Qualified Assignment

An assignment is said to be qualified if it satisfies the criteria set forth in Internal revenue Code Section 130. Qualification of the assignment is important to assignment companies because without it the amount they receive tp induce them to accept periodic payment obligation would be considered income for federal income tax purposes. If an assignment qualifies under Section 130, however the amount received is excluded from the income of the assignment company. This provision of the tax code was enacted to encourage assigned cases. Without it, assignment companies would owe federal income taxes but would typically have no source from which to make the payments.

Furthermore, once an agreement is reached, these payments generally cannot be accelerated, increased, decreased, etc. In fact, the total amount paid out must match the total judgment amount. Also, in some jurisdictions, one can actually sell their structured settlement for a buyout. However, several states have actually prohibited one's ability to sell a structured settlement. In any case, contacting a tax attorney would be a wise move before selling a structured settlement, as there would likely be tax consequences.

Long-Term Periodic Payment Obligation

In an assigned case, the defendant or property/casualty company does not wish to retain the long-term periodic payment obligation on its books. Accordingly, the defendant or property/casualty insurer transfers the obligation, through a legal device called a qualified assignment, to a third party. The third party called an assignment company will require the defendant or property/casualty company to pay it an amount sufficient to enable it to buy an annuity that will fund its newly accepted periodic payment obligation. If the claimant consents to the transfer of the periodic payment obligation , the defendant and/or its property/casualty campany has no further liability to make the periodic payments. This method of substituting the obligor is desirable for defendants or property/casualty companies that do not want retain the periodic payment obligation on their books. A qualified assignment is also advantageous for the claimant as it will not have to rely an the continued credit of the defendant or property/casualty company as a general creditor. Typically, an assignment company is an affiliate of the life insurance company from which the annuity is purchased.

Legal Structure of Structured Settlement

The typical structured settlement arises and is structured as: An injured party settles a tort suit with the defendant or its insurance carrier pursuant to a settlement agreement that provides that, in exchange for the claimant's securing the dismissal of the lawsuit, the defendant or more commonly its insurer agrees to make a series of periodic payments over time. The defendant ot the property or casualty insurance company, thus find itself with a long term payment obligation to the claimant. To fund this obligation, the property or casualty insurer generally takes one of two typical approaches: It either purchases an annuity from a life insurance company (an arrangement called a "buy and sold" case) or it assigns (more properly, delegates) its periodic payment obligation to a third party which in turn purchases an annuity which arrangement is called an "assigned case".

In an unassigned case, the defendant or property/casualty insurer retains the periodic payment obligation and funds it by purchasing an annuity from a life insurance company, there by offsetting its obligation with a matching asset. The payment stream purchased under the annuity matches exactly, in timing and amounts, the periodic payments agreed to in the settlement agreement. The defendant or property/casualty company owns the annuity and names the claimant as the payee under the annuity, thereby directing the annuity issuer to send payments directly to the claimant. if any of the periodic payments are life contingent (i.e., the obligation to make a payment is contingent on someone continuing to be alive), then the claimant or whoever is determined to be the measuring life is named as the annuitant or measuring life under the annuity.

Structured Settlements Definitions

There's more definition about structured settlements,which one has been added in my blog.

There's other definition about structured settlements.

A definition of "Structured Settlement" can be found in Internal Revenue Code (IRC) section 5891 (c)(1) (26 U.S.C. 5891 (c)(1)), which states that a structured settlement is an "arrangement" that meets the following requirements:

1. A structured settlement mus be established by:

a). A suit or agreement for periodic payment of damages excludable from gross income under Internal Revenue Code Section 104 (a)(2) (26 U.S.C. 104 (a)(2)).

b). An agreement for the periodic payment of compensation under any worker's compensation law excludable under Internal Revenue Code Section 104(a)(1) (26 U.S.C. 104(a)(1)).

2. The periodic payments must be of the character described in subparagraphs (A) and (B) of Internal Revenue Code Section 130(c)(2) (26 U.S.C. 130(c)(2)) and must be payable by a person who:

a). Is a party to the suit or agreement or to a workers compensation claim.

b). By a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with Internal Revenue Code Section 130 (26 U.S.C. 130).

It is important to note that the language immediately prior to Internal Revenue Code Section 5891 (c)(1) states that the definition that appears there is for the purpose of this section. Internal Revenue Code Section 5891 entitled "Structured Settlement Factoring Transactions" deals with the excise tax imposed on the factoring discount, when there is a purchase of structured settlement payment rights and the exceptions to the excise tax. A number of structured settlement industry commentators have been observed attempting to broaden the express language that appears in the Internal Revenue Code.