by John Darer® CLU ChFC MSSC RSP CLTC
What federal tax rules govern the use of structured settlements and qualified assignments?
One ANSWER appearing on an industry website: "In order to protect the public, Congress specified in Section 130 the requirements to establish a qualified assignment:
- The assignee assumes the liability from the defendant;
- Both the victim (and his/her attorney) and the defendant agree that the payment schedule cannot be "accelerated, deferred, increased or decreased";
- The payment stream may be excluded from the recipient`s gross income for tax purposes;
- The injury must be a physical sickness or injury; and
- A highly secure funding asset (such as an annuity or U.S. Government obligation) must be used to fund the payments".
While the statement on the other website is true by itself, it is an incomplete answer, because it completely ignores the FACT that the terms of Rev Proc 93-34 provide assurance that a designated settlement fund or qualified settlement fund will satisfy the "part to the suit or agreement" requirement set forth in IRC 130(c)(1). This is of importance to lawyers who handle mass torts, class actions and those who participate in class action lawsuits.
To wit, please find the relevant text of Rev Proc 93-34
.01 A designated settlement fund or a qualified settlement fund will be treated as "a
party to the 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
(b) a claim described in section 2.05(2) in the case of a qualified settlement
(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 settlementfund will not be treated as receiving a deemed distribution described"
Recap of How Structured Settlements Work, including a helpful flow chart
What is a Revenue Procedure?
A Revenue Procedure or Rev. Proc., such as Rev. Proc 93-34 is a statement from the IRS or state tax authority intended to provide guidance to taxpayers with regard to the administration of laws and regulations.