After a settlement is reached and reduced to writing in a settlement agreement, the defendant can “assign” its obligation to pay any future payments to the plaintiff. This assignment is made to an entity called an assignment company to meet its obligations.
During the assignment process, the defendant must transfer the applicable settlement monies to the assignment company, after which both parties must sign a Uniform Qualified Assignment contract.
Understanding Qualified Assignments
An assignment is considered a “qualified assignment” if the settlement proceeds are excluded from income taxes under IRC §104a(2). To be excluded, the proceeds must be for compensatory damages from a case involving physical injury or illness.
IRC§130(c) states that payments can be made in the form of future periodic payments as long as:
- Cash flows are fixed and determinable
- Cash flows cannot be accelerated, deferred, increased, or decreased
Upon assignment of the obligation from the defendant to the assignment company, the defendant is released from further liability and administrative duties.
The Benefits of Qualified Assignments
From the plaintiff’s perspective, an assignment to a financially secure insurance company gives them the assurance that future payments will be made as promised. For many plaintiffs, this assignment to the life company alleviates the stress of future contact with the defendant, their insurer, or any party responsible for the injury.
From the defendant and/or their insurer, an assignment relieves the defendant of further compensation and responsibility. The defendant and/or their insurer are able to write just one check to the assignment company for the defendant’s liability, take the corresponding tax deduction, and transfer administrative duties and payment responsibilities to a third party (the life company and their assignee).
Learn more by contacting ROBINYOUNG & COMPANY.