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What is a qualified assignment?
A qualified assignment is a formal arrangement wherein a defendant or its insurance company or other representative agrees to transfer their obligation to make future periodic payments to a third party (“an assignment company”)..
When a settlement is reached that involves future payments to the claimant, the defendant and its insurers typically anticipate meeting the obligation to make the future payments with a structured settlement annuity. Structured settlement annuities typically require qualified assignments. A qualified assignment is a formal arrangement wherein a defendant or its insurance company or other representative agrees to transfer their obligation to make future periodic payments to a third party (“an assignment company”). This is generally done using a uniform qualified assignment (“UQA”) document. The UQA is designed to meet the requirements of IRC Section 130, which is the section that determines what cases qualify for an immediate tax deduction for the payor after making a third party assignment. Among these requirements are:
- The assignee assumes the liability from a party to the suit or agreement;
- The payments are fixed and determinable;
- The payments cannot be accelerated, deferred, increased or decreased, or otherwise changed after the agreement is reached;
- The assignee's obligation is no greater than that of the assignor;
- The periodic payments are excludable from the recipient's gross income under Section 104(a)(2), and, for settlement of filed workers compensation claims on or after 8/5/97, Section 104(a)(1);
- The injury must be a physical sickness or injury;
- A qualified funding asset must be purchased.
The UQA identifies the parties involved and makes clear the schedule of future payments required by the claimant in the form of an addendum. Once the UQA is signed by both parties the claimant agrees to release the original defendant from further liability. After paying the agreed premium to the assignment company, the defendant is released from the claim and it can take a tax deduction for the payment and go about its business without the burden of the liability for future payments.
In order to implement qualified assignments, insurance companies participating in the structured settlement market set up assignment companies that will accept the assignment and subsequently purchase the annuity. Usually these companies do nothing but assume the obligations of defendants and hold qualified funding assets. The assignment company is typically associated with the issuing life insurance company. A structured settlement annuity is purchased from the related life insurance company as a qualified funding asset. The assignment company, not the payee, then owns the contract for the duration of the contractual period.
Qualified assignments are an integral part of a structured settlement and thus should always be reviewed by experts to ensure proper execution.
Call a settlement expert now, what is a qualified assignment, why most insurers won't structure without one.
What is a qualified assignment with a structured settlement?
A qualified assignment enables a Defendant, Insurer, or Qualified Settlement Fund, to achieve a complete novation of the future periodic payment claim when a structured settlement is established, through a substitution of obligors. This is important to Defendants, or Insurers because the total payments from a structured settlement will exceed the cost of the structured settlement. A structured settlement is a useful settlement tool for all parties, but without a qualified assignment the Defendant or insurer has contingent liability in the event of insolvency of the annuity issuer that could exceed the settlement funding amount.
A qualified assignment is a transfer of a contractual obligation to make future periodic payments, which satisfies the requirements of Internal Revenue Code (IRC) §130. In a structured settlement agreement, the original obligor (the defendant, insurance carrier for the defendant, or the trustee of an IRC 468B qualified settlement fund), assigns its obligation to make the future periodic payments defined in the settlement agreement to a "qualified assignment company".
Today it is very rare that a structured settlement is established as part in a personal injury, wrongful death or workers compensation settlement without a qualified assignment.
Only payments which represent damages for personal injury, physical sickness, wrongful death and payments for workers compensation may be assigned via a qualified assignmen t.
Qualified Assignment in the Internal Revenue Code
According to IRC 130(c) , 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 on account of personal injury or sickness (in a case involving physical injury or physical sickness)—
(1) if the assignee assumes such liability from a person who is a party to the suit or agreement, or the workmen’s compensation claim, and
(2) if —
(A) such periodic payments are fixed and determinable as to amount and time of payment ,
(B) such periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments,
(C) the assignee’s obligation on account of the personal injuries or sickness is no greater than the obligation of the person who assigned the liability, and
(D) such periodic payments are excludable from the gross income of the recipient under paragraph (1) or (2) of section 104(a).
