Summit Structured Settlements
755 S.E. Frontier Suite 101
Waukee, Iowa 50263
Voice: 515.987.6888
Fax: 515.987.6999
Toll Free: 866.267.1177
info@summitsettlements.com
Disclaimer
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'Perfect World' is Here
Fortunately, the perfect world is here for claimants and their attorneys
who wish to take advantage of it. You simply negotiate in terms of a cash
settlement, making it clear from the beginning that you will not entertain any
settlement offers that contain future payments. Engage your own settlement
broker early to assist in the negotiation strategy by helping you and your
client arrive at a realistic minimum amount that you will accept, taking into
account costs, liens, expenses, attorney fees, upfront cash needs of the
claimant, and future needs. Go into the negotiations with the confidence that
your side is in control. The other side cannot misrepresent the value of future
payments, because all offers must be in terms of cash. The other side cannot
dictate to you or your client or limit the choice of annuity issuers, obligors,
secondary guarantors, or the broker to handle the transaction. And, the annuity
issuer will pay your broker the commission on the annuity sale, at no cost to
your client, which would have been paid to the adversary's broker for helping
the defendant or its insurer save money at your client's expense.
Once you and the other side reach agreement on the amount the defendant will
spend for the benefit of your client, simply direct that all settlement proceeds
be paid into the "[Client's Surname] Qualified Settlement Fund (QSF)." A fund,
account or trust satisfies the QSF requirements under Treasury Regulations
1.468B-1(c) if it is established, generally, by any entity of government,
including a court of law, and is subject to the continuing jurisdiction of that
authority. It must be "established to resolve or satisfy one or more contested
or uncontested claims that have resulted or may result from an event (or related
series of events) that has occurred and that has given rise to at least one
claim asserting liability" under CERCLA; arising out of a tort, breach of
contract, or violation of law; or designated by the IRS commissioner in a
revenue ruling or revenue procedure. The QSF may not be used for workers'
compensation claims.
Once the defendant or insurer—called the "transferor"—makes the deposit into the
QSF, completely segregating those funds from the transferor's other assets, the
transferor may deduct the entire amount, having satisfied the "economic
performance" requirements of Internal Revenue Code § 461(h).
With the transfer of funds into the QSF, so goes the tort liability of the
original defendant. This substitution of parties is called a novation. The QSF
administrator is then free to effect settlement agreements with the claimant or
claimants. The settlement agreement can provide for cash lump sums and periodic
payments, just like the original defendant or insurer could have done. The
difference between settling with the original defendant or its insurer and
settling with the QSF is that you and the court know that all of the money is
available to be paid for the benefit of the injury victims. None of it can go
back to the transferor.
If the payments qualify for tax exclusion under I.R.C. § 104(a)(2), the QSF may
make a "qualified assignment" of any future payment obligation under the
authority of I.R.C. § 130. Revenue Procedure 93-34 says the QSF will be
considered "a party to the suit or agreement" for the purposes of section 130.
In other words, the QSF preserves the tax-free nature of future damage payments
for personal physical injury or physical sickness (other than punitive damages).
If the payments will be taxable to the recipient, there still may be advantages
to deferring the obligation under some non-qualified assignment to a third
party. The QSF can do whatever the transferor could have done.
Why Expose Yourself and Your Client?
The QSF and those who promote its use by plaintiffs is being vilified by the
same people who once tried to tell you that knowledge of the annuity premium
amount was constructive receipt. They will try to convince you that there is an
unnecessary tax risk to using a QSF. The rules are black-letter, and you can
have a tax expert issue an opinion. On the other hand, you do not have to be an
expert to see that the greater risk to the claimant and claimant's attorney is
not using a QSF.
This article was written by Richard B. Risk, JD |
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