What is a non-qualified assignment?
A non-qualified assignment (NQA) is an assignment of an obligation to pay money in the future. It is used to plan structured settlement payment schedules, and only for litigation types that would consider the settlement earnings as taxable.
Tax-exempt qualified settlements are reserved for cases such as wrongful death, personal bodily injury, or physical sickness claims. In a personal bodily injury claim, the plaintiff will not get taxed on their awarded income regardless of whether they accept a lump sum payment or if they opt for a structured settlement.
Cases that do not involve personal bodily injury, however, will get heavily taxed by the government, especially if the plaintiff opts for the lump sum payment. Selecting the lump sum payment would cause the plaintiff to receive the largest taxation on their settlement value. However, it would be beneficial to opt for a non-qualified structured settlement, also known as a non-qualified assignment, in cases that are not considered bodily injury claims.
With a non-qualified assignment, a plaintiff can reap the benefits of financial planning by spreading their settlement over a long period of time instead of receiving it in one lump sum (which would be taxable). Not only does it offer the opportunity to receive payments designed to spread the tax burden, but by controlling the timing of the receipt of income, taxpayers can plan each and every year around the receipt of the additional income.
Types of cases to which an NQA may be applicable include (but are not limited to):
- Employment litigation, including wrongful termination, sexual harassment, discrimination, mental anguish, etc.
- Construction defects
- Whistleblower claims
- Contract disputes
- Punitive damages
- Environmental claims
- Directors and officers (D&O) claims
- Errors and omissions (E&O) claims
- Patents/intellectual property cases
- Attorney fees from with these cases
When a plaintiff spreads out the payments from a settlement, they can avoid the heavy taxation that accompanies a lump sum payment. One can also avoid losing various government benefits due to a sudden increase in income, and non-qualified assignments provide more flexibility for investing settlement monies.
There are numerous benefits to setting up a non-qualified structured settlement:
- This is the primary benefit associated with establishing a non-qualified assignment. Plaintiffs can effectively put off the taxation of earnings until a later date, so they will not be taxed as heavily.
Interest Earned on Pre-Tax Earnings
- While avoiding taxation in the interim, one can still earn interest on the untaxed value of each settlement payment—this means more interest accrued over a longer period of time until the point of taxation.
- A non-qualified assignment allows a plaintiff extreme flexibility in how they receive their earnings over time. They can choose to spread them out over a short period or over many decades and into retirement.
If your clients require assistance establishing an NQA payment plan that works for their specific needs, our non-qualified structured settlement planners can help create a plan that truly works for them. Contact our consultants today.
Structured Installment Sales
Large-dollar transactions bring large tax implications. Receiving the proceeds in one lump sum — whether it’s through divesting business, selling real property, or receiving a settlement — results in significant local, state, and federal income taxes as well as investment income taxes. The gains on lump sum investments are also taxed substantially.
Why forfeit upwards of one-third of what’s coming to you, and then give it to the IRS?
You can be more strategic about your money to avoid a huge tax burden at once. Structured installment sales provide options that are custom to your transaction and future personal and professional goals—with less tax burden and greater security than those who claim to offer such solutions with creditor status.
Instead of accepting all of the funds from your sale upfront, a structured installment sale can transform your one-time sale into a series of installments that will arrive in your bank account over time in a schedule of your choosing. While you await receipt of your funds, the money is being invested through a national custodian where the funds then grow tax-deferred. So that means less taxes and more money.
How to implement a structured installment
Here is how a structured installment works in five simple steps:
- When the buyer and seller execute the Purchase & Sale Agreement, they sign an Addendum of Sale agreeing to a periodic payment schedule.
- The buyer assigns a periodic payment obligation through the contract, resulting in a lump sum transferred to a third-party assignment company.
- The periodic payment obligation is assigned to the third-party assignment company, which then directs the entire deferral to a holding company.
- The holding company issues a contract schedule to the third-party international assignment company ensuring all periodic payments are made, which are backed by a professionally-managed investment account.
