Structure Now, Participate in Future Rate Increases
Interest Rate Linked Structured Settlements, a product innovation of American General Life Insurance Company introduced in 2020 to address certain challenges when settling during periods of low interest rates, now appears to have the benefit of a favorable IRS Private Letter Ruling!
What are Interest Rate Linked Structured Settlements?
Interest Rate Linked Structured Settlements, affectionately called IRLSS (pronounced “Earls”), permit a structured settlement annuitant to participate in future rate increases at pre-determined times, through the conversion of deferred lump sums to income streams at higher rates, if the reference rated (in this case the United States 10 Year Treasury Bond) is greater than the initial reference rate on the Benefit Determination Date when the structured settlement was established. For more details please refer to my March 31, 2020 post Interest Rate Linked Structured Settlements | How They Work
In Private Letter Ruling 202127039, published July 9, 2021, the IRS concluded with respect to the settlement of a minor’s medical malpractice case that:
1. The periodic Subject Payments of damages that Minor will receive are fixed and determinable as to amount and time of payment within the meaning of § 130(c)(2)(A) even though they are calculated pursuant to an objective formula based on the performance of 10-year United States Treasury Bond Yield Rate. In addition, the other requirements of § 130(c) have also been met. Accordingly, the assignment entered into pursuant to the Assignment Agreement is a qualified assignment under § 130(c).
2. The Annuity purchased by the Assignee qualifies as a qualified funding asset under § 130(d).
The Settlement Agreement in the ruling request provides for the Subject Payments to be monthly payments in an amount greater than the Monthly Payment Amounts starting on the Beginning Date and ending Date. [Note IRLSS involves picking a deferral date (or series of deferral dates) and the term of income 10-30 years]. Note These periodic payments will be made provided that (i) Minor is alive on the Beginning Date, and (ii) the 10-Year United States Treasury Bond Yield Rate (“Reference Rate”) is greater than the Initial Reference Rate as of the Benefit Determination Date. If Minor dies before the Beginning Date, or if the Reference Rate is not greater than the Initial Reference Rate, the Settlement Agreement provides for a guaranteed lump sum payment in the amount of Lump Sum Payment to be made on the Beginning Date.
The terms of the Annuity, including the basis for determining the monthly payments were set at the time
the Annuity was issued and cannot be changed.
1.Minor is entitled to damages in the form of periodic payments as a result of personal injury.
2. Amounts payable under the Settlement Agreement will be excludable from Minor’s gross income under § 104(a)(2) of the Code relating to physical injury or physical sickness.
3. Pursuant to the Assignment Agreement, Insurer assigned to Assignee, and Assignee assumed from Insurer, the sole responsibility for making Subject Payments to Minor.
4. The obligations of Assignee under the Assignment Agreement are no greater than the obligations of Insurer.
5. Neither Claimants nor Minor will be able to accelerate, defer, increase or decrease the Subject Payments from Insurer or from Assignee.
6. The Annuity qualifies as an annuity under the laws of the state in which it was issued.
7. The Annuity was issued by Issuer to Assignee to fund the Subject Payments due to Minor pursuant to the assignment of a liability to make periodic payments as damages on account of physical injury or sickness (in a case involving physical injury or sickness).
8. The amount of the Subject Payments to Minor and the correlative amount of the payments under the Annuity funding the Subject Payments will be determined taking into account the Reference Rate on the Benefit Determination Date as prescribed by the Settlement Agreement.
9. The periods of the payments under the Annuity issued to Assignee are reasonably related to the periods of the Subject Payments, and the amount of any payment under the Annuity will not exceed the Subject Payment to which it relates.
10. Assignee will designate the Annuity as being taken into account under § 130 of the Code with respect to the transaction entered into pursuant to the Assignment Agreement.
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Last updated April 21, 2023