The determination for purposes of this chapter of when the recipient is treated as having received any payment with respect to which there has been a qualified assignment shall be made without regard to any provision of such assignment which grants the recipient rights as a creditor greater than those of a general creditor.
(d) Qualified funding asset
For purposes of this section, the term “ 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, if—
(1) such annuity contract or obligation is used by the assignee to fund periodic payments under any qualified assignment ,
(2) 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,
(3) 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
(4) 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.
Does " fixed and determinable" mean that payments are fixed at a certain amount and cannot change?
The IRS has concluded in several Private Letter Rulings over two decades, obtained by structured settlement annuity issuers in support of product innovation, that fixed and determinable could be based on an objective formula
In IRS PLR-202127039 (published July 9, 2021) in response to a request from American General Life Insurance Company in support of its Interest Linked Structured Settlement Annuity, the IRS ruled:
- The periodic Subject Payments of damages that Minor will receive are fixed and determinable as to amount and time of payment within the meaning of § 130(c)(2)(A) even though they are calculated pursuant to an objective formula based on the performance of 10-year United States Treasury Bond Yield Rate. In addition, the other requirements of § 130(c) have also been met. Accordingly, the assignment entered into pursuant to the Assignment Agreement is a qualified assignment under § 130(c).
2. The Annuity purchased by the Assignee qualifies as a qualified funding asset under § 130(d).
In IRS PLR 201435006 (published on August 29, 2014) in response to a request by Pacific Life to support its Index Linked Annuity Payment Adjustment Rider (ILAPA), the IRS ruled that:
1. The periodic payments of damages that Claimant will receive are fixed and determinable as to amount and time of payment within the meaning of § 130(c)(2)(A) even though they are calculated pursuant to an objective formula based on the performance of the S&P 500 Index.
2. The Structured Settlement Indexed Annuity which Assignee will acquire from either Issuer 1 or Issuer 2 will not fail to qualify as a qualified funding asset under § 130(d) solely by reason of annuity’s variable payments.
3. The possibility of a commutation by Claimant pursuant to the Notice of Hardship Conversion will not affect whether the structured settlement assignment satisfies the requirements of a qualified assignment under § 130(c).
4. The annuity purchased by Assignee will not fail to be a qualified funding asset under § 130(d) by reason of the Notice of Hardship Conversion.
In PLR 199943002 (1999), obtained by MetLife to support a variable annuity structured settlement product it was introducing, the IRS concluded:
I1. The periodic payments of damages that Claimant will receive are fixed and determinable as to amount and time of payment under § 130(c)(2)(A) even though they are calculated pursuant to an objective formula based on the performance of the Standard & Poor’s 500 Stock Index and/or a mutual fund portfolio designed to achieve long-term growth of capital and moderate current income;
2. The annuity Assignee will acquire from Issuer will not fail to qualify as a qualified funding asset under § 130(d) solely by reason of the annuity’s variable payments, which are reasonably related to the periodic payments under the qualified assignment; and 3. Claimant’s physical possession of the annuity solely to perfect, under applicable state law, a security interest in the annuity used to fund the periodic payments will not cause Claimant to receive income in the year Claimant takes possession of the annuity contract if the defendant's assignment to Assignee is a qualified assignment under § 130(c).
What is a qualified assignment company?
Generally, a qualified assignment company is a special purpose company, which does little more than hold structured settlement annuities or United States Treasury obligations as a "qualified funding asset" to back up the periodic payment obligations it assumes from Defendants, Insurers or qualified settlement fund administrators/trustees. A qualified assignment company may actually be an insurance company itself, but most qualified assignment companies are not insurance companies. When an annuity is used as a qualified funding asset, the qualified assignment company is usually related to the life insurance company issuing the structured settlement annuity. In such cases, the qualified assignment company typically purchases an annuity from the related life insurance company as a qualified funding asset pursuant to IRC 130(d).