- The holding company then distributes periodic payments to the seller according to the payment schedule in the Purchase & Sale Agreement.
Through this relatively simple process, a structured installment sale can provide you with income that will last your lifetime.
What to look for in structured installment options
There are several options out there if you’re considering a structured installment. When shopping around, it is important to look toward security, customization of investments, and a failsafe, no-fee liquidation clause.
Security. Many national programs tout secured creditor status in their assignment agreements. But there’s an elevated level of security that also allows for greater tax-exempt investment gains. Search for a company willing to provide a default judgment directly against the investment account, giving true, unparalleled default protection.
Customization. You should have complete customization over your investments. Your investment strategy should be customized into a tailored portfolio with full-time portfolio management. Your investment manager can thereby search out top-performing securities exchanges and liquidity providers—the likes of TD, Fidelity, Pershing, etc.—while rigorously evaluating execution quality. It’s important that your wealth advisor has access to a wide range of financial products and services that represent sophisticated financial planning in order to help you achieve your goals.
Liquidation Clause. Let’s face it, sometimes plans change, which is why — unlike a 401k — you should be able access your money in the event of a hardship. Look for a company that will honor a one-time hardship liquidation of the periodic payment in accordance with IRC 5891. If you provide instructions in writing to the assignee, your plan assets should be converted to cash without penalty or fee. You would then receive a 1099 for the entire distribution of the year in which the hardship is requested.
Case study: Flower shop owner plans for retirement
To see this put into practice, let’s take the example of Scarlet Begonia. Scarlet has owned and operated a florist shop in Upstate NY for 30 years. Having celebrated her 50th birthday and experienced a surge in revenue thanks in large part to a revamped social media presence, she’s ready to sell to her longtime, cross-town rival – a national flower delivery chain – and ease into retirement as a part-time grandmother and full-time world traveler.
She negotiated a deal with the flower chain and accepted their offer of $2 million. Her shop had an adjusted basis of $950,000. After accounting for the $50,000 in transaction fees, Scarlet stood to receive only $1,000,000. Before signing the deal, and after speaking with several lawyers and financial advisors, Scarlet could not stand to lose so much of her end of the sale (nearly 40%), all at once, through taxation and expect the funds to last until she could withdraw from her 401k. So she engaged in a structured installment sale with Milestone, reducing her taxes associated with capital gains, net investment income, and state income taxes. She instead structured her sale into a series of $100,000 annual payments over the foreseeable future through a customized Milestone structured installment sale. She will now easily be able to build the future she sees for herself. All of the sweat equity of building her own business will set her up for life.
Structured installment sales have the ability to turn dreams into realities. By properly planning the sale of your business, your sale of real property, or a large settlement, you can achieve financial independence for the rest of your life. Contact Milestone for a free consultation about whether this is a good option for you.
Milestone Consulting is one of the only companies today to offer an independent, non-qualified solution. We offer non-qualified options for plaintiffs and attorneys to evaluate the amount of the settlement or fee they choose to take in the year of settlement. Deferring portions of the settlement through non-qualified assignments can reduce the overall tax bite, and gives litigants and their attorneys investment options (pre-tax).
How does Milestone Consulting do this? The Milestone team handles all of the setting up and managing of the non-qualified assignment. We do this through use of our additional entities, listed below.
Specialty Asset Holdings LLC (SAH)
SAH serves as the sole owner of any assets, investments and/or funds that may be invested to meet the periodic payment obligations. Based in Buffalo, New York, Specialty Asset Holdings serves as the exclusive agent for GPPAC and markets GPPAC products and services to plaintiff attorneys and business owners in the United States.
Global Periodic Payment Assignment Company (GPPAC)
GPPAC is an International Business Corporation and independent non-qualified assignment company domiciled in Barbados to serve the purpose of accepting periodic payment obligations.
We welcome you to contact Milestone for assistance or to learn more.