by John Darer CLU ChFC MSSC CeFT RSP CLTC
When a structured settlement is part of the settlement package for your client's legal case, then the consideration MUST be cash and future periodic payments (with the schedule expressly described).
Language in a settlement agreement and release which does not create an obligation to pay future periodic payments is to be avoided. Without consideration being properly expressed the structured settlement could fail, with financial consequences to all parties, Defendant, Plaintiff and Insurers.
We sometimes see proposed settlement agreement language which says "Defendant or its Insurer will arrange for the purchase of an annuity". This is a potentially fatal mistake. But why is it a fatal mistake?
For starters, a properly formed structured settlement is not simply "buying an annuity"
There is unfavorable taxation on corporate owners of annuities, for which IRC 130 provides an express exclusion, if the requirements of IRC 130 are met. Most Defendants or Insurers do not want to retain the contingent liability of a long tail periodic payment obligation on their books and this is one of the reasons most structured settlements are created using qualified assignments. Lastly, the plaintiff or payee may not want to be tied emotionally or financially to the Defendant who harmed, them, or whose product or servce harmed them and the qualified assignment helps to accomplish this. .
A qualified assignment is defined in the United States Internal Revenue Code of 1986, as amended, in Section 130.
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)—