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How IRC 130 Failure Could Cause Major Tax Hit to Qualified Assignment Company, or Payee

by John Darer CLU ChFC MSSC CeFT RSP CLTC

The failure to satisfy IRC 130 could have crushing financial consequences to a qualified assignment company or Payee in certain circumstances. IRC 130

An IRC 130 failure could result in a big tax hit 

provides a tax exemption to the qualified assignment company subject to certain conditions. Without the tax exemption the qualified assignment company must declare income that it receives (the money intended for the annuity premium or cost of treasury obligations plus the qualified assignment fee). 

It's not hard to satisfy IRC 130, But...over stretching could cause you to "split your plans" with the IRS

In the typical qualified assignment there is substitution of obligors for periodic payment obligations to plaintiffs who have suffered personal physical injury, physical sickness, are wrongful death survivors, or workers compensation. 

(a) In general
Any amount received for agreeing to a qualified assignment shall not be included in gross income to the extent that such amount does not exceed the aggregate cost of any qualified funding assets.

(b)Treatment of qualified funding asset In the case of any qualified funding asset—
(1)the basis of such asset shall be reduced by the amount excluded from gross income under subsection (a) by reason of the purchase of such asset, and
(2)any gain recognized on a disposition of such asset shall be treated as ordinary income.

(c) Qualified assignment For purposes of this section  (i.e. Section 130 in its entirety) , the term “qualified assignment” means any assignment of a liability to make periodic payments as damages (whether by suit or agreement), or as compensation under any workmen’s compensation act, on account of personal injury or sickness (in a case involving physical injury or physical sickness)—
(1)if the assignee assumes such liability from a person who is a party to the suit or agreement, or the workmen’s compensation claim, and (2)if—
(A)such periodic payments are fixed and determinable as to amount and time of payment,
(B)such periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments,
(C)the assignee’s obligation on account of the personal injuries or sickness is no greater than the obligation of the person who assigned the liability, and
(D)such periodic payments are excludable from the gross income of the recipient under paragraph (1) or (2) of section 104(a).
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.

Important Pro Tip:  IRC 130(c) is a definition of what a qualified assignment is, in the context of what a qualified assignment does from a tax standpoint.   The terms of IRC 130(c) and the other parts of IRC 130 are not mutually exclusive.  This is recognized in so many words by Rev. Proc. 93-34, at Section 3 "Scope",  wherein it expressly states "an assignment by a designated or qualified settlement fund of a liability to make periodic payments must also satisfy all the other requirements of section 130 to be a qualified assignment. ..."  A Revenue Procedure is an official statement of a procedure published in the Internal Revenue Bulletin that either affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code and related statutes, treaties, and regulations or, although not necessarily affecting the rights and duties of the public, should be a matter of public knowledge. – Rev. Proc. 89-14, 1989-8 I.R.B. 20

(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.

Despite being easy to satisfy, most qualified assignments have an out clause for the qualified assignment company

Here's how the Model Qualified Assignment and Release reads

Failure to Satisfy Section 130(c).  If at any time prior to completion of the Periodic Payments, the Settlement Agreement is declared terminated in a final, non-appealable order of a court of competent jurisdiction (or in the case of a workers’ compensation settlement, a final order of the applicable workers’ compensation authority) or if it is determined in any such final order that the requirements of Section 130(c) of the Code have not been satisfied in connection with this Agreement: (i) the assignment by Assignor to Assignee of the liability to make the Periodic Payments, Assignee’s acceptance of such assignment and the release by Claimant(s) of Assignor’s liability shall be of no force or effect; (ii) Assignee shall be conclusively deemed to be acting as the agent of Assignor; (iii) the Annuity shall be owned by Assignor, which shall retain the liability to make the Periodic Payments; (iv) Assignee shall have no liability to make any Periodic Payments; and (v) the parties hereto agree to cooperate in taking such actions as may be necessary or appropriate to implement the foregoing.

Under the typical qualified assignment, provided no constructive receipt has occurred, the Settlement Agreeement and Release establishes a future periodic payment obligation as consideration for the type of damages that fall within the meaning of IRC 130(c) and where the assignment company is affiliated with annuity issuer, there really is no chance that the assignment company is going to fail the IRC 130(d)  qualified funding asset statutory requirement, because the qualified funding asset is an annuity.

But what of the independent qualified assignment companies?  Independent qualified assignment companies have been used to inject other investments into the mix, including factored structured settlement payment streams, which are not annuities. What would happen under the unwind clause in the qualified assignment document of one such company.

A settlement planning firm which attempts to use other investments including factored structured settlement payment streams it calls "secondary market annuities", which are not annuities, raises concerns on many levels. 

Have you seen this in a qualified assignment agreement that you've signed for an attorney fee deferral funded with factored structured settlement payment streams or other investments?   9.  " In the event the Settlement Agreement is terminated by a court of law or in the event that Section 130(c) of the Code has not been satisfied, this contract shall terminate.  _______Assignment Company shall then assign ownership of any "qualified funding asset(s)" purchased hereunder to Claimant and/or Payee, and Assignee's liability for the Periodic Payments shall terminate"

If a factored structured settlement payment stream, or any other investment, that does not fall squarely within IRC 130(d),  were mischaracterized, or misrepresented, as a "qualified funding asset", if it was not a qualified funding asset,  the qualified assignment company could lose its tax exemption on the transaction and have a significant taxable event. And if that happens, where is money to pay the IRS going to come from? 

