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There are several consideration that will determine the type of funding asset to be chosen, the method of assigning the future payment obligations, and the selection of the company to issue the funding asset:

• Is this a fee for services with no amount being recovered by your client from another party?
• If the funds from the client are being recovered as damages from another party, what is the underlying event that gave rise to the claim? Physical injury, physical sickness or death? Nonphysical injury, i.e., defamation, punitive damages, psychological or emotional distress, breach of contract, property damage, fraud, harassment, other intentional torts, etc.
• Will your client also be deferring part of the damage recovery?
• Who will be paying the funds? Your client? A self-insured defendant? A liability insurance company?
• If the funds are coming from a defendant or liability insurer, will that party cooperate by creating a future payment obligation to be assigned and by allowing you to designate the broker to handle the transaction?

Qualified Assignment: If the attorney fee will be paid from funds recovered by the client as workers' compensation or for a personal physical injury or physical sickness, both of which are excluded from the claimant's income under section 104 of the Internal Revenue Code [26 U.S.C. § 104], the future payment obligation for attorney fees can be transferred to a third party under what is called a "qualified assignment" under Code section 130 on the theory that the funds being deferred belong to the plaintiff until they are paid to the attorney. While the attorney fee is technically an obligation between the attorney and the client, the payments are made directly from the third-party obligor to the attorney "as a convenience to the plaintiff." Section 130 permits the future payment obligation to be funded either with an annuity or a government obligation. Virtually all qualified assignments are funded with annuities. Until recently, the only way an attorney could defer a fee from a client, if the client's obligation was to be assigned to another party with stronger financial credentials, was if the client's damage recovery was excluded from taxable income. A qualified assignment under the authority of section 130 was the only way, until some creative life insurance companies invented some alternatives.

Reinsurance Assumption Agreement:If the attorney fee will be paid from funds recovered by your client as taxable tort or contractual damages not excluded from your client's taxable income under section 104, a qualified assignment under section 130 may not be made. However, the future payment liability may be assumed by a third party under a nonqualified assignment, which is still a novation and involves a substitution of parties, relieving the original obligor of all obligation. An annuity is not usually a viable funding vehicle for nonqualified assignments because of the 10 percent penalty imposed on premature distributions from annuity contracts "not held by natural persons" by Code section 72(u), unless the distribution falls into one of the exceptions under section 72(q)(2). To avoid the penalties associated with annuity ownership, when there is no applicable exception, some creative life insurance companies use a reinsurance assumption agreement, where the life insurance company assumes the future payment obligation of the original obligor, as long as the original obligor is also an insurance company. Reinsurance agreements are between insurance companies, including some self-insured risk pools that have been assigned an identification number by the National Association of Insurance Commissioners. Reinsurance assumption agreements were first introduced to assume obligations for workers' compensation claims filed before August 5, 1997, when section 130 was amended to include workers' compensation claims in the field of eligibility for qualified assignments. Reinsurance agreements offered for the purpose of assuming future payment obligations were priced like single premium immediate annuities, and their payment streams can be designed just like their annuity counterparts, including lifetime payments with period certain guarantees. In fact, most companies that offer them use the same quoting software for both vehicles, the only difference being the type of contract that is issued to promise the future payments.

Nonqualified Assignment: One creative thinking company figured that the 10 percent tax penalty on annuities would have no effect on a non-natural person owner, if the annuity were owned in an environment where the tax penalty is not imposed - a "tax haven." Taxable obligations funded with an annuity from a U.S. life insurance company are assigned to an "offshore" entity. To allay any concerns that collection from a foreign entity might be difficult in the event of default, the performance of the obligor is guaranteed by a surety bond issued by a U.S.-based property and casualty company. Since the annuity is simply the funding asset behind the foreign obligor's periodic payment promise and is not owned by the claimant or the attorney, there are no tax penalties that apply to the payee. Each payment received by the claimant or attorney is fully taxed, but only in the year in which that payment is received. Another U.S. life insurance company followed suit, creating its own offshore entity, securing future payment obligations with a U.S. corporate guarantee.

While there is a lot of flexibility under both reinsurance agreements and offshore annuity ownership, neither device can be used to assign damages that represent wages subject to FICA and FUTA. This is the reason why a deferred compensation agreement between the client and attorney works, while an agreement between the attorney's own law firm and the attorney will not. There may also be constructive receipt considerations in an arrangement between a law firm of a solo practitioner and the attorney, since they are the same, or if an attorney to receive the deferred compensation is also the managing partner of a multiple-attorney law firm.

The selection of the company to issue the annuity or reinsurance assumption contract will depend on a lot of factors specific to the case on which your fee is based. For example, some life insurance companies are still not comfortable with the concept of assigned attorney fees and will not accept them - even though they are approved by the U.S. Tax Court and have withstood a challenge by the IRS in one of the circuits of the U.S. Courts of Appeal. Other companies will not accept attorney fee assignments if