by John Darer® CLU ChFC MSSC RSP CLTC
It is absolutely shocking to discover a major blunder on the web site of one of the structured settlement industry veterans in a discussion of financial risk:
"From the claimant's perspective, structured settlements are not an acceptable form of settlement unless there is confidence that all future payments will be made in full. This concern arises because of a condition imposed by federal tax law: as a condition to receiving a structured settlement tax-free, the claimant may be no more than a general creditor of the obligor. This means that the claimant is not allowed to improve his creditor rights by taking a security interest in property owned by the obligor. Instead, the claimant receives only a contract right against the obligor. The value of this contract right depends on the obligor's creditworthiness".
A. The statement about "no more than a general creditor" is not accurate and has not been accurate for more than 2 decades! At the time of posting, with all but two annuity issuers, a security interest IS available and expressly permitted under Federal tax law. Although not in the Periodic Payment Settlement Act of 1982, IRC §130(c)(2)(D) was amended in 1988 to allow the recipient to be a secured creditor of the funding asset.[ see Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, § 6079, 102 Stat. 3709 (1988)].
B. Have a look at the text of IRC 130 (c) Qualified assignment
"Assignee hereby pledges and grants to each Claimant, unless excluded by the Agreement, a lien on and security interest in all of Assignee's right, title, and interest in the Annuity purchased to fund Assignee's obligations to such Claimant (the "Pledged Annuity") under the Agreement. The Pledged Annuity secures the obligation of Assignee to make such Periodic Payments." (emphasis ours)