Non-Qualified Structures and Assignments
The non-qualified assignment often referred to as a non-qualified structured settlement is an important tool to help payees 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. In a non physical injury tort or attorney fee scenario, the plaintiff releases the defendant from the claim or dispute in return for an immediate cash payment and future periodic payments and benefits from income tax deferral. Another application example is for structured business and property installment sales, where the non qualified assignment serves helps to make capital gains deferral more secure. For each type of application and purpose there may be a different nuance and procedure and we can help you achieve your objectives. To learn more about non qualified structured settlements please read on and be sure to watch our videos.
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.
a. With an annuity funded non qualified assignment the payments are fixed and determinable as to amounts and payment dates.
b. 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 ( or, for structured business and real estate installment sales and structured celebrity endorsement fees, a separate "Agreement to Pay"), by a large, A.M. Best rated A+ XV (Superior) domestic US insurance company, or Fortune 100 financial holding company, to back up the obligations of the non qualified assignee.
- For those with suitable risk tolerance an alternate non annuity funded non qualified assignment facility is available through our strategic alliance with 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 the Treasury Funded Structured Settlements International (TFSS-I) facility. United States Treasury obligations are purchased to back up the assigned 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.
In the"non qualified structured settlement", each periodic payment is fully taxable to the payee in the year that each periodic payment is received. The type of tax applied will depend on the transaction. The non qualified assignment concept may also be used in a tax neutral transaction.
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 is taxed at the highest rates and is taxed on the gross settlement amount before deductions. 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
We have customized solutions to solve your problems and to accommodate specific cash flow needs and preferences of our clients.
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
- 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
- Breach of Contract claims
- Wrongful imprisonment/False Arrest
- Fraud Claims
Contact us for more details
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.