Under the above Paragraph 9 "out clause",  the settlement planner's qualified assignment company could assign ownership of the asset to the Claimant and/or a Payee who happens to be a trial lawyer who believed they had structured and deferred their fees. Any attorney payees could face a potentially monster tax hit as a result.  If the Payee is the former Plaintiff then the Plaintiff has a tax hit on the interest on the funding asset that he/she or his or her trust would now own. One way or another it has the potential to be a huge mess. This would be compounded if this was created in connection with a Qualified Settlement Fund controlled by the settlement planner's firm or an affiliate, which would potentially invalidate the assignment for not meeting the terms of Rev. Proc. 93-34.

I have lingering doubts following a webinar on QSF's delivered by Milestone CEO John T. Bair last week which misrepresented Rev. Proc. 93-34* as "black and white" permission to use investments other than annuities (and obligations of the United States) as "qualified funding assets'. His assertion was not supported from the plain reading of either Rev. Proc. 93-34,or IRC 130(d).

*According to the transcript Bair said at
29:52
"I've talked to lawyers and they assume
29:55
that if they're gonna do a fee deferral
29:58
then it has to be an annuity and that is
30:02
not the case it can be backed by
30:05
investments we have a revenue procedure
30:08
ruling from 2003 that says that you know
30:12
if you create a proper periodic payment
30:14
then it can be backed by investments so
30:17
that it's black and white" 

 

 

 

 

 

 

 

 

Structured Settlement Factoring Company Plays The Coronavirus Card

by Structured Settlement Watchdog

Merchants touting paid for Lawyer Associations Recommendations while offering pennies on the dollar to lawyers' clients, are "here to help". Of course they are.

From: Ric Perez <ric.perez@strategiccapital.com>
Sent: Friday, March 27, 2020         AM
To: [Redacted]
Subject: Strategic Capital is here to help
Importance: High

(Lawyer Name Redacted),
I hope this email finds you, your family and staff safe and healthy.
All of us at Strategic Capital share the concerns surrounding the ever-changing situation with the Coronavirus. Our priority remains focused on the health and safety of our team, customers, and colleagues such as yourself.
With the current situation evolving daily, we know there may be questions and concerns that you or your clients may have now, or will have, as it relates to their structured settlement payments. Rest assured, we are here to help annuitants navigate through these uncertain times and be a resource for you.
If any of your clients have been affected by COVID-19, whether by illness or temporary unemployment, please have them contact me and ask about our paycheck assistance program, available during the processing of their transaction. Please call or email me for further details at 310/xxx-4607, my direct mobile number.
Looking forward, we acknowledge that some of us will experience new challenges, unthinkable prior to the pandemic. We understand this uncertainty is daunting, however, we are here to help colleagues and annuitants as best as we can. Strategic Capital has been in business for over 25 years; we’ve seen a lot, and we are confident that this too shall pass.
As we go through this time, we find ourselves reminded of the things we treasure and hold dear, like family, friends and relationships, and the confidence that we have what it takes to get through these times.
We look forward to getting through this safely and successfully together. I appreciate your support and trust in assisting your clients, please call me at any time if I can help!
Sincerely,
Ric

Ric Perez
Senior Vice President
National Marketing Director
Email: ric.perez@strategiccapital.com

When & Why to Use a Qualified Settlement Fund | "Revenue Procedure Ruling" Misrepresented in QSF Webinar

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Milestone CEO John T. Bair appears to have misrepresented a 1993 Revenue Procedure in an attempt to justify why Milestone Consulting uses investments besides annuities with its attorney fee deferral programs from Qualified Settlement Funds. 

Excerpt of Transcript of John T. Bair QSF webinar  March 26, 2020  (  Source:  YouTube  Transcript Auto-generated by YouTube)

Bair at

29:52
I've talked to lawyers and they assume
29:55
that if they're gonna do a fee deferral
29:58
then it has to be an annuity and that is
30:02
not the case it and be backed by
30:05
investments we have a revenue procedure
30:08
ruling from 2003 that says that you know

30:12
if you create a proper periodic payment
30:14
then it can be backed by investments so
30:17
that it's black and white it's going on
30:19
you know 19 years you know of precedence
30:23
and so you should think of the ability
30:26
to do a fee deferral as an unlimited
30:29
401k or profit sharing plan and not
30:32
getting into the specifics 

What Does  Rev. Proc. 93-34 Actually Say

"Sec.1   Purpose This revenue procedure provides rules under which a designated settlement fund described in section 468B(d)(2)of the Internal Revenue Code or a qualified settlement fund described in section 1.468B-1 of the Income Tax Regulations will be considered "a party to the suit or agreement" for purposes of section 130. In general, section 130 provides that an assignee may exclude from gross income amounts it receives for assuming the liability of a party to a suit or agreement to make described periodic payments of damages to a claimant".

Note: It should be noted that neither Milestone Consulting, nor John T. Bair its CEO, were in the business when the Rev. Prov 93-34 was published. It should be further noted that Rev. Proc. 93-34 is, as stated above "for the purposes of section 130 " of the Internal Revenue Code.

