by John Darer CLU ChFC CSSC
"Know The Assignee for your Structured Settlement" was the title of two previous entries for this blog.
What I'm saying to you attorneys is "Danger Will Robinson, Warning! Warning!" (the catch phrase from the 1960s TV series Lost in Space, now a teasing way in which you tell someone that he or she is about to make a huge mistake) that there's a factor you may overlook which ought to be taken into account.
Today I spoke with a tax attorney who is knowledgeable about the structured settlement business, in particular Section 130 of the Internal Revenue Code which he took part in drafting.
It's a given that physical injury damages are excluded from income pursuant to Section 104(a)(2) of the Internal Revenue Code. Worker's Compensation payments are also excludable pursuant to Section 104(a)(1) of the Internal Revenue Code. In most structured settlements there is a qualified assignment. In this case the obligation or "promise to pay" of the Defendant, or its Insurer, is assigned to the qualified assignee.
Prior to Section 130 most structured settlements were unassigned and the Defendant or Insurer owned the annuity. The promise to pay was only as good as the good faith and credit of the Defendant or Insurer and the asset (annuity), used to fund the structure, was part of the general assets of the Defendant or Insurer. In the event of bankruptcy the best the Plaintiff could hope for was to be a general creditor. Section 130 changed all that by permitting a substitution of obligors. Both sides benefit. The Plaintiff does not have to rely on the general credit of the Defendant for an extended period of years or for the rest of his life. The Defendant gets the obligation of its books and should be able to write off the payment as a business expense.
An important prerequisite of the tax exclusion afforded the assignee under Section 130 is that a qualified funding asset must be purchased.
A qualified asset may be an annuity or an obligation of the United States government. If a qualified funding asset is not purchased the assignee loses its tax exclusion and would likely have to recognize income that would otherwise be excluded under Section 130. Without the exclusion, the assignee might not be able to meet its obligations under the structured settlement. For example if the Defendant pays $1,000,000 to the the Assignee and the Assignee does not purchase a qualified funding asset within 60 days of the qualified assignment then the $1,000,000 represents taxable income to the Assignee. Faced with 2/3 of the $1,000,000 (after 1/3 taxes) how is the Assignee now going to make up the difference without exposing the Plaintiff to an extraordinary amount of risk?
As previously discussed purportedly there is a well-known plaintiff structured settlement broker in our industry who is purportedly taking on, or attempting to take on, qualified assignments in the name of the firm of which he is an officer.
I have seen, with my own eyes, a copy of a settlement agreement that was purportedly submitted with the name of his firm as assignee. Purportedly there is paperwork out there in a Petition which would suggest that less than the full amount of the annuity proposal presented to the Court for its approval of that case was scheduled to be paid to the Plaintiff. In the purported attempted transaction in question the attempt of this broker to effectuate this transaction was thwarted. But it begs the question of whether anyone else has been subject of activity similar to those described here.
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