FEE STRUCTURE GLOSSARY
An annuity is a life insurance product that is designed to turn a lump sum investment into a stream of income. It can be lifetime payments, payments for a certain period of time (period certain) or lump sum payments. It can also be a combination of all three. The payments can start immediately or be deferred.
An annuity contract is an agreement between the owner of the contract and the issuing life insurance company that provides for benefit payments to be made to at least one annuitant or payee. The contract may be for a fixed period of time or for a period of time contingent upon an annuitant’s life. For example, the contract might specify that the issuer of the contract will pay the annuitant of the contract monthly benefits starting of $1,000 per month and increasing by four percent at each anniversary of the contract for either a fixed number of years or the remainder of the annuitant’s life. Either the annuitant, or someone on the annuitant’s behalf, will have paid (at least) an immediate single lump sum premium to the issuer to initiate this flow of payments.
An annuity issuer is a life insurance company that issues an annuity policy in a structured settlement transaction.
Annuitant (measuring life)
An annuitant is the person that will receive or is entitled to receive annuity payments and who is the measuring life for a life annuity. In the case of personal injury settlements, the annuitant is the injury victim and/or other persons who have claims.
The Alternative Minimum Tax (AMT) is imposed by the United States Federal government on individuals, corporations, estates, and trusts. AMT is computed at 26% or 28% for individuals and 20% for corporations on taxable income as adjusted for AMT. Taxpayers are allowed a flat exemption amount but not personal exemptions or the standard deduction. The exemption for married couples filing jointly, for single individuals, and for corporations is phased out at higher incomes. Individuals may not deduct taxes or miscellaneous itemized deductions.
The assignee is an entity who accepts from the assignor a legal obligation to make future periodic payments via a structured settlement annuity. This is accomplished as part of the qualified assignment process.
A person or company who has a legal obligation to make future periodic payments via a structured settlement annuity that they want to assign to a 3rd party (assignor). In most cases, the assignor would be the defendant or its insurance company. This is accomplished as part of the qualified assignment process.
Typically, these are special purpose companies. However, they can be a life insurance company. Many times, an assignment company is a wholly owned company of an annuity issuer (the company that makes the annuity payments). In a structured settlement transaction, the assignment company has the
Attorney Fee Structure
A structured settlement annuity funded as part of settlement involving contingent attorney fees. A “fee structure” is an alternative method of receiving contingent legal fees. Instead of receiving a lump sum of contingent fees, a lawyer may elect to have all, or part of his legal fees paid in future periodic payments via an annuity from a life insurance company. When correctly utilized, the attorney fees placed into the fee structure are pre-tax and the payments are tax-deferred.
Childs v. Commissioner
This is the ruling that structured attorney fee programs are based upon. The final ruling came out of the United States Court for the 11th Circuit in Atlanta, GA.
Deferred Compensation Plans for Attorneys
These plans have a variety of investment options and more flexibility in terms of timing of income. An example is the best way to illustrate how it works: Let’s assume that in 2018 you want to defer $1 million in contingent legal fees. To maximize liquidity, you can split the $1 million (plus earnings) into 20 quarterly payment buckets (over 5-years). Thirteen (13) months prior to any scheduled payment bucket, you may elect to withdraw it. However, if you don’t need the payment as scheduled, the payment bucket will automatically roll forward to the end of the line. By laddering the payments this way, you can effectively manage your cash-flow and better control the timing of taxation. Using this type of plan, you can effectively have your cake and eat it too! Control the investment options and when you take income.
Equity Indexed Attorney Fee Structure
Index-Linked Annuity Payment Adjustment (ILAPA) Rider from Pacific Life. This is an attorney fee structure option that can help attorneys defer taxes—and the ILAPA rider can add upside market potential without downside risk. With the ILAPA rider, payments increase with the positive performance of the S&P 500® index, up to an annual maximum of 5%. If the index is flat or decreases, the payment remains the same.
Fixed Structured Settlement Annuity
Life & Health Insurance Guaranty Association
According to the National Organization of Life & Health Insurance Guaranty associations, “guaranty associations were created to protect state residents who are policyholders and beneficiaries of policies issued by a life or health insurance company that has gone out of business. All 50 states, the District of Columbia, and Puerto Rico have life and health insurance guaranty associations. All insurance companies (with limited exceptions) licensed to write life and health insurance or annuities in a state are required to be members of the state’s life and health insurance guaranty association. If a member company becomes insolvent (goes out of business), the state guaranty association obtains money to continue coverage and pay claims from member insurance companies writing the same line or lines of insurance as the insolvent company.”
Qualified Assignment ("QA")
A “QA” is a transfer of the legal obligation to make future periodic payments as damages for personal physical injury or sickness from a lawsuit defendant to a life insurance assignment corporation. This is done pursuant to Section 130 of the Internal Revenue Code. A qualified assignment can be used if all of the following requirements are met 1) the transferee assumes the liability from a person who is a party to the suit or agreement; 2) the periodic payments are fixed and determinable regarding amount and time of payment; 3) the periodic payments cannot be accelerated, deferred, increased, or decreased by the recipient of such payments; 4) the assignee’s obligation is no greater than the obligation of the person who assigned the liability; and 5) the periodic payments tax-free to the recipient under section 104(a)(2).
Qualified Funding Asset
A qualified funding asset is an asset that may be purchased by an assignment corporation as part of a qualified assignment transaction under Section 130 of the IRC. The qualified funding asset, typically an annuity, is how the assignment corporation makes the payments it is obligated to make under the qualified assignment. If an annuity is not used as the qualified funding asset, the only other option is obligations of the United States Government (Treasury Bonds).
Structured Settlement Annuity
A structured settlement is a special type of annuity purchased by the defendant in a personal injury law suit to pay the annuitant (injury victim) future periodic payments. The payments are tax-free under the Internal Revenue Code and have certain creditor/judgment protections. There are many types of payment plans that can be designed for injury victims depending on their needs or the needs of their families.
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