NFP Structured Settlements


Installment Sales

Individuals who sell their business or personal property at a gain are faced with the dilemma of recognizing the gain immediately or deferring some or all of the gain. Generally, the entire profit is taxable in the year of the sale. However, there is an alternative known as an “installment sale."

An installment sale is a “disposition of property where at least one payment is to be received after the close of the taxable year in which the disposition occurs.” Installment sales generally permit sellers to defer gain on certain property dispositions to the tax year in which the related sale's proceeds are received.

Each installment sale payment received by the seller consists of three components:

  1. Non-taxable recovery of the investment or basis
  2. Taxable gain
  3. Interest

Not all property dispositions in which payments are received in later tax years qualify as installment sales (e.g. sales of inventory, sales by dealers in real and personal property, sales of securities traded on established exchanges, the portion of a sale of real or personal property that is subject to depreciation recapture, and certain sales of property between related persons). Sellers should consult with their own independent tax advisor to see if a sale qualifies as an installment sale.

Structuring the Sale Transaction

The structured sale may appeal to the seller who has concerns with relying on the credit quality of the buyer. Once the sales transaction is completed, it can be structured in the following steps, assuming there is a valid installment sale.

  1. The buyer and the assignment company enter into an assignment agreement whereby the buyer transfers to the assignment company its obligation to make future payments. This assignment agreement between the buyer and the assignment company makes no changes to the terms of any prior agreement between the buyer and the seller. The seller is not a party to the assignment, and the buyer will remain liable to the seller pursuant to any agreement between the buyer and the seller.
  2. The broker ensures all necessary documents are sent to the assignment company, including, but not limited to: the purchase agreement, assignment agreement, annuity application, and wire transmittal forms.
  3. The buyer then wires funds to the assignment company as agreed.
  4. The assignment company wires funds to the life company to purchase an annuity contract, for which it retains all rights and incidents of ownership.
  5. The assignment company, for its convenience, directs the life company to make payments directly to the seller.

Legal Relationships of Seller, Assignment Company and Life Company

The assignment company’s primary business involves assuming liabilities to make periodic payments to payees on behalf of obligors in exchange for consideration. The agreement, called the “assignment,” provides that the assignment company’s obligation to make the periodic payments to the seller will be no greater than that of the buyer/assignor immediately preceding the assignment.

The assignment company then purchases an annuity contract from the life company to fund its payment obligations to the payee. Although the assignment company may direct the life company to send the payments directly to the payee, such direct payment would be for the assignment company’s convenience only. Thus, the payee has no rights under the annuity contract.

After the purchase of the annuity, the life company provides the payee with an "agreement to pay," wherein the life company states that the payee will receive all payments required to be made by the assignment company under the terms of the assignment of obligation agreement. The agreement to pay is a separate and independent agreement that is entered into by the life company at the time the assignment company purchases an annuity contract with the life company to fund its obligations to the payee.

There is no consideration for the life company’s agreement to pay. This agreement does not give the payee any status greater than that of a general creditor of the life company and does not impose any greater obligation on the life company than that of the assignment company. The payee is at risk for the insolvency of the assignment company, and neither the assignment company nor the life company sets aside any funds or assets as security or collateral for the benefit of the payee.

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