SEC. 2. Background 
.01 Section 130(a) of the Code provides that any amount received for agreeing to a qualified assignment is not included in gross income to the extent that the amount does not exceed the aggregate cost of any qualified funding assets.
.02 Section 130(c) of the Code defines a "qualified assignment" to mean any assignment of a liability to make periodic payments as damages (whether by suit or agreement) on account of personal injury or sickness (in a case involving physical injury or physical sickness) if:
(1) the assignee assumes the liability from a person who is a party to the suit or agreement;
(2) the periodic payments are fixed and determinable as to the amount and time of payment;
(3) the periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of the payments;
(4) the assignee's obligation on account of the personal injuries or sickness is not greater than the obligation of the person who assigned the liability; and
(5) the periodic payments are excludable from the gross income of the recipient under section 104(a)(2)

03 Section 130(d) of the Code defines a "qualified funding asset" as 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) the 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) the annuity contract or obligation is designated by the assignee as being taken into account under section 130 with respect to the qualified assignment; and
(4) the annuity contract or obligation is purchased by the assignee not more than 60 days before the date of the qualified assignment and not later than 60 days after the date of such assignment.

Note : In my March 27, 2020 blog post Is a Factored Structured Settlement a Qualified Funding Asset?, I made the case for why such an investment was not an annuity or an obligation of the United States, and therefore NOT a qualified funding asset. Therefore ALL the prongs of IRC 130(d) fail.  There are obvious tax implications. Upon information and belief United States Periodic Payment Assignment Company has entered into one or more assignment agreements using a Qualified Assignment and Release despite no annuity or United States Treasury obligation being used. Nothing in IRC 130(d) refers to "other investments".

05 Section 1.468B-1(a) of the regulations provides that a qualified settlement fund is a fund, account, or trust that satisfies the requirements of section 1.468B-1(c). Section 1.468B-1(c) provides that a fund, account, or trust is a qualified settlement fund if: 

(1) it is established pursuant to an order of, or is approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;
(2) it is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or a related series of events) that has occurred and that has given rise to at least one claim asserting liability:
(a) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. 9601 et seq.; or
(b) arising out of a tort, breach of contract, or violation of law; or
(c) designated by the Commissioner in a revenue ruling or revenue procedure; and
(3) the fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related persons).

Note: Milestone is a promoter of the Seventh Amendment Holdings QSF, a self-described National Master QSF, established by the Order of a Seattle judge in 2017. Dees it meet the "resolve or satisfy rule for an event (or "related series of events"?   See Is a Multi-Claim QSF A Fable? , where such a  QSF is questioned by multiple legal authorities, including a tax lawyer that Bair has said is the most credible as recently as 2018. Note mentioned by Bair,  Private Letter Rulings in 1999 and 2014 supported the use of a variable income payout annuity (MetLife) and index linked annuity payment adjustment (Pacific Life) respectively. But these are both having to do with annuities. Bair is claiming, incorrectly, in my opinion, that a Rev. Proc from 1993 supports what Milestone is doing with investments.

SEC. 3. SCOPE
This revenue procedure provides specific guidance on the requirements that must be satisfied in order for a designated settlement fund or qualified settlement fund to be treated as "a party to the suit or agreement" under section 130(c)(1) of the Code. In addition to the requirements provided by this revenue procedure, an assignment by a designated or qualified settlement fund of a liability to make periodic payments must also satisfy all the other requirements of section 130 to be a qualified assignment. No inference should be drawn regarding the application of section 130 to any other type of taxpayer.

SEC. 4. APPLICATION
.01 A designated settlement fund or a qualified settlement fund will be treated as "a party to th e suit or agreement" within the meaning of section 130(c)(1) of the Code if each of the following requirements is satisfied:
(1) the claimant agrees in writing to the assignee's assumption of the designated or qualified settlement fund's obligation to make periodic payments to the claimant;
(2) the assignment is made with respect to a claim on account of personal injury or sickness (in a case involving physical injury or physical sickness) that is either:
(a) a claim described in section 2.04(1) in the case of a designated settlement fund, or
(b) a claim described in section 2.05(2) in the case of a qualified settlement
fund;
(3) each qualified funding asset purchased by the assignee in connection with the assignment by the designated or qualified settlement fund relates to a liability to a single claimant to make periodic payments for damages;
(4) the assignee is not related to the transferor (or transferors) to the designated or qualified settlement fund within the meaning of sections 267(b) or 707(b)(1); and
(5) the assignee is neither controlled by, nor controls, directly or indirectly, the designated or qualified settlement fund. For purposes of this section 4.01(5), examples of control include an assignee that is a corporation the stock of which is owned by the fund or an assignee that is a trust the trustee of which is the administrator of the fund

.02 If an assignment by a designated or qualified settlement fund satisfies the requirements of section 4.01 of this revenue procedure and all the other applicable requirements of section 130 of the Code, the assignment is a qualified assignment within the meaning of section 130 and the transferor to the designated or qualified settlement fund will not be treated as receiving a deemed distribution described in section 2.08 of this revenue procedure when the qualified assignment is made

When a Settlement Planner Turns Life Insurance Salesman and Misses Important Details

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Trial lawyers on their mailing list recently received Milestone Consulting's FeeMaster attorney fee deferral brochure.  FeeMaster Option 2 is a cheap and deceptive sales pitch to buy permanent whole life insurance.

