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: Structured Settlements 4Real

Structured Settlements...How Well Do You Know IRC Section 130?

By John Darer

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Prior to delivery of the annuity contract and signed qualified assignment to the parties , there should be a review of the documents by the structured settlement broker (or settlement planner) to be sure that all of the terms of the structured settlement are accurately reflected in the annuity contract AND, among other things, that the transaction falls within the statutory guidelines set forth in IRC 130. Immediately prior to that, the quality control department of the life insurance company issuing the annuity should be going over the documents carefully to make sure there are no inconsistencies.

IRC 130 is the section of the tax code that bestows a tax exclusion to the qualified assignment company for the amount received for agreeing to a qualified assignment, provided that certain conditions are met.

IRC 130(d) deals with qualified funding assets. Pursuant to IRC 130(d)(4) such qualified funding assets must be purchased not more than 60 days before the date of the qualified assignment and not later than 60 days after the date of such assignment. Here's the full text of IRC 130(d):

(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. IRC Section 130.

What are the consequences if there are inconsistencies? For example, if the effective date traditionally inserted into the qualified assignment by the qualified assignment company is more than 60 days from the date listed as issue date on the annuity contract or certificate is there any consequence to the plaintiff? to the qualified assignee? to the plaintiff attorney? to the defendant? to the insurer?

One tax attorney who this author spoke to suggested that this is primarily a potential tax problem for the qualified assignee. Consider however, if the "Out Cause" in paragraph 9 (in the QA, QAR) or 12 (of the QARP), designed to protect the qualified assignee in the event it took on an assignment that didn't meet the rules of IRC 130(c), be triggered? Could (or would) it be triggered by a qualified assignee if it found itself itself in "deep doo doo" as a result of its own quality control error? If the assembly line was a little lax over a period of time, what is the impact on that qualified assignment company and the insurer's bottom line?

Quality control departments at all structured settlement annuity issuers must be cognizant of the potential for an IRC 130(d)(4) violation when dating the effective date on qualified assignment.

The disturbing thing to me is when I discovered such an error and brought it to the attention of the qualified assignee and annuity issuer's representative, the individual remarked that "nobody had ever brought this up before". I'm not sure which is more disturbing-the instant remark or the revelation that non of my worthy competitors has ever brought this up.

All settlement professionals, including representatives of the annuity issuing life insurers and government bond structured settlement providers, have a professional obligation to possess a mastery of the fundamentals of their profession. It sure doesn't much more fundamental than IRC Section 130.

READ IT...KNOW IT!

Full post as published by Structured Settlements 4Real on March 02, 2008 (boomark / email).