Documentation for Qualified Assignment or Non-qualified Assignment in Structured Settlement for Personal Injury Claim

A qualified assignment involves the transfer of the obligation to make future periodic payments from the defendant or insurer to a qualified assignment company. This setup is designed to relieve the defendant or insurer of future liability and to allow them to take an immediate tax deduction for the settlement amount. Below are the detailed documents typically involved in a qualified assignment:

1. Settlement Agreement

Description: The settlement agreement is a critical document that outlines the terms of the settlement, including the total settlement amount, the schedule of periodic payments, and any lump sum payments. It specifies the nature of the claim, the parties involved, and the agreement reached between them.

Key Components:

  • Total Settlement Amount: The overall amount agreed upon for the settlement.

  • Payment Schedule: Details on how and when the payments will be made (monthly, quarterly, annually).

  • Lump Sum Payments: Any one-time payments included in the agreement.

Example: The settlement agreement for Jane Doe's car accident injury specifies that she will receive $2,000 per month for the next 20 years, plus an initial lump sum of $50,000 to cover immediate medical expenses.

2. Qualified Assignment Agreement

Description: This agreement facilitates the transfer of the obligation to make the future periodic payments to a qualified assignment company. The assignment company then takes over the responsibility for making the payments to the claimant.

Key Components:

  • Assignment of Obligations: Details the transfer of the payment obligations from the defendant or insurer to the assignment company.

  • Acceptance by Assignment Company: The agreement includes acceptance by the assignment company of the obligation to make the periodic payments.

Example: An insurance company agrees to transfer the payment obligation to a qualified assignment company, which then ensures Jane Doe receives her periodic payments as agreed.

3. Annuity Contract

Description: The assignment company purchases an annuity from an insurance company to fund the periodic payments to the claimant. The annuity guarantees that the payments will be made according to the agreed schedule.

Key Components:

  • Annuity Purchase: The assignment company buys an annuity that matches the terms of the settlement agreement.

  • Payment Guarantee: The annuity ensures that the claimant receives the agreed-upon payments.

Example: The qualified assignment company purchases an annuity that ensures Jane Doe receives $2,000 every month for 20 years, funded by the insurance company's payments to the annuity provider.

4. Court Order

Description: In some cases, a court order may be required to approve the structured settlement and the qualified assignment. This court approval ensures that the settlement is fair and in the best interest of the claimant.

Key Components:

  • Judicial Approval: The court reviews and approves the settlement terms and the qualified assignment agreement.

  • Protection of Claimant's Interests: The court ensures that the settlement is in the best interest of the claimant, especially in cases involving minors or incapacitated individuals.

Example: A court reviews and approves the structured settlement for Jane Doe, ensuring that the periodic payments and the qualified assignment are in her best interest.

5. Tax Compliance Documentation

Description: Documentation is required to ensure compliance with relevant tax laws, including Section 130 of the Internal Revenue Code. This section allows the assignment company to exclude the transferred obligation from its gross income.

Key Components:

  • Tax Exclusion: Ensures that the payments are excluded from the assignment company's gross income.

  • IRS Compliance: Documentation confirms compliance with IRS regulations regarding structured settlements.

Example: The qualified assignment company files the necessary tax documents to comply with Section 130, ensuring that the periodic payments to Jane Doe are tax-free.

Documentation for Non-Qualified Assignment

A non-qualified assignment is used for settlements that do not qualify for tax exclusion under Section 104 of the Internal Revenue Code. This type of assignment is common in cases involving non-physical injury claims, such as employment disputes or construction defects. Here are the key documents involved:

1. Settlement Agreement

Description: Similar to the qualified assignment, the settlement agreement outlines the terms of the settlement, including the total amount, the schedule of periodic payments, and any lump sum payments. It specifies the nature of the claim, the parties involved, and the agreement reached between them.

Key Components:

  • Total Settlement Amount: The overall amount agreed upon for the settlement.

  • Payment Schedule: Details on how and when the payments will be made (monthly, quarterly, annually).

  • Lump Sum Payments: Any one-time payments included in the agreement.

Example: The settlement agreement for John Smith's employment dispute specifies that he will receive $3,000 per month for the next 15 years, plus an initial lump sum of $100,000.

2. Non-Qualified Assignment Agreement

Description: This agreement facilitates the transfer of the obligation to make the future periodic payments to a non-qualified assignment company. The assignment company then takes over the responsibility for making the payments to the claimant.

Key Components:

  • Assignment of Obligations: Details the transfer of the payment obligations from the defendant or insurer to the assignment company.

  • Acceptance by Assignment Company: The agreement includes acceptance by the assignment company of the obligation to make the periodic payments.

Example: An employer agrees to transfer the payment obligation to a non-qualified assignment company, which then ensures John Smith receives his periodic payments as agreed.

3. Annuity Contract

Description: The assignment company purchases an annuity to fund the periodic payments to the claimant. The annuity guarantees that the payments will be made according to the agreed schedule.

Key Components:

  • Annuity Purchase: The assignment company buys an annuity that matches the terms of the settlement agreement.

  • Payment Guarantee: The annuity ensures that the claimant receives the agreed-upon payments.

Example: The non-qualified assignment company purchases an annuity that ensures John Smith receives $3,000 every month for 15 years, funded by the employer's payments to the annuity provider.

4. Court Order

Description: In some cases, a court order may be required to approve the structured settlement and the non-qualified assignment. This court approval ensures that the settlement is fair and in the best interest of the claimant.

Key Components:

  • Judicial Approval: The court reviews and approves the settlement terms and the non-qualified assignment agreement.

  • Protection of Claimant's Interests: The court ensures that the settlement is in the best interest of the claimant, especially in cases involving minors or incapacitated individuals.

Example: A court reviews and approves the structured settlement for John Smith, ensuring that the periodic payments and the non-qualified assignment are in his best interest.

5. Tax Compliance Documentation

Description: Documentation is required to ensure compliance with relevant tax laws. Unlike qualified assignments, non-qualified assignments may not be eligible for the same tax exclusions and may require different documentation.

Key Components:

  • Income Recognition: Ensures that the payments are recognized as income by the assignment company and taxed appropriately.

  • IRS Compliance: Documentation confirms compliance with IRS regulations regarding non-qualified structured settlements.

Example: The non-qualified assignment company files the necessary tax documents to comply with IRS regulations, ensuring that the periodic payments to John Smith are reported as income and taxed accordingly.

Conclusion

Both qualified and non-qualified assignments play a crucial role in structured settlements for personal injury claims. They provide a structured approach to managing settlement funds, ensuring that the claimant receives periodic payments while the defendant or insurer is relieved of future liability. By understanding the documentation involved in each type of assignment, claimants and their representatives can navigate the complexities of structured settlements and secure the financial stability needed for their recovery.