This information on assignments is in addition to our page on Qualified Settlement Funds. As a buyer of an existing payment stream, this info is not really relevant to your specific case, however the info is here for your general knowledge about the Structured Settlement Annuity marketplace.
There are two methods of assigning liability from the defendant or its insurer for the benefit of the plaintiff or winner in a structured settlement. In an arrangement called a Buy and Hold, or ‘unassigned’ case, the insurer typically purchases an annuity from a life insurance company.
Let’s look at an example: you trip and fall on the sidewalk in the city of Chicago. You sue the city of Chicago, and win $5000 per year for 10 years in a lawsuit. The City of Chicago does not assign its liability to make a future payment to you, and instead buys an annuity to pay you the $5000 per year for 10 years from Met Life.
In this case, the annuity owner is the City of Chicago, and the issuer is MetLife. You are the payee. If you choose to sell your future payments, the buyer of your payments is buying a MetLife annuity, with the City of Chicago as the secondary guarantor.
Now that said, there is an alternative and often more common way of settling lawsuits that involves assigning the liability. Instead of buying the annuity from MetLife, the City of Chicago may delegate or assign its periodic payment obligation to a third party. This is called an “assigned case.”
In an Assigned Case, and the defendant generally funds what is known as a qualified settlement fund or QSF with money to close the case. The QSF then in turn purchases a “qualified funding asset” to finance the assigned periodic payment obligation. Pursuant to IRC 130(d) a “qualified funding asset” may be an annuity or an obligation of the United States government.
To look at our previous example, if the City of Chicago chose to settle its liability through a qualified settlement fund, it could assign its entire liability to a qualified settlement entity. Many insurance companies offer these services. So you may see MetLife settlement fund as the annuity owner and MetLife insurance as the annuity issuer.
In our previous example, the City of Chicago may have assigned its entire liability to MetLife settlement fund company, who in turn bought an annuity from MetLife life insurance. In this case, if you are the buyer of this secondary market annuity, the issuer is MetLife life insurance, the owner is MetLife settlement fund, and you are the new assignee.
To summarize, 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, thereby 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.
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.
The original claimant must consent to the transfer of the periodic payment obligation (either in the settlement agreement or, failing that, in a special form of qualified assignment known as a qualified assignment and release). Then, the defendant and/or its property/casualty company has no further liability to make the periodic payments.
The qualified assignment method of substituting the obligor is desirable for defendants or property/casualty companies that do not want to retain the periodic payment obligation on their books. A qualified assignment is also advantageous for the claimant as it will not have to rely on 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.
There are a few important notes about assignment cases for annuity owner and issuer. As an assignee, your taxes are another matter discussed in another section of this site.
To go back to our City of Chicago example, MetLife assignment company would not accept money from the City of Chicago to close the case if that money from the City of Chicago was taxable to MetLife. Structured settlements are be IRS definition tax free, so to create an intermediary layer of taxation would stifle the industry.
The IRS recognizes this, and makes the money from the City of Chicago to MetLife tax-free to MetLife assignment company. MetLife assignment company in turn purchases an annuity from MetLife life insurance. Now, MetLife insurance receives a premium and has to pay out a tax free award to the original claimant.
This tax-free nature of lawsuit awards is well-established in IRS regulations, and the qualified assignment and qualified settlement fund vehicles ensure the tax-free transfer of money between these parties.
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 to induce them to accept periodic payment obligations would be considered income for federal income tax purposes.
If an assignment qualifies under Section 130, 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.
What’s the Point For You?
As a Buyer of Secondary Market Annuities, the intricacies of assignment are irrelevant. Becoming the new assignee under an existing payment stream is simply a change to an existing court order. The parties- annuity owner and obligor, do not generally have the right to block existing payee from selling his or her payments, even though their benefits statements sometimes say so. The Court takes precedence, and that’s where we take each case to ensure full and complete assignment to you.
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