"I've got sunshine on a cloudy day

Their cash is gone,  My structure pays and pays

I guess you'd say
What can make me feel this way?

My IRLSS, MY IRLSS, My IRLSS"   

I may not have the pipes of the late David Ruffin, Rock and Roll Hall of Famer, listed as one of the greatest singers of all time by Rolling Stone magazine in 2008 and 2023, however I'm sure you can appreciate my parody of The Temptations classic from the time that Ruffin was the lead singer. We all grapple with the financial temptations in life.

Rising rates and stock market volatility have made structured settlements increasingly attractive. Knowing now what you're going to get then is increasingly cool.

 At he time of original publication of this post, I ran a USAA quote for a life annuity with 40 years certain structured settlement on a minor which bore an IRR of 4.71%.

For those that are interested in structured settlements, American General's Interest Linked Structured Settlement Annuity (IRLSS) presents an interesting solution that provides a potential upward adjustment if interest rates rise.

Traditional structured settlements may include deferred lump sum payments targeted to specific or random dates, to help fund things such as college tuition, buying or funding a down payment on a home or real estate investment, paying for a wedding, fund a child's education, fund or supplement retirement, or provide a source for future investment.  Assuming that the payments represent tax exempt damages (i.e. personal physical injury or physical. sickness, workers compensation, wrongful death) the deferred lump sum payments are tax exempt. But the tax exemption does not apply to subsequent investments of the future lump sums after they've been paid.

The Interest Linked Structured Settlement Annuity addresses that issue using an objective formula that converts deferred lump sums to future income streams at prevailing rates on target dates if there has been an increase in reference interest rates. Deferred lump sum payment dates could be from 5 to 30 years for example and, if converted to an income stream, subject to the objective formula, they could be designed to pay for 5, 10, 15, 20 years and so on, instead of the lump sum. However if the conversion occurs it will be based on higher rates than existed when the annuity was established. Contrast the possibility of an IRLSS conversion with the standard lump sums that are based on the rates that exist at the time the annuity is established.

In Private Letter Ruling 202127039, the IRS concluded, in  a minor's medical malpractice case that the periodic subject payments of damages that the Minor will receive are fixed and determinable as to amount and time of payment within the meaning of IRC 130(c)(2)(A) veen though they are calculated  pursuant to an objective formula based on the performance of the 10-year United States Treasury Bond Yield Rate. In addition, the other requirements of IRC 130(c) have also been met. Accordingly, the assignment entered into pursuant to the Assignment Agreement in a qualified assignment under IRC 130(c).

Here's an illustrative example of how the Interest Rate Structured Settlement works:

Purchase Date: 7/1/2022

Lock Date: 6/13/2022

Total Annuity Cost: $250,000.00

Owner State: TX

Reference Rate: 20-Year U.S. Treasury Bond Yield Rate Initial Reference Rate: 3.56%

Benefit Determination Date: 5/2/2042

Benefit A will be paid to the Payee through 6/1/2072 if

(1) the Single Measuring Life is living on the Beginning Date; and

(2) the current value of the Reference Rate on the Benefit Determination Date is greater than the Initial Reference Rate shown above. Otherwise Benefit B will be paid on 7/1/2042.

Benefit A

PERIOD CERTAIN: Beginning 7/1/2042 for 30 years guaranteed through 6/1/2072, a monthly benefit amount greater than the Minimum Payment Amount of $2,464.70.

If Benefit A will be paid, the table below shows the actual benefit amount for representative values of the Reference Rate on the Benefit Determination Date. Please refer to the Payment Schedule of the Contract for details of the calculation.

Benefit B

GUARANTEED LUMP SUM: $550,141.32 on 7/1/2042