The traditional structured settlement funding products have been fixed annuities (which represent “qualified funding assets” under IRC Section 130(d)) issued by life insurance companies using a “qualified assignment” (defined in IRC Section 130(c)) to achieve a release and transfer of the structured settlement payment obligation. Structured settlement payments are also referred to as “periodic payments.”
1. Advantages - The advantages of structured settlements funded by fixed annuities using qualified assignments include:
i. Release - A tort and contract release for all current and future liability for defendants which also protects their insurers, attorneys, and structured settlement brokers.
ii. Transfer - A transfer of funding responsibility to a mutually accepted third party (called an “Assignee”). The Assignee purchases and owns the fixed annuity, which funds the periodic payments.
iii. Tax Exclusion – A Federal income tax exclusion for claimants who receive the periodic payments which has significance primarily for claimants in medium to high income tax brackets.
iv. Lifetime Payouts - Lifetime payouts which can be priced to include substandard age ratings.
v. Design Options - Annuity payout options can be designed to match a variety of fixed future payment schedules.
vi. Limited Risk for Claimant – so long as the Qualified Assignee and annuity company remain solvent, claimants (and/or their successors) will receive the exact periodic payments as and when promised. Claimant security can be further enhanced with guarantees and/or secured creditor status. State insurance guarantee funds generally apply to structured settlements.
2. Disadvantages - The disadvantages of structured settlements funded by fixed annuities in qualified assignments include:
i. Lack of Liquidity - Structured settlement factoring provides one solution. However, factoring can be expensive and time-consuming and is not available to every structure settlement recipient.
ii. Fixed Payments - Fixed annuities do not match inflation, do not permit changes in payout timing and/or amounts and do not provide for unforeseen contingencies.
iii. Potential Insolvency - Although protective devices (including state guarantee funds) exist, a claimant remains potentially at risk if the responsible party for making structured settlement payments fails.
iv. Potential Loss of Public Benefits - Unless structured settlement annuities are paid into qualifying funding vehicles (eggs trusts or custodial accounts), they can permanently disqualify recipients from receiving certain public benefits (eggs Medicaid and Medicare).
For additional information, see “Structured Settlement Definition” , “Introduction to Annuities” and "Structured Settlement Factoring" as well as “Structured Settlements and Periodic Payment Judgments”.
Comments