Structured Settlements Legal Framework and Court Approval 2 — Questions and Answers
Question 1: What is a 'qualified assignment' under IRC §130?
- An assignment of settlement proceeds to a qualified retirement plan
- A transaction in which the defendant assigns its periodic payment obligation to a third party, allowing the defendant to exclude the assignment proceeds from income (Correct answer)
- An IRS-approved payment schedule for workers' compensation claims
- A court-ordered transfer of annuity rights
Correct answer: A transaction in which the defendant assigns its periodic payment obligation to a third party, allowing the defendant to exclude the assignment proceeds from income
Under IRC §130, a qualified assignment allows a defendant (or its liability insurer) to transfer the periodic payment obligation to a qualified assignee and exclude the consideration received from gross income.
Question 2: For a workers' compensation structured settlement, which IRC section governs the tax exclusion?
- IRC §104(a)(1) (Correct answer)
- IRC §104(a)(2)
- IRC §130
- IRC §72
Correct answer: IRC §104(a)(1)
Workers' compensation payments, including those structured as periodic payments, are excluded from gross income under IRC §104(a)(1), not §104(a)(2).
Question 3: What is a 'structured settlement factoring transaction'?
- An IRS audit of a structured settlement annuity
- A transaction in which a claimant sells some or all future structured settlement payment rights to a third party for a lump sum (Correct answer)
- The process by which an insurer prices a structured settlement annuity
- A court-ordered modification of payment amounts
Correct answer: A transaction in which a claimant sells some or all future structured settlement payment rights to a third party for a lump sum
A factoring transaction occurs when a payee sells the right to receive future structured settlement payments to a factoring company in exchange for an immediate (discounted) lump-sum payment.
Question 4: Under IRC §130, the periodic payments in a qualified assignment must be 'fixed and determinable.' What does this mean?
- Payments must be tied to a market index
- The amount and timing of each payment must be ascertainable at the time the assignment is made (Correct answer)
- Payments must be determined by a court each year
- Payments must be identical in amount throughout the term
Correct answer: The amount and timing of each payment must be ascertainable at the time the assignment is made
Fixed and determinable means the amount and timing of every future payment can be calculated at the time the assignment is executed, ensuring certainty for all parties.
Question 5: Which court generally has jurisdiction to approve a structured settlement transfer in the US?
- Federal district court
- A court of competent jurisdiction in the state where the payee resides, as specified by the applicable SSPA (Correct answer)
- The original settlement court regardless of where the payee now lives
- Only courts in the state where the annuity was issued
Correct answer: A court of competent jurisdiction in the state where the payee resides, as specified by the applicable SSPA
Most SSPAs confer jurisdiction on a court (typically a superior or circuit court) in the payee's state of residence at the time of the transfer application.
Question 6: What is the primary purpose of requiring court approval for structured settlement transfers?
- To generate court filing fees for the state
- To protect vulnerable claimants from selling future income streams at exploitative discount rates (Correct answer)
- To ensure the IRS receives tax revenue on the transaction
- To allow the original defendant to object to the transfer
Correct answer: To protect vulnerable claimants from selling future income streams at exploitative discount rates
Court approval requirements were enacted to protect claimants — often injury victims — from factoring companies that might pressure them into selling long-term income at unfavorably high discount rates.
Structured Settlements Legal Framework and Court Approval 2
What is a 'qualified assignment' under IRC §130?