The Milestone sales pitch is this:  "Keep more of your total contingency fee and work within an existing financial framework that can return historical dividends as high as 6% or greater. This is a long-term wealth accumulation strategy that significantly outperforms fixed annuity returns and is designed with certain attorneys in mind".

12-2018 footnotes the 6% says its based on illustrations and not guaranteed

2020 Milestone FeeMaster sales pitch omits the footnote

"The most groundbreaking option relies on one of the greatest existing wealth accumulation tools—permanent whole life insurance. By becoming a policy holder in one of these large mutual, you reap the benefits of their financial strength and dividend-paying histories".

But that's not the shocking part. This Milestone Consulting  page header from the FeeMaster brochure, is a classic case of baffling them with this bullshit:  "Where else have you seen historical dividends of 6% or greater?".  Well I'll answer the question because I have!

I've been in the life insurance world for 37 years in May. I started my insurance career with Northwestern Mutual, which is one of the leading mutual insurance companies in the United States. I have held the professional designation of Chartered Life Underwriter (CLU) for 30 years and Chartered Financial Consultant (ChFC) for 29 years. I am an owner of whole life policies that I bought in my 20s when dividend interest rates exceeded 11%.  Portfolio vs new money investments have had a role in keeping dividend rates higher than new money baeed policies, but portfolio rates have declined. Long term bonds at higher rates are maturing and rates cannot be reinvested at the same rates. This has been a phenomenon all across the board. Historical Whole Life Dividend Rates 2020 by Top Whole Life proves the point. That being said, focusing on the historical dividend rate as Milestone Consulting is doing, without accounting for the costs, and projecting that rate or greater  is misleading at best. Actual policy performance is important and you will also find that performance was different historically. Actual performance will also be different for different underwriting classes.

Here is what Northwestern Mutual says about its dividend interest rate

"In regard to Northwestern Mutual's dividend payout and dividend interest rate (DIR), comments in this document pertain generally to life insurance policy dividends.

The company's DIR for unborrowed funds for most whole life insurance policies reflects the investment performance of the applicable managed assets net of taxes and any contribution to surplus. This rate is used for the determination of the interest component of a policy's dividend. The rate is applied to unborrowed funds for most whole life insurance policies after mortality and expense charges have been deducted from policy values. Depending on the terms of a particular policy, a different rate may be applied. For example, either a different rate is credited on borrowed funds to reflect individual policy loan activity, or all funds, both borrowed and unborrowed, are credited with a single rate that reflects the average level of borrowing for all similar policies. 

The DIR is not the rate of return on a policy and is only one factor for determining the life insurance dividend. The majority of our life insurance dividend payment is a result of our industry-leading persistency, favorable mortality costs and diligent expense management. Decisions with respect to the determination and allocation of divisible surplus are left to the discretion and sound business judgment of the company's Board of Trustees. There is no guaranteed specific method or formula for the determination or allocation of divisible surplus. Accordingly, the company's approach is subject to change. Neither the existence nor the amount of a dividend is guaranteed on any policy in any given policy year. Some policies may not receive any dividends in a particular year or years even while other policies receive dividends".

MassMutual, the life insurance company believed to be used with Milestone FeeMaster Option 2,  noted in its recent dividend announcement, that dividends are not guaranteed. MassMutual further states "Dividends are not guaranteed and will vary over time. As a result, the income payments that you receive may be more or less than the dividends that were illustrated when you bought your policy".

But both Northwestern Mutual and Mass Mutual have paid dividends since the 19th Century.  Both companies have experienced declining dividends over the last 20 years.

"Gain access to cash without triggering taxation through traditional policy loans".

• You can access cash value without triggering taxation through traditional policy loans, but Milestone fails to account for the impact of loans on the actual policy performance.
• If you borrow too much from a whole life policy and the policy lapses due to non payment of premium or otherwise lapses, there is a taxable event if the outstanding loan exceeds your cost basis.

"The short-term internal rate of return yields are low, but contract years 11-20 credit at greater than 6%"  

A 12/2018 upload of a prior rendition of the Milestone brochure contained the disclosure and said the 6% was based on 2013 market trends, but the new one doesn't.  If known, I doubt this would ever get past any life insurer's or regulatory compliance.  One wonders if any client is shown an illustration of what happens if dividend scale is reduced.

"Unrivaled" , " A home run for a select few"  " The most groundbreaking option" are superlatives used by Milestone to would-be FeeMasters

The quintessential Woody Allen nightmare?

Is Master Qualified Settlement Fund a Fable?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Qualified Settlement Funds Advances and Updates, a recent presentation by tax attorney Robert Wood and Eastern Point Trust Company CEO Glen Armand 

Glen too! 

raises doubts about the viability of a master qualified settlement fund. A multi-case master qualified settlement fund is referred to as a fable, a fictitious narrative or statement, according to Merriam-Webster.

Concerning the tax treatment of litigation settlements and judgments, Robert W. Wood is perhaps the preeminent tax lawyer in the United States. Wood's tax planning and tax controversy work is broad-based, including tax opinions, audits, appeals, rulings, protests, appellate conferences, closing agreements, Tax Court, District Court and appellate court litigation. In addition, Wood is a frequent expert witness on tax matters in civil cases, in disputes over independent contractor versus employee classification, class actions, and tax and accounting malpractice cases.  

