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Structured Settlement Obligors William J. Skyrm Credit quality of the annuity Obligor A Structured Settlement Obligor is established to accept assignment of structured legal settlement obligations from property and casualty companies. Prior to the advent of IRC Section 130 plaintiffs receiving structured settlements were at the mercy of the obligor. In the event the obligor became insolvent the claimant would be a general creditor of that entity. When Congress enacted Internal Revenue Code Section 130 (See Appendix 1) it created certain tax benefits to participants and memorialized the structure to ensure those tax benefits. In particular congress wished to protect the tax fee nature of settlement amounts due to Claimants. At the heart of the issue was concern that receipt of or constructive receipt of the investment vehicle in which settlement proceeds were invested (annuity policies or treasuries) would result in a tax obligation for gains on the investment. (See Page 6, Structured Settlements, The Definitive Guide, The Risk Law Firm (2006)(See Appendix 2). The solution, place the asset in the name of a “qualified assignee” for the benefit of the claimant as per the terms of the underlying contractual settlement agreement. The qualified assignee is commonly referred to as the Obligor. The Obligor is established to accept assignment of the settlement obligation at the time a lawsuit settles from the underlying defendant, typically a property and casualty company. The obligation is offset by a “qualified funding asset” typically a structured settlement annuity purchased with funds from the property casualty company. The Obligor customarily purchases a structured settlement annuity from a related life insurance company. The Qualified Assignment process is tax neutral to the Obligor. The Obligor is not required to report the amount received to assume the liability nor may it deduct the payments that are made to the Claimant. The exact requirements to effectuate a “Qualified Assignment” are outlined by Congress in IRC Section 130. (Appendix 1) The Claimant receives settlement compensation on a tax free basis pursuant to the terms in the underling settlement agreement. Because the Obligor is listed as the owner of the policy there is no constructive receipt of the annuity in advance of the date on which payments are due. The claimant maintains a vested right to receive payments when they come due. These rights of the claimant are evidenced by the settlement agreement, qualified assignment document and annuity contract. Copyright 2010 What are the rights of the “Owner” Obligor The Obligor becomes the Owner of the structured settlement annuity as it tenders the premium for the purchase of the structured settlement annuity. Furthermore, the Obligor is listed as the Owner to avoid the tax problem outlined above. But what authority does the Owner have? The Owner is limited by contractual arrangements for which it is bound. Therefore the Obligor has a contractual duty to direct structured settlement annuity payments to the Claimant pursuant to the legal settlement agreement. In the bankruptcy In Re Monarch Capital Corporation the court denied attempts on behalf of the Obligor to direct structured settlement annuity payments for its benefit deciding that, “The right to make any such changes would also be in direct conflict with the settlement documents signed by the parties”. (In re Monarch Capital Corporation, Debtor No. 91‐41379‐JFQ (D. Massachusetts, August 12, 1991) (See Appendix 3). In the Monarch case the court went a step further to state “Monarch Capital’s rights in the policy are virtually non‐existent” and “But Monarch Capital can only assign whatever rights it has in the policy; its ability to assign cannot enhance its interest”. State courts have consistently reached the same result that the rights of the owner are separate and distinct from the rights of a third party with a vested right to receive payments as they come due. Assessing credit quality of Obligors Despite the outcome above, concerns over the solvency of the Obligor can be assessed if the financial health of the Obligor is known. Many of the Obligors involved with structured settlements have financial ratings issued by independent rating agencies such as A.M. Best, S&P or Moody’s. Alternatively, some structured settlement obligations are specifically guaranteed by the related issuing life insurance company. (See Sample Guarantee in Appendix 4) Additional risks for select Obligors Where no rating or guarantee exists there is an additional risk as to the viability of the Obligor. Typically non‐rated and non‐guaranteed Obligors are those no longer engaged in the structured settlement business. Generally, a Claimant or its assignee should not expect the Obligor to impact the ability of the structured settlement annuity issuer to make or not make payments pursuant to the settlement agreement. The Obligor’s authority as Owner is severely limited under the Monarch Capital case leaving it with mostly administrative rights. Nonetheless exposure by secondary market purchasers or lenders should be limited through diversification and concentration limits. Copyright 2010 Appendix 1 Copyright 2010 Appendix 2 Copyright 2010 Appendix 3 Copyright 2010 Appendix 4 Copyright 2010
"Structured Settlement Obligors 2010"