly enough. Unless there is a mechanism that could fine, suspend or revoke licenses the free for will likely continue to the detriment of consumers such as those profiled by the Star Tribune.

Star Tribune talking points

• "Judges say they are routinely deprived of key information about the people selling their payments, including medical records and court filings that might provide insight about their cognitive ability or mental competency".
• "Based on its review of 1,400 Minnesota cases that have gone to a hearing since 2000, the Star Tribune says that (factoring) companies have successfully sought removal of some judges who have rejected sales or questioned the lopsided nature of deals in past cases.
• "A former Hennepin County judge cited by the Star Tribune, raised concerns at bench meetings but was met with apathy by other judges  "nobody wanted to get into it"
• "A guardian was appointed in just a single case" of the ones reviewed by the Star Tribune.
• "Some judges take a narrow view of responsibilities". Summons up an apparition of former Portsmouth Virginia Circuit Court Judge Dean Sword for his "best interest standard" exhibited in presiding over 9 of 10 transactions of systematic destruction of a black man's structured settlement in 2 years. Sword relied solely on affidavits, according to Washington Post commentary in 2015.

The Star Tribune profiled a number of sellers. One of them was Laura Dalluhn.  In November 2019, a Dakota County Minnesota judge rejected a structured settlement transfer petition, noting that Dalluhn testified that she "suffers from a mental health condition, has been civil committed four times and is under civil commitment now". The petition was essentially resubmitted in January 2020 and assigned to another judge (Joseph Carter),who approved the transfer as well as a day later  extending Dalluhn's commitment for another 6 months, finding her mental problems were still serious enough to require close supervision. The company that preyed on Laura Dalluhn was Greenwood Funding, which  after being rejected in November 4 2019, refiled under the affiliate name Sempra Finance. 

Sempra Finance is a real piece of work. It's certainly not the first time they've been encountered participating in transactions involving highly vulnerable persons.  For example, Sempra Finance was on the tail end of a daisy chain in what might best be described as "the serial financial rape of a minor's structured settlement" in Pennsylvania

See ZACHARY BARBER, JEFFREY BARBER, ADMINISTRATOR OF THE ESTATE OF LINDA LEE JENKINS A/K/A/ LINDA LEE BARBER, DECEASED
v. BRUCE STANKO, NORTH HILLS PHARMACY SERVICES, LLC; PACERCHECK, INC.; ET AL
APPEAL OF: SEMPRA FINANCE, LLC ("SEMPRA") : IN THE SUPERIOR COURT OF PENNSYLVANIA  No. 615 WDA 2020
Appeal from the Order Entered June 5, 2020 In the Court of Common Pleas of Allegheny County Orphans' Court at No(s): No. 4037 of 2005

and my blog of  May 14, 2021 Structured Settlement Investors' Bad Day in Barber Case as PA Superior Court Quashes Appeal

According to that decision  "It has been said that the SSPA places the common pleas court in “position of a guardian of a person who stands in the presumptive position of the defenseless recipient of a benefit. It is for the Court to determine, as a guardian would, on an independent basis, whether the transaction serves the best interests of an unsophisticated (if not incompetent) person” and “is to ensure that an otherwise financially defenseless and possibly injured individual would receive a regular, sustaining source of income.” In re Jacobs, 936 A.2d 1156, 1160 (Pa. Super. 2007).

Requiring a judge to serve as guardian to protect the interests places the judge in unfamiliar territory. Generally, the petition to transfer payment is unopposed with plaintiff-payee wanting to transfer payments so that it can receive payments for what he or she considers in its best interests, whether it is or not, and the factoring company wanting it approved so it can make the Requiring a judge to serve as guardian to protect the interests places the judge in unfamiliar territory. Generally, the petition to transfer payment is unopposed with plaintiff-payee wanting to transfer payments so that it can receive payments for what he or she considers in its best interests, whether it is or not, and the factoring company wanting it approved so it can make the most money. That requires the trial judge to make an independent determination of whether the sale is in the best interests of the plaintiff-payee based on economic factors that it is not within its ken and with parties who are not that forthcoming. Moreover, this determination is made even more difficult because the proceedings are non-adversarial, with no factual development and competing positions to inform its judgment as would be the usual. It depends on the forthrightness and good faith of counsel to provide all the information available for the judge to make an informed decision on what is in the best interests of the plaintiff-payee to avoid fraud on the court".

States where judges don't do their part to take "best interest" seriously hurt both the sellers, any applicable and investors who buy assigned rights to the payments from the transaction the judge has approved.

Stay tuned for the next installments from the Minneapolis Star Tribune's expose on the structured settlement secondary market on Structured Settlement Payment Buyers and Guardians