Many types of tax-free structured settlements are commonly used for paying damages in physical injury cases. However, recently, there has been an emerging market for an alternative settlement solution: non-qualified assignments.
A non-qualified assignment is a settlement tool that involves a transfer of future periodic payments and obligations arising from the dispute settlement from the defendant or its carrier to a third-party assignee. In other words, it is a settlement that uses future periodic payments to receive taxable damages in a tax-efficient way.
With a non-qualified assignment, the assignee accepts the assignment and assumes the future payment obligation. As a result, the defendant and the carrier are fully released from the future periodic payment obligations.
A non-periodic assignment can benefit settlements not eligible for the Internal Revenue U.S. Code § 130: qualified assignments.
Non-qualified assignments can be helpful in a variety of cases. For example, it is a valuable tool for settlements arising from non-physical injury cases such as discrimination and psychological and emotional damages.
Non-qualified assignments are also helpful for worker’s compensation cases dated pre-August 6, 1997. While the IRS has stated that post-August 6, 1997, cases do qualify under section 130, any cases that pre-date that are eligible.
Non-qualified assignments are also helpful for divorce cases and long-term disability settlements.
There are several benefits of using non-qualified assignments.
First, non-qualified assignments associated with a structured settlement provide a negotiation tool that bridges the gap between an offer and a demand and gives cases the potential to sell more quickly.
Also, non-qualified assignments offer a way to customize payment streams to meet the financial needs of the payee. For example, payments can be set up to coincide with certain major life milestones. They can be made in weekly, monthly, and annual payments, so they are very flexible. They can also include a cost of living adjustment (COLA) to offset the impact of inflation.
Thirdly, non-qualified assignments are a way to transfer the burden from the payee.
Finally, non-qualified assignments offer a tax advantage. For example, electing to receive periodic payments before settlement provides an opportunity to receive tax-efficient income. The potential advantage of deferring taxable income includes a greater overall payout than would otherwise be achieved with a single lump sum payout. It also helps to avoid a higher tax bracket, preserves the ability to take deductions that might be lost at a higher income level, and avoids the Alternative Minimal Tax (AMT).
The assignment process for a non-qualified assignment is very similar to that for a qualified assignment. Once all parties agree on a periodic payment plan in the settlement agreement, the defendant or insurer assigns its obligations to a non-qualified assignments company responsible for executing the agreement.
The company then funds the payment obligation by purchasing an annuity contract issued to the assignment company, which is the owner. The company issuing the annuity contract will also issue a notice of financial commitment to the payee and will begin making payments according to the terms of the payment assignment.
Interested in hearing more about this topic? We have a great episode on the Ringler Radio Podcast about this topic here: Structured Settlements and Non-Qualified Assignments