Can a Plaintiff Purchase a Structured Settlement Annuity? ​

by John Darer CLU ChFC MSSC CeFT RSP CLTC

In Settlement Planning "Identity Politics", Letters Matter

It's been said that words matter, but in settlement planning sometimes letters matter! 

Fellow Settlement Planner Has B in His Bonnet

This following claim was seen December 30, 2023 on the FAQ page of a Western US settlement planning firm's website in an answer to the question posed in the title to this blog.

"No. Only a qualified settlement fund (468(b)(1)), the defendant, the insurer or an assignment company may purchase an annuity to fund a structured settlement"

Note: We'll deal with the answer to the question later in this blog.

And the "B in Bonnet" is a coast-to-coast phenomenon too!  A New York settlement planning firm advertises that it "administers 468(b) qualified settlement funds

Why Do Letters Matter in Settlement Planning "Identity Politics"

Here's why letters do matter...

26 U.S. Code § 468 - Special rules for mining and solid waste reclamation and closing costs | U.S. Code | US Law | LII / Legal Information Institute (cornell.edu)

IRC 468(b) is for "Allocation for property where election not in effect for all taxable years

If the election under subsection (a)(1) is not in effect for 1 or more taxable years in which the reserved property is disturbed (or production occurs), items with respect to the reserve property shall be allocated to the reserve in such manner as the Secretary may prescribe by regulations.

Now, if one were to extract the " B" from the settlement planning firms' respective bonnets,

"I.R.C. § 468B(b)(1) In General — 

There is imposed on the gross income of any designated settlement fund for any taxable year a tax at a rate equal to the maximum rate in effect for such taxable year under section 1(e)".  Source: Ibid.

 

The "B" in the bonnet, get it?   Now let's tackle a few important questions....

 

Please refer first to the following link and the flow chart below.

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

A fundamental part of a settlement is a "meeting if the minds" in which one party makes the promise to make future periodic payments as part of the consideration for a release from liability ("Periodic Payment Obligation". The establishment of most structured settlement involve a qualified assignment. What is a Qualified Assignment? (4structures.com).

In general, it is the qualified assignment company that purchases the structured settlement annuity, as a qualified funding asset, as set forth in IRC 130(d). Where there is a qualfied assignment, the purchase of structured settlement annuity (or annuities) occurs in Step 3.

To further illustrate, the typical qualified assignment and settlement agreement have language that looks like this:

"Assignee-Debtor may fund the Periodic Payments by purchasing the Annuity from Annuity Issuer to serve as a “qualified funding asset” within the meaning of section 130(d) of the Code. All rights of ownership and control of the Annuity shall be and remain vested in Assignee-Debtor"

Can a Plaintiff Purchase a Structured Settlement Annuity?

​No, neither a plaintiff, nor any plaintiff lawyer, can actually buy a structured settlement annuity for themselves. In the unlikely circumstance either or both are a self insured Respondent, or a Defendant in a lawsuit, and the parties enter into a settlement agreement in which the Plaintiff is to make future periodic payments are part of the consideration and that the Plaintiff in THAT case makes the imprudent decisions to consent to a "buy and hold" in which Plaintiff in THAT case agrees to be a general creditor of an individual for the duration of the structured settlement payout possibly stretching decades into the future.

Stretching the bounds of intellectual curiosity, one can ask if a Plaintiff can sue themselves?  Surely a Plaintiff cannot make a promise to pay damages to himself/herself/themselves. See Your Guide to Suing Yourself [Yes, Really] (donotpay.com).

For my life insurance company readers, I'd love to hear from the intellectually curious among you after you read the "Guide to Suing Yourself-Yes Really". Let's put this improbable issue to rest.

Can a Firm-wide Qualified Settlement Fund Purchase a Structured Settlement Annuity?

No, a firmwide qualified settlement fund cannot purchase a structured settlement annuity. Why would any plaintiff want to be a general creditor of a law firm QSF? If a Firmwide QSF proves to actually stand up over a long period of time and have sufficient assets in the event of insolvency of the annuity issuer to make up shortfalls? Limits on insurance policies for financial advice are limited and in any event insolvencies are usually not covered. What if the Firmwide QSF owned annuities to fund obligations from multiple losses and multiple durations? 

Can a Qualified Settlement Fund Purchase a Structured Settlement Annuity?

No, a qualified settlement fund cannot purchase a structured settlement annuity?  Same as above. Rev. Proc. 93-34 discusses how a QSF may enter into a qualified assignment as a party to a suit or agreement. 

For my life insurance company readers, I'd love to hear from the intellectually curious among you after you read the "Guide to Suing Yourself-Yes Really". Let's put this improbable issue to rest.

