Structured Settlement Agreements | Avoid This Fundamental Flaw
When a structured settlement is part of the settlement package for your client's legal case, then the consideration MUST be cash and future periodic payments (with the schedule expressly described)
by John Darer CLU ChFC MSSC CeFT RSP CLTC
Language in a settlement agreement and release which does not create an obligation to pay future periodic payments is to be avoided. Without consideration being properly expressed the structured settlement could fail, with financial consequences to all parties, Defendant, Plaintiff and Insurers.
Proposed settlement agreement language which says "Defendant or its Insurer will arrange for the purchase of an annuity" is a potentially fatal mistake. WHY?
For starters, a properly formed structured settlement is not simply "buying an annuity"
“ Buying an annuity” or “Arrangement for the purchase” does not create a liability make to make periodic payments that can be assigned under the terms of IRC 130 as I will go into below.
Most Defendants or Insurers do not want to retain the contingent liability of a long tail periodic payment obligation on their books and this is one of the reasons most structured settlements are created using qualified assignments.
Lastly, the plaintiff or payee may not want to be tied emotionally or financially to the Defendant who harmed, them, or whose product or servce harmed them, or their Insurer(s) and the qualified assignment helps to accomplish this.
A qualified assignment is defined in the United States Internal Revenue Code of 1986, as amended, in Section 130.
IRC 130(c)
The term “qualified assignment” means any assignment of a liability to make periodic payments as damages (whether by suit or agreement), or as compensation under any workmen’s compensation act, on account of personal injury or sickness (in a case involving physical injury or physical sickness)—
(1) if the assignee assumes such liability from a person who is a party to the suit or agreement, or the workmen’s compensation claim, and
(2) if—
(A) such periodic payments are fixed and determinable as to amount and time of payment,
(B) such periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments,
(C) the assignee’s obligation on account of the personal injuries or sickness is no greater than the obligation of the person who assigned the liability, and
(D) such periodic payments are excludable from the gross income of the recipient under paragraph (1) or (2) of section 104 (a). [emphasis added]
So if you want to use the "arrange for the purchase of an annuity" language, you're "batting 0 for 1 " out of the gate, violating IRC 130(c)(1).
Look at any qualified assignment agreement and you will see the following:
A recital
The Recital includes: "...under which the Assignor has liability to make certain periodic payments to or for the benefit of the Claimant" and (2) that the Assignor and Assignee wish to effect a "qualified assignment within the meaning of Section 130(c) of the Internal Revenue Code of 1986, as amended" and THEN
The Decretal
The first decretal paragraph which is usually titled Assignment and Assumption and states "Assignor hereby assigns to the Assignee, and Assignee hereby accepts and assumes, all of the Assignor's liability to make the Periodic Payments"
What are the consequences of Failure to Satisfy IRC 130(c) in a Qualified Assignment agreement?
Every qualified assignment agreement comes with a little gem titled "Failure to Satisfy Section 130(c)." I like to call it the "sneaky S.O.B. clause." It's essentially a safety net for the assignment company, bailing them out if they accidentally take on an obligation that doesn’t meet the tax exclusion perks offered by IRC 130. Classic!
If there is an IRC 130(c) failure, the unwind provisions in each assignment agreement ensure that the qualified funding asset or annuity reverts to the Assignor. Corporate owners of annuities face unfavorable taxation, which IRC 130 excludes. In the event of a qualified assignment unwind due to failure to meet IRC 130 requirements, the Defendant or Insurer that previously claimed a write-off for a novated claim will likely need to recognize the asset's value as income, leading to an asset-liability mismatch after accounting for taxes.
If a plaintiff has executed a qualified assignment release and pledged to obtain secured creditor status, that goal is lost if an IRC 130(c) failure occurs. They may end up as a general creditor of the defendant or insurer in such cases.
Even worse, if the qualified funding asset is returned to them after the unwind due to being pressured during settlement negotiations and not being properly informed, they could now hold an asset that generates taxable income on any interest.
A good settlement consultant should be able to elucidate the reasons why there needs to an obligation to make future periodic payments in the settlement agreement,
The requirements of IRC 130 are straightforward to meet, so avoid complicating settlement documents by including "arrange for purchase" language. Adhering to the exact wording of the tax code is essential—this is fundamental Structured Settlements 101.
Last updated September 14, 2025.