No Need to Go Offshore to Defer Taxable Damages Start
Non-Qualified Structured Settlements
A Non-Qualified Assignment (NQA) allows the transfer of a periodic payment obligation for consideration of claims that do not qualify as workers compensation or personal physical injury or sickness claims within the meaning of IRC Sections 104(a)(1) and (2) and are not eligible for a qualified assignment under IRC §130. It’s an ideal solution for a variety of different types of damages, such as wrongful birth.
With the NQA, instead of a lump sum settlement, the claimant/payee receives periodic payments and is tax reported for the amounts when they receive those payments. At all times, the payee should consult a tax and legal professional for advice.
The Non-Natural Person Rule and Corporate Owned Annuities
The non-natural person rule applies to deferred annuity contracts owned by corporations, trusts, and other entities. The rule provides that if a non-human owns an annuity contract, the buildup in the contract is taxable each year to the owner, thus defeating the tax benefits of annuity ownership by such entities. IRC§130 provides an exception to the non-natural person rule where the period payment obligation funded by the annuity (“qualified funding asset”) represents damages that qualify as personal physical injury or sickness or workers compensation. Where damages do not qualify, an immediate annuity is an exception to the non-natural person rule per IRC §72(u)
IRC §72(u) Requirements
The NQA funded with an annuity is subject to IRC §72(u) requirements which state that:
•Payments must begin within one year from purchase
•Payments must be substantially equal
•Payments must be no less frequent than annual
The §72(u) requirement allows for the potential spread-out of income, but may not be the most advantageous in a wrongful birth scenario where a deferral start date of more than one year is desire
What Are the Solutions if a Deferred Option is Desired?
Until recently the only deferred options involved an assortment of independent offshore assignment companies in either Barbados or Ireland. The tax treaties between the United States and those countries help mitigate the IRC §72(u) issue. There are both fixed and market based options available with offshore assignment companies as well a United States Treasury bond backed non-qualified structured settlement program.
Non-Qualified Assignment Funding Agreement
What is a Funding Agreement? A funding agreement is a deposit type contract issued by a life insurance company. Its characteristics are similar to a Period Certain annuity in that it provides a predictable stream of fixed periodic payments in exchange for a lump sum today. It can be fully customized at the outset, and payments can be paid at different amounts and times.
The Non-Qualified Assignment Funding Agreement (FA), a domestic solution that may be used for the resolution of legal disputes or settlement of claims not involving personal physical injury, and which may or may not involve non-natural person(s). At all times, the payee should consult a tax and legal professional for advice.
The Funding Agreement issued by American General Life insurance Company or United States Life Insurance Company in the City of New York, each AIG companies, can provide both immediate and deferred periodic payment streams in non-qualified cases without having to go off shore. The assignment company is AGL Assignment Company, LLC and AGC Life Insurance Company issues a guarantee of the assignment company.
Last updated April 10, 2023 #fundingagreement