I personally contacted multiple structured settlement annuity issuers to confirm whether each would allow a plaintiff to purchase their structured settlement annuity. Some of the responses:

1. "They do not offer an unassigned product"
2. "No, they would not under any circumstances"
3. "They don't see how it would be possible, because once a QSF has paid out its claims it ceases to exist".
4. "No, not under any circumstances"

Maybe the settlement planner has an explanation worth posting on its website?

The QSF Purchasing Structured Settlement Annuities Canard | Leaving No Stone Unturned

In the 2010s, with interest rates falling, certain settlement planners began to promote creative ways to fund plaintiffs' needs. One being promoted was using structured settlement receivables, which carried more risk and tempering that risk by deceptively calling them "in force annuities" as a marketing gimmick not an annuity. 

Some took it a step further, like a West Coast settlement planner whose April 4, 2012 Declaration to the Court under penalty of perjury. was a misrepresentation under penalty of perjury, about the nature of structured settlement receivables as  "no change in funding asset".. Structured settlement receivables are not annuities, let alone structured settlement annuities) 

Notable in the Calfornia settlement planner's Declaration is the settlement planner's choice of parenthetical emphasis... "inforce" annuities.

How did California Insurance Law define annuities at the time?

The settlement planner's under penalty of perjury declaration was dated in April 2012 and submitted to the Superior Court by a member of the California Bar in May 2012. California Insurance Code Section 10509.913 was added by Chapter 295, statutes of 2011 (AB689), effective January 1, 2012 and includes the Definition of "annuity". "10509.913 (a) “Annuity” means an annuity that is an insurance product under California law that is individually solicited, regardless of whether or not the product is classified as an individual or group annuity. See  CA Ins Code § 10509.913 :: Section 10509.913 :: 2011 California Code :: US Codes and Statutes :: US Law :: Justia

The Texas Insurance Code at the time of the Declaration was Sec. 1116.001. DEFINITION. In this chapter, "annuity" means a fixed, variable, or modified guaranteed annuity that is individually solicited, whether classified as an individual annuity or group annuity. INSURANCE CODE CHAPTER 1116. REQUIRED PROVISIONS FOR ANNUITY CONTRACT (texas.gov) 2nd Leg., R.S., Ch. 77 (H.B. 1032), Sec. 1, eff. September 1, 2011.

The Declaration and the Petition are public record of  course and I have a copy. The West Coast settlement planner's Declaration under penalty of perjury was submitted  to the CA Superior Court in San Francisco by a member of the California bar, in support of creation of a QSF for a Texas plaintiff's Special Need Trust. The Petition sought to use a QSF to buy the structured settlement receivables that were not annuities as defined under California law.

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SIDE BAR

People who appreciate assiduous research may enjoy delving into this 1942 California Court of Appeals decision about who can issue an annuity

Equitable Life Assurance Society v. Johnson :: :: California Court of Appeal Decisions :: California Case Law :: California Law :: US Law :: Justia

"It is beyond question, however, that a sum of money paid and received in consideration for an insurance, endowment or annuity is a premium, whether it be sufficient or not from an actuarial standpoint. A very simple definition would seem to be: 'A premium is the price of an insurance, endowment or annuity.'

"Annuities can be purchased through insurance agents, financial planners, banks and life insurance carriers. However, only life insurance companies issue policies".  See How are annuities sold? |Insurance Information Institute

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What Would Happen if Structured Settlement Receivables Were Annuities?

If in fact the structured settlement receivables were annuities (they were only misrepresented as such in a Declaration under penalty of perjury, by a licensed California insurance agent, in support of a petition submitted to the Court by a member of the California bar, to advocate for the establishment of a QSF, so that the QSF Administrator could buy structured settlement receivables (misprepresented as annuities) for the SNT of a Plaintiff in another state), and what they paid for the receivables (misprepresented as annuities) was a premium. What about the premium tax? California levies a 2.35% state premium tax on annuities. Qualified deferred and income annuities are taxed at 0.5%.

Someone would be caught in a Hobson's Choice,  with the defense to not paying the taxes would be that what were misrepresented as annuities under penalty of perjury and submitted by a member of the California Bar as part of a petition to the Superior Court, were not in fact annuties. Ruh-Roh!

Any financial planners still want to call receivables structured settlement annuities?   

CA Settlement Planner's Scary Declaration Supporting Convoluted QSF and "In Force" Annuities Pitch - Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and John Darer Reviews (typepad.com) ,my blog published June 9, 2021

Today 80% of US states (as of August 2023) expressly exclude structured settlement receivables from state insolvency schemes. For the other 20%, the exclusion is retroactive following state adoption.

Investing in Structured Settlements A Guide for Unwary Investors and Judges (4structures.com)

What Is A Qualified Settlement Fund §468B-1 | When to Use QSFs (4structures.com)

Let's try to do better people.

Last updated January 5, 2024