He has consistently been rated among the top ten tax lawyers in the United States by United States Lawyer Rankings, was awarded the State Bar of California's Judson Klein Award, is featured in numerous who's who and best lawyers publications. The author of more than 30 tax books, including Qualified Settlement Funds and 468B, published by the Tax Institute. Wood writes tax columns for Forbes.com, and writes regular articles for Tax Notes and other publications. He has often appeared in the media discussing tax issues.

Glen Armand is Chief Executive Officer and Chief Compliance Officer of Eastern Point Trust Company in Warrenton Virginia

The Chief Points Made by Wood and Armand.

26 CFR §1.468B-1(c)(2) Says
“It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability -…”

By regulation and ruling the IRS has demonstrated that eligibility requires commonality among the claims for which the purported QSF was established to resolve. Commonality of representing law firm, defendant, or professionals working on the matter is unlikely to satisfy this requirement.

Buffalo New York settlement planning firm Milestone Consulting advertises a "National master qualified settlement fund, which the Milestone CEO purports "allows lawyers settling cases now, to ajoinder (sic) to the existing QSF, alleviating the issue of having to get a court order in their particular case or inventory of cases". Milestone is heavily marketing this fund to trial lawyers across the United States. Milestone claims that "QSF regulations only require that the creation and formation of the qualified settlement fund be established pursuant to court order, which, of course, ours is". 

Despite what Milestone claims here are the requirements set forth in the statute:

26 CFR §1.468B-1(c) Requirements. A fund, account, or trust satisfies the requirements of this paragraph (c) if -
(1) It is established pursuant to an order of, or is approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;
(2) It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability -
(i) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended, 42 U.S.C. 9601 et seq.; or
(ii) Arising out of a tort, breach of contract, or violation of law; or
(iii) Designated by the Commissioner in a revenue ruling or revenue procedure; and
(3) The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related persons).

New Jersey attorneys Thomas D. Begley, Jr. and Angela E. Canellos also cast doubts in this practice tip from Chapter 15 their Special Needs Trust handbook emphasizing the "related series of events" issue:

"Structure brokers in mass tort cases are often anxious to force the defense broker out of the picture. It has been suggested that one way to accomplish this , particularly in small cases, is to establish a poled QSF. It is authors' opinion that a pooled QSF would not be effective, because the QSF must be established to  resolve or satisfy one or more contested or uncontested claims, that have resulted from an event (or related series of events)

"If you need tax advice, Robert Wood is the most credible and professional authored tax attorney expert in the country when it comes to lawyers fees, QSFs, and attorney fee deferral"  John T. Bair Milestone Examiner, Buffalo NY  May 14, 2018  

More information about Qualified Settlement Fund

 

Is a Factored Structured Settlement a Qualified Funding Asset?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Do you have a structured settlement or structured attorney fee sold to you by a settlement planner, sourcing the money from a qualified settlement fund, using the settlement planner's qualified assignment company and funded with someone else's structured settlement payments?  If so you may want to check the papers and perhaps speak with your accountant.

The Apparent Steps in the Purported Qualified Assignment

• Defendant, or its Insurer, has paid money in to a qualified settlement fund in exchange for a general release. 
• A periodic payment obligation is created based on the availability of other people's structured settlements offered for sale in the structured settlement secondary market.
• A Qualified Assignment and Release is executed by the Plaintiff/Payee or Attorney/Payee, the settlement planner's Delaware based qualified assignment company and the qualified settlement fund (related, unrelated or possibly administered by the plaintiff's settlement planning firm)
• The Qualified Assignment Release represents that the" Qualified Funding Asset" is Annuity
• The Qualified Assignment and Release  represents that the "Issuer of Qualified Funding Asset" is a Life Insurance Company that issues structured settlement annuities that the settlement planner's firm holds an agency appointment with.
• The Qualified Assignment and Release states  "In exchange for "legal payment rights" pursuant to 5891 of the IRC, to the Periodic Payments specified in Paragraph ____, Claimant hereby  releases and forever discharges the defendant/s and/or the Respondents with regard to the Periodic Payments and agrees only to look to (Name of Settlement Planner's Delaware qualified assignment company) for satisfaction of the obligation to pay periodic payments.
• But the Qualified Assignment and Release also states " In the event of notice of an application to any court for the transfer of payment rights established under this agreement, (Name of Settlement Planner's Delaware Qualified Assignment Company) reserves the right to effectuate a transfer of ownership of the " Qualified Funding Asset(s) to the Claimant/Payee. Upon the transfer of ownership to Claimant and/or Payee, this contract shall terminate.

My first reaction was "Holy Conflated Musical Chairs Batman!" If you have entered into one of these agreements, perhaps you should simply be asking "What the F*** is going on?"

Before we dig deep into that, let's get into the background of qualified assignments and what should be happening when there is a qualified assignment.

What is a Qualified Funding Asset?

Background

For the purpose of this discussion let's assume that we are speaking about a structured settlement which represents payment of damages for personal physical injury or physical sickness. [i.e. qualifies for the income tax exclusion under IRC 104(a)(2)]. Most structured settlements are created via what is known as a qualified assignment. The following chart displays the sequence of events that take place when a typical structured settlement is created.