Types of Qualified Assignment Agreements
1. Qualified Assignment (QA)
A legal instrument executed by Defendant, Insurer or Qualified Settlement Fund Trustee and Qualified Assignment Company
Also referred to as a two-party qualified assignment.
2. Qualified Assignment and Release (QAR)
A legal instrument executed by Defendant, Insurer or Qualified Settlement Fund Trustee, Qualified Assignment Company and Releasing Party. Also referred to as a three-party qualified assignment
3. Qualified Assignment Release and Pledge (QARP)
A legal instrument executed by Defendant, Insurer or Qualified Settlement Fund Trustee, Qualified Assignment Company and the Claimant-Secured Party. Used where there is a desire to give the payee a security interest in the annuity contract.
Which Qualified Assignment Agreement to Use?
While the QA works, it is no longer the standard of practice. While it affects the plaintiff, the QA's two-party process is not inclusive of the plaintiff. It is between the insurer and the assignment company. With the next two options, the QAR and QARP a plaintiff signature and review is required.
Where the Claimant-Secured Party is different than the Releasing Party an additional signature on the QARP may be required.
For example, a minor plaintiff who will be adult when payments are made but is represented by a parent or guardian at the time of settlement. Another example could be where the payee is a Special Needs Trust (Supplemental Needs Trust, in New York), and the trust is the secured party, but the plaintiff is releasing the claim
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The Top 5 Reasons to Consider a Structured Settlement
Lump sum vs. structured settlement: what’s the better choice, qualified vs. non-qualified assignments: what do they mean for settlement proceeds.
Structured Annuities: How They Work
If a claimant decides to utilize a structured settlement, the defendant (or insurance company) “assigns” its obligation to pay to a third-party assignment company. The assignment company then uses the settlement proceeds to purchase a structured settlement annuity that provides regular payments to the claimant based on a schedule previously chosen by the claimant.
When an attorney chooses a fixed annuity as the financial vehicle for their attorney fee deferral , the process is essentially the same: the defendant or insurance company directs the fees to an assignment company, which then uses the funds to purchase an annuity. The attorney receives the annuity payments on a pre-determined schedule.
A “qualified assignment” simply means one that qualifies for income tax exclusion based on the criteria defined in Internal Revenue Code §§104(a)(2) and 130. Settlement proceeds from personal injury, wrongful death, and workers’ compensation cases all fall under this designation. Not only are the settlement proceeds income-tax free, but if placed in a structured settlement annuity, the growth on the proceeds is also income tax-free.
A “non-qualified” assignment is—you guessed it—one that does not qualify for income tax exclusion. However, certain types of non-injury settlements do still have the option for tax-favored treatment . If placed in a structured annuity, taxes are only due on the proceeds as they are received. Rather than getting hit with a large tax bill for a cash lump sum payment, the tax obligation can be spread out over time.
A non-qualified assignment can be used for attorney fee deferrals and for a multitude of legal settlements, including: age discrimination, Americans with Disabilities Act, athletes’ endorsement fees, celebrity endorsement fees, construction defects, divestment, divorce settlements, environmental settlements, legal fee disputes, legal malpractice/professional errors and omissions, race discrimination, sexual harassment, structured sales, and wrongful termination.
Contact Traci Kaas to learn more about your options
To learn more about financial options for injury and non-injury settlements, contact the experienced team at Traci Kaas today. We can be reached at [email protected] or 800-354-2258.
How to reap long-term financial benefits in a taxable damages case: the latest options for settlements outside of the realm of physical injury, physical sickness, or wrongful death, vote for tsaw as california’s #1 structured settlement provider.
What’s the Difference Between Qualified vs. Non-Qualified Settlements?
What is the difference between a “ qualified ” structured settlement and a “ non-qualified ” structured settlement?
When describing a structured settlement, the terms “ qualified ” and “ non-qualified ” generally refer to “ assignments ” and IRC Section 130. The primary tax difference, from a structured settlement recipient’s perspective, is that “ qualified ” structured settlement periodic payments are excluded from income tax whereas “ non-qualified ” structured settlement periodic payments are deferred until actually received.
