Structured Settlements Structured Settlement Basics 2 — Questions and Answers
Question 1: Who typically serves as the 'qualified assignee' in a structured settlement qualified assignment?
- The plaintiff
- A special-purpose assignment company affiliated with a life insurer (Correct answer)
- The defendant's employer
- The state court
Correct answer: A special-purpose assignment company affiliated with a life insurer
A qualified assignee is usually a special-purpose company set up by a life insurer to assume the payment obligation from the defendant or its insurer.
Question 2: Under IRC §130, what happens when a defendant assigns its structured settlement obligation to a qualified assignee?
- The defendant owes capital gains tax on the assignment proceeds
- The defendant excludes from income any amount received for assuming the periodic payment liability (Correct answer)
- The assignee must pay estate taxes on future payments
- The assignment invalidates the original settlement agreement
Correct answer: The defendant excludes from income any amount received for assuming the periodic payment liability
IRC §130 allows the defendant (or its insurer) to exclude from gross income amounts received from the assignment of the periodic payment obligation to a qualified assignee.
Question 3: What does 'present value' mean in the context of structured settlements?
- The total of all future payments without discounting
- The current worth of future payments discounted at an assumed interest rate (Correct answer)
- The original settlement demand amount
- The inflation-adjusted value of the annuity
Correct answer: The current worth of future payments discounted at an assumed interest rate
Present value is the current dollar value of a stream of future payments, calculated by discounting them at an appropriate interest rate.
Question 4: Which of the following is NOT a typical type of structured settlement payment schedule?
- Level periodic payments
- Increasing periodic payments
- Lump-sum payments at set future dates
- Declining government bond yields (Correct answer)
Correct answer: Declining government bond yields
Structured settlement payment schedules include level, increasing, or decreasing periodic payments and future lump sums, but bond yield curves are not a payment schedule type.
Question 5: What is a 'life-contingent' structured settlement payment?
- A payment guaranteed regardless of the claimant's survival
- A payment that is made only if the claimant is still alive (Correct answer)
- A payment that adjusts for inflation annually
- A payment funded by life insurance death benefits
Correct answer: A payment that is made only if the claimant is still alive
Life-contingent payments cease upon the claimant's death, so the payment obligation is contingent on the claimant remaining alive.
Question 6: What is a 'guaranteed' structured settlement payment?
- A payment backed by the US government
- A payment that will be made for a fixed number of years regardless of the claimant's survival (Correct answer)
- A payment that increases with the CPI each year
- A payment contingent on the defendant's solvency
Correct answer: A payment that will be made for a fixed number of years regardless of the claimant's survival
Guaranteed payments are made for a specified period (e.g., 20 years certain) regardless of whether the claimant is alive, often paid to a beneficiary upon the claimant's death.
Structured Settlements Structured Settlement Basics 2
Who typically serves as the 'qualified assignee' in a structured settlement qualified assignment?