The term "qualified funding asset", is defined at Internal Revenue Code (IRC) Section 130(d), which states:

"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—

• such annuity contract or obligation is used by the assignee to fund periodic payments under any qualified assignment,
• 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,
• 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
• 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".

Why I Am Concerned About the Settlement Planner's Methodology. Should You Be?

• The settlement planner's own assignment company's  Qualified Assignment and Release document referred to releasing the Defendants  or Respondents. For defendants, an important element of a qualified settlement fund is that it can remove them and their insurers from decisions that must be made post settlement [the "resolve or satisfy rule"]. The qualified settlement fund allows for the defendants to pay cash into the fund in exchange for a general release. Thus, post General Release,  why would they need to be released again in the Qualified Assignment and Release?
• Internal Revenue Code Section 5891 refers to structured settlement payment rights not "legal payment rights". Structured settlement payment rights are defined at IRC 5891(c)(2) as "rights to receive payments under a structured settlement". The term "legal payment rights" appears nowhere in IRC 5891.
• A structured settlement factoring transaction does not involve the sale of an annuity.
• A structured settlement factoring transaction is defined at IRC 5891(c)(3)(A) 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"
• Structured settlement payment rights are also known as " factored structured settlement payment streams". Acquired structured settlement payment rights  are not an annuity according to the National Association of Insurance Commissioners in Statutory Issue Paper 160. 
• Beside the NAIC exclusion of acquired structured settlement payments as not being a covered annuity contract, none of the cash flows are filed with the Department of Insurance in your state. The Departments of Insurance specifically don't regulate factoring because the purchase and sale of cash flows is not the business of insurance.
• If the settlement planner's Delaware qualified assignment company, the taxpayer intended by the statute, has "designated" such factored structured settlement payment stream "an annuity contract" when it isn't, as appears to the case here "(in such manner as the Secretary shall by regulations prescribe) as being taken into account under this section with respect to such qualified assignment", then wouldn't, or shouldn't, there' be an IRS concern? 

A 2017 legal decision in Delaware, the domicile of the settlement planner's qualified assignment company, supports an opinion that the settlement planner's representation of factored structured settlement payment streams as an annuity is a bald- faced lie:

In a March 29, 2017 decision in Greenwald v Caballero-Goehringer, Delaware Superior Court C.A. No. K14C-04-027 JJC. a Delaware Superior Court judge rejected an attempt to portray structured settlement payment rights as an annuity in a minor's prove up hearing, stating. "The proposed "structured settlement" was described in the Third Petition as a structure to be purchased through a third party to be facilitated by a Houston, Texas law firm. The "annuity" proposed by the Petitioner was in fact a "receivable purchase agreement" which involved purchase of the rights of payment of a structured personal injury settlement from a California injured party having nothing to do with this case. In other words, the annuitant in the proposed plan facilitated by the Texas law firm was the California claimant, not the Minor. Furthermore, despite the Petitioner describing The Hartford as providing the annuity, the seller of the receivable purchase agreement was Genex Capital. No rating was provided for that entity in the petition. The Court denied the Third Petition, without prejudice" .  Also see my post Greenwald v Caballero-Goehringer | Judge KOs Portrayal of Structured Settlement Derivatives as Structured Settlement

Is March 2010, Thomas D. Begley, Esq. of the Begley Law Group in Morristown, NJ wrote "The companies do not buy the structured settlement annuity itself, but rather buy the right to the income stream". 

If structured settlement payment rights are not an annuity (or an obligation of the United States), then they cannot be a "qualified funding asset". 

Then the prongs of IRC 130(d) ALL potentially fail.

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 FAILS because a factored structured settlement payment stream is not an annuity contract, but a receivables purchase agreement under Caballero--Goehringer. Settlement Planner's qualified assignment company is not a company licensed to do business as an insurance company. , if—

1. 
   such annuity contract or obligation is used by the assignee to fund periodic payments under any qualified assignment, FAILS because a  factored structured settlement payment stream is not an annuity contract, but a receivables purchase agreement under Caballero--Goehringer. Settlement Planner's qualified assignment company is not a company licensed to do business as an insurance company.
   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, (FAILS because a factored structured settlement payment stream is not an annuity contract, but a receivables purchase agreement under Caballero--Goehringer. Settlement Planner's qualified assignment company is not a company licensed to do business as an insurance company.
   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, FAILS because a factored structured settlement payment stream is not an annuity contract, but a receivables purchase agreement under Caballero--Goehringer. Settlement Planner's qualified assignment company is not a company licensed to do business as an insurance company. 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". FAILS because a factored structured settlement payment stream is not an annuity contract, but a receivables purchase agreement under Caballero--Goehringer. Settlement Planner's qualified assignment company is not a company licensed to do business as an insurance company

Now lets go back to IRC Section 130  (if IRC 130(d) fails,  is there a greater tax issue of an attempt to characterize factored structured settlement payments streams as qualified funding asset?

IRC 130(a) In general  Any amount received for agreeing to a qualified assignment shall not be included in gross income to the extent that such amount does not exceed the aggregate cost of any qualified funding assets.  Does this now FAIL because there has been no purchase of a qualified funding asset?  Was the settlement planner's qualified assignment company entitled to a tax exclusion under IRC 130, or did they report the income on its tax return?

