Non-Qualified Structures and Assignments
What is a Non-Qualified Assignment?
The non-qualified assignment, often referred to as a non-qualified structured settlement, is an important settlement planning tool to help plaintiffs keep more of their taxable damage settlements. A non-qualified assignment/non-qualified structured settlement 1, is a form of settlement used to resolve disputes, claims for damages that do not fall within the realm of physical injury, physical sickness or wrongful death, to secure installment sales of businesses or real estate, divorce payments, or professional athlete or celebrity endorsement fees. The tax benefits vary with the type of transaction.
What Are the Tax Benefits of a Non-Qualified Assignment?
Tax deferral is the primary benefit of non-qualified assignments. Being able to “kick the taxes down the road”. The tax benefits vary by the type of transactions, but generally:
- Earn interest tax deferred.
- Earn in interest on the deferred taxes tax deferred.
- Earn interest on the interest tax deferred.
In addition to the tax benefit, a non-qualified assignments allows the plaintiff to avail themselves of popular benefits associated with structured settlements, such as stable income for a fixed period of transition or, if desired, over a life time. For each type of application there may be a different nuance and procedure and we can help the parties achieve their objectives. If your preferred method of absorbing information is by listening/watching please be sure to watch our videos on non-qualified assignments.
How Does a Non-Qualified Assignment Work?
Generally a non qualified assignment works like this.
- The parties come to an agreement.
- The parties then execute a settlement agreement and release (sales agreement in the case of structured sales) that includes periodic payments as part of the consideration.
- With an annuity funded non qualified assignment the payments are fixed and determinable as to amounts and payment dates.
- With a non qualified assignment not funded by an annuity, the periodic payments are set as to payment date. Payment amounts are based on a fixed and determinable formula. For more details please contact us.
- The non qualified assignee accepts the funds with which it purchases the funding instrument(s), along with the obligation to make the periodic payments to the plaintiff, or payee. Annuity funded non-qualified assignments include a guarantee by a large A.M. Best rated “A” (Excellent) domestic US insurance company and a separate Agreement to Pay by a 105+ year old A.M. Best A XV (Excellent) domestic US insurance company, backing the obligations of the non-qualified assignment company with the obligations of the Annuity Issuer.
- For those with suitable risk tolerance an alternate non-qualified assignment facility is available through strategic alliances with Structured Assignments, Inc., Havelet Assignments Ltd and Kenmare Assignments, Ltd ( which marries a deferred payment mechanism with a customized portfolio that, for example, could include fixed income from structured settlement payment rights purchased in the structured settlement secondary market). Contact John Darer for details.
- For the most conservative, another non annuity alternative is a non-qualified assignment using Treasury Funded Structured Settlements. United States Treasury obligation are purchased by a trust to back up the assigned periodic payment obligation. At the very least this offers an opportunity to diversify risk.
The assignment in this type of transaction is a general assignment unrelated to qualified assignments under IRC Section 130.
Payments are generally fully taxable to the payee in the tax year that each periodic payment is received. The type of tax applied will depend on the transaction. Damages in wrongful conviction or wrongful imprisonment cases, while excluded under IRC §139F, can be paid using a structured settlement, but must be established using a non-qualified assignment because IRC §130 only covers assignments of damages that are excluded under IRC §104(a)(1) and §104(a)(2), namely damages payable for physical injury, physical sickness, wrongful death or workers compensation.
Where Can a Non-Qualified Assignment Be Used?
Examples of cases involving taxable damages or payouts, where settling parties to a lawsuit, claim, dispute, or contract, may benefit from a non-qualified structured settlement/non-qualified assignment:
A. Employment Law Suits
- Age, Gender, Race or Religious Discriminations settlements
- Disability Buyout settlements
- Failure to Promote
- Sexual Harassment settlements
- Wrongful Termination settlements
- Company paid LTD Settlements
- Construction Defects settlements
- Director’s & Officers and related claim settlements
- Errors & Omissions claim settlements
- Environmental claims including clean up and monitoring of cleanup sites
- Funding of Lotteries and Contest Winnings
- Intellectual Property Claims of Inventors and Copyright and Trademark Holders
- Lease Buyouts (cash basis tax payer, other solutions for accrual basis taxpayers)
- Pre August 5, 1997 Workers' Compensation Claims
- Punitive Damages Awards
For the Plaintiff
The decision to accept distribution by way of a "non-qualified structured settlement" is based upon which form of distribution puts the largest amount of net settlement proceeds into his or her pocket. In a non qualified tort settlement, the net settlement proceeds represent the gross settlement less attorney fees, liens and taxes. With a lump sum settlement, the plaintiff may end up being taxed at the highest rates, or may be even be subject to Alternative Minimum Tax (AMT). With a non qualified structured settlement, the plaintiff may be taxed at a lower rate that is applied to comparatively smaller periodic payments, thus producing a smaller tax burden than that created by a lump sum settlement. When used as part of the resolution of a divorce case, a non qualified structured settlement might be used to fund alimony, or spousal support, and child support , a non qualified structured settlement provides vital payment assurance to the recipient spouse.
For the Defendant
Unlike with a qualified structured settlement, the tax deduction here may be taken over time as payments are made to the plaintiff. This may be offset by the following advantages:
- Tax savings accruing to the Plaintiff may be so great that the Defendant or Payor gains leverage to negotiate a potentially lower settlement cost enabling the parties to bridge the gap in negotiations.
- Facilitated settlement thereby avoiding trial costs
- Avoid risk of punitive damages
- Avoid exposure to runaway jury verdicts
- Avoid adverse jury finding that could lead to appeal and post appeal expense
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1. While it has many of the same features of a structured settlement, and may commonly be referred to as such, since the introduction of IRC §5891 in 2001 a non qualified assignment is technically not a structured settlement. What is a structured settlement?
2.The tax issues of certain aspects of divorce settlements may be different that the standard non qualified assignment described above. However, it is a extremely viable application. Follow link for more details.If interested in exploring how this strategy can be applied we can discuss with you in conjunction with your professional tax advisor.
3. The documentation for structured installment sales of property or business differs from non qualified assignments in the other scenarios. However it is relatively simple. We have all of the necessary forms for you.