A qualified assignment is a formal arrangement wherein a defendant or its insurance company or other representative agrees to transfer their obligation to make future periodic payments to a third party (“an assignment company”).
When a settlement is reached that involves future payments to the claimant, the defendant and its insurers typically anticipate meeting the obligation to make the future payments with a structured settlement annuity. Structured settlement annuities typically require qualified assignments. A qualified assignment is a formal arrangement wherein a defendant or its insurance company or other representative agrees to transfer their obligation to make future periodic payments to a third party (“an assignment company”). This is generally done using a uniform qualified assignment (“UQA”) document. The UQA is designed to meet the requirements of IRC Section 130, which is the section that determines what cases qualify for an immediate tax deduction for the payor after making a third party assignment. Among these requirements are:
- The assignee assumes the liability from a party to the suit or agreement;
- The payments are fixed and determinable;
- The payments cannot be accelerated, deferred, increased or decreased, or otherwise changed after the agreement is reached;
- The assignee's obligation is no greater than that of the assignor;
- The periodic payments are excludable from the recipient's gross income under Section 104(a)(2), and, for settlement of filed workers compensation claims on or after 8/5/97, Section 104(a)(1);
- The injury must be a physical sickness or injury;
- A qualified funding asset must be purchased.
The UQA identifies the parties involved and makes clear the schedule of future payments required by the claimant in the form of an addendum. Once the UQA is signed by both parties the claimant agrees to release the original defendant from further liability. After paying the agreed premium to the assignment company, the defendant is released from the claim and it can take a tax deduction for the payment and go about its business without the burden of the liability for future payments.
In order to implement qualified assignments, insurance companies participating in the structured settlement market set up assignment companies that will accept the assignment and subsequently purchase the annuity. Usually these companies do nothing but assume the obligations of defendants and hold qualified funding assets. The assignment company is typically associated with the issuing life insurance company. A structured settlement annuity is purchased from the related life insurance company as a qualified funding asset. The assignment company, not the payee, then owns the contract for the duration of the contractual period.
Qualified assignments are an integral part of a structured settlement and thus should always be reviewed by experts to ensure proper execution.