IRC 130 (b)Treatment of qualified funding asset In the case of any qualified funding asset—

(1)the basis of such asset shall be reduced by the amount excluded from gross income under subsection (a) by reason of the purchase of such asset, and
(2)any gain recognized on a disposition of such asset shall be treated as ordinary income.

But what about the term "obligation" as  a "qualified funding asset"under Internal Revenue Code 130(d)?  Reading the express language of the statute one can clearly see that It refers solely to an obligation of the United States.

This is Qualified Assignment 101 folks. One wonders how many qualified assignments were done this way and what an IRS audit of the books  and tax records of the qualified assignment company would turn up?

2. Securities and Exchange Commission/ FINRA investor alert 2013-86 also warns investors who might be attracted to the yield offered by buying the rights to someone else’s pension or structured settlement to be aware that:

• Investors may encounter commissions of seven percent or higher. [Our note:  the fees/mark up may or may not be disclosed. There are places to hide fees. Always ask to avoid a steep mark up] "Not surprisingly, the amount paid by the second plaintiff for the recycled payment stream is much greater than what the factoring company paid to the original payee. The factoring company markets the recycled payment stream based on its apparently attractive yield. However, because the recycled payment stream is taxable and also fraught with risk, the deal is not as good as advertised" -Stephen R. Harris, Esq.  Cozen O'Connor " Recycled Annuities" a Bad Alternative for Funding a Structured Settlement American Bar Association Journal December 17, 2018. 
• Pension and structured settlement income-stream products may or may not be securities and likely are not registered with the SEC.  
• These products could be difficult to sell if you need money and want to sell the product.
• Your “rights” to the income stream you purchased could face legal challenges

To jury rig the Qualified Assignment and Release document and misrepresent acquisition of someone else's structured settlement payment stream as a "Qualified Funding Asset(s) is outrageous, to say the least!

• "The settlement planner recently promoted a glossy attorney fee deferral brochure which also refers to these instruments by the tertiary market scam label " secondary market annuities.
• On the one hand, the same glossy brochure cites the seminal case of Childs v Commissioner, in which "the Petitioners never had the right to receive immediate payment, and non fund or property was set aside for petitioners which they could draw on at a time of their choosing", yet the glossy brochure says  "Change your investment at any time during deferral". Ohhhhkay.....
• Without the IRC 130 exclusion, If the attorney fee deferral is for more than one year and the factored structured settlement payments were an annuity, which they are not, is there any adverse consequence to the qualified assignment company?
• Again what the settlement planner is peddling as an annuity is not an annuity/ are not annuities.

Worth Reading ‘Recycled Annuity’: A Misleading Phrase For A Risky Investment That No One Should Confuse With A Structured Settlement by Pete Vodola.  Vodola is a Connecticut attorney who is intimately familiar with structured settlement factoring tranactions having consulted with and litigated on behalf of annuity issuers on compliance issues related to structured settlement protection acts thrroughout the United States for more than 15 years.

 

 

 

 

 

 

 

 

 

Genex Capital 10th Anniversary of Faulty interest Rate Prediction to Induce Sell Structured Settlements

by Structured Settlement Watchdog

Dubious Genex Capital Anniversary

Ten years ago today Genex Capital CEO Roger Proctor cried wolf about rising interest rates in an attempt to get structured settlement annuitants to sell their

A Decade of "Clairvoyance"

structured settlement payments to his company for pennies on the dollar. His prophecy tuned out to be a dud. Anyone who got sucked in by Proctor's scare tactics would have lost money.

Genex Capital CEO Roger Proctor's cry of wolf from March 26, 2010:
"WARNING AGAIN: If you are thinking of selling your structured settlement payments, do it NOW, before interest rate increases eat into the value of your future payments and make you poorer".
Proctor's sense of urgency and act of "clairvoyance" proved to be unfounded and interest rates actually declined, in some cases massively, between March 26, 2010 and March 25, 2020. Lower interest rates mean a higher present value. 

5 Year US Treasury

March 26, 2010 2.59%
March 25, 2020 0.49% WOW!

10 Year US Treasury
March 26, 2010 3.86%
March 25, 2020 0.80% WOW!

30 Year US Treasury
March 26, 2010 4.75%
March 25, 2020  1.37%  WOW

 

CrowFly "Maximize Profits" With Pennies on the Dollar Structured Settlement Exchange?

by Structured Settlement Watchdog

Maximize profits? Oh Dear Lord!

Hocus pocus from CrowFly LLC today as a Google ad from the company suggests that selling payments from your structured settlement is a profitable deal and that you can "maximize profits" with CrowFly.   Maximize profits for whom?

• Nobody profits on the sale of their structured settlement except the buyer, or the "toll-taker",
• Doing business with CrowFly is a money loser every single time for sellers, just like any other structured settlment factoring company.
• You always lose money with CrowFly when you use them for structured settlement cash now, unless you do not sell, just like with any other structured settlement factoring company.

CrowFly's advertising has plummeted to a level of the worst of the structured settlement factoring companies. Who cares if "they care", if consumer facing ads like in the inset (right) are a lie.

