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,
(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).
- 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.
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
Comments and Trackback Policy