The term “ qualified assignment ” is defined for tax purposes by IRC Section 130. “ Qualified assignment ” means that a defendant or its liability insurer first gives the claimant a promise to pay structured settlement periodic payments in the future; next transfers that obligation to a substituted obligor pursuant to IRC Section 130; and thereby extinguishes its contractual liability for the obligation it transferred.
IRC Section 130 provides that any amount received by an assignee for assuming a periodic payment obligation may be excluded from the assignee’s gross income so long as seven requirements are satisfied:
- The tort claim involves personal physical injury or physical sickness;
- The periodic payments are excludable by the recipient under IRC Section 104(a)(2);
- The assignor is a party to the suit or agreement which gives rise to the obligation;
- The periodic payments are fixed and determinable as to amount and time of payment;
- The periodic payments cannot be accelerated, deferred, increased or decreased by the recipient of the payments;
- The assignee’s periodic payment obligation is no greater than that of the assignor; and
- The assignee purchases qualified funding assets (either annuities or U.S. Government obligations) to fund the periodic payment obligations.
Although IRC Section 130 does establish any restrictions on what types of companies or legal entities may serve as assignees, most qualified assignments are funded with life insurance annuities and the assignees are almost always affiliates of the life insurance companies that issue those annuities. For example, Independent Assignment Company serves as the assignment company for all of Independent Life’s qualified structured settlement assignments.
Qualified Assignments can also be made out of an IRC Section 468B Qualified Settlement Fund (QSF) and can be utilized to fund structured attorney fees for tort cases that involve personal physical injury or physical sickness – whether or not the claimant decides to structure his or her settlement.
Not all settlements involve tort claims, however, and not all tort claims involve “ physical personal injury or physical sickness ” – which is one of the requirements of IRC Section 130.
A “ non-qualified assignment ” represents the transfer of a structured settlement periodic payment obligation that does not qualify under Section 130 of the Internal Revenue Code. This means the assignee is subject to applicable taxation on the amount it receives from the defendant or liability insurer that assigns the structured settlement periodic payment obligation when it receives money to purchase the annuity(s) to fund the obligation to the claimant.
“ Non-qualified assignments ” therefore allow litigating parties the ability to settle a claim and to fund a periodic payment obligation using a “ Section 130-like ” transfer when neither the claim being settled nor the agreed periodic payments qualify for treatment under IRC 104(a)(1) or Section 104(a)(2). Unlike “ qualified ” structured settlement cases, however, the income taxation on these “ non-qualified ” structured settlement periodic payments are deferred rather than excluded.
There are many types of cases that may be resolved through non-qualified structured settlements such as:
- Employment disputes
- Wrongful termination
- Psychological/emotional harassment
- Sexual harassment
- Attorney fees
- Wrongful incarceration
- Punitive damages
An assignee of a non-qualified assignment based in the United States will be subject to corporate income tax on any funds paid to it in exchange for assuming assignee obligations. For this reason, companies offering “ non-qualified ” assignments typically utilize non-domestic assignment companies.
Independent Life is one of the few structured settlement annuity providers that offers both “ qualified ” and “ non-qualified ” structured settlements. For “ non-qualified ” cases, we leverage the strength and market recognition of two non-domestic assignment companies, Structured Assignments (SAI) of Barbados and Kenmare Assignment Company Limited (Kenmare) of Ireland. By utilizing an offshore assignment company, Independent Life can offer fully customizable payout patterns of fixed and guaranteed payments to settlement planners and their claimants including deferred, lump sum, fixed period or lifetime payments.
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Any discussion of taxes herein is for general informational purposes only and does not purport to be complete or cover every situation. Independent Life, its affiliates, its distributors, and its and their respective representatives do not provide tax, accounting, or legal advice. You should confer with your qualified legal, tax and accounting advisors based on your particular circumstances. All guarantees are obligations of Independent Life Insurance Company.