CrowFly Founder Misleads in Pitching Factored Structured Settlements as Life Insurance Products to Replace Treasuries

by Structured Settlement Watchdog

Why is Milestone Consulting CEO and CrowFly Board Member Misrepresenting Non Insurance Products as Insurance Products To Investors?

In January 2020, in his Milestone Consulting hat, Milestone CEO John T. Bair claimed that structured settlements were irrelevant. He doubled down in a post in February. Now in March 12, 2020, with his CrowFly, LLC factoring origination hat on, CrowFly Board member published  " Can Recycled Structured Settlement Annuities Replace U.S. Treasuries in Your Portfolio?"

Bair sets up the misrepresentation with a nod to Bob Dylan "The times, they are a-changing. War, pandemic, inflation, recession, oil shortages, housing markets, liquidity in the markets. These and thousands of other factors can make the stock market a wild ride for some, and downright devastating for others.

I'll tee up my touche with a quote from "Bare" Naked Ladies "Hold it now and watch the hoodwink As I make you stop,  and think"*

Bair says 'replace your low-yielding corporates and Treasuries in exchange for a 20-year guaranteed structured settlement that yields 4.5 percent — a value proposition if you’ve ever seen one. Interested in these “super bonds”?' 

Bair, proposes that "there is, on average, $2 billion worth of assets that are made available every year as people with structured settlements face life circumstances and need to sell at a slight discount. These assets are life insurance products, guaranteed by the issuer, and in most states by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). Are these regulatory safety nets as good as Uncle Sam? No, but they are the next best thing in terms of credit. The ratings of the companies whose paper circulates in this market are Berkshire Hathaway, MetLife, New York Life, Prudential, Pacific, and others — all A+ and A++ A.M best rated insurers. Their guarantees have held up through major wars and other global calamities. So, it’s secure paper in my opinion.

Let's take Bair's statements one by one show why, in my opinion, they are wholly misleading:

1. What Bair calls " Recycled Structured Settlement Annuities" are not in fact annuities, they are factored structured settlement payment streams.  Life insurers buy individual streams or securitizations of factored structured settlement payments streams as investments, but they are not permitted to account for them as annuities or insurance products pursuant to the NAIC's Statutory Issue Paper 160.
2. The buyer of a factored structured settlement payment stream (such as that being peddled by Mr. Bair as a Treasury alternative) is not buying an annuity or a life insurance product per Statutory Issue Paper 160. 
3. One has to pose a big question WHY Bair fails to refer to the instrument he is pitching to investors truthfully and accurately. Instead of " factored structured settlement payment streams"  (NAIC) or "structured settlement payment rights  (Internal Revenue Code), in the most recent publication he uses " recycled structured settlement annuities and "super bonds".   He has also used in other published sales pitches, the tertiary market scam label "Secondary market annuity".
4. One wonders how securities regulators view the use of the term "super bonds".  Factored structured settlement payment streams are not bonds. Another former heavy user of "secondary market annuity" settled a FINRA complaint against him and a former employee for an aggregate $105,000  [Cooper v Somerset et al.]
5. Bair's published statement "These assets are life insurance products, guaranteed by the issuer, and in most states by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) is false in more ways than one.  Factored structured settlement payments streams are not insurance products according to the National Association of Insurance Commissioners as set forth in Statutory Issue Paper 160. Furthermore, in a January 26, 2009 opinion letter addressed to me, subsequently published by the New York State Insurance Department (now Department of Financial Services),  the Office of General Counsel concluded in answer to my quesion, that N.Y. Insurance Law Section 7718 broadly prohibits the existence of LIGCONY for the purpose of selling, soliciting or inducing the purchase of annuity contracts. Thus a statement that "state insurance guaranty funds provide an additional layer of protection for future structured settlement recipients", which is aimed at New York residents, runs afoul of Insurance Law,  Can Mr. Bair, who individually and through Milestone is licensed as an insurance agent in the State of New York and many other states legally make (1) the false claim that factored structured settlements are life insurance products in the inducement to buy/invest and (2) draw a conclusion from the false claim in (1), in inducing the purchase of factored structured settlement payment streams,  that they are guaranteed by NOLHGA
6. Bair and his agency continue to be appointed by many, but not all of the life insurers issuing structured settlement annuities.

Don't misconstrue this sharply word piece. Bair is a maverick and he does a lot of good things like End Distracted Driving and other pro bono work, but Bair sometimes just leaves you scratching your head with a reckless disregard for the truth such as here. It's just not necessary. Substitute olive oil for the snake oil. It's a lot healthier.

 

*from Barenaked Ladies " One Day" , 1999 Reprise records, written Ed Roberston

 

 

Get More Money "From Your Structured Settlement Annuity" | Settlement Payment Buyout?

by Structured Settlement Watchdog

A structured settlement factoring origination firm from Buffalo New York claims that you can "get more money from your structured settlement annuity" by doing a settlement payment buyout. Clever marketing language it isn't.  It's total rubbish.  When you sell your structured settlement payments you get pennies on the dollar. It's indisputable. It doesn't matter who you sell to you still get only pennies on the dollar, even from flying "carrion birds" that care.

Crow, I'm afraid that shit just doesn't fly. You always get less out of your structured settlement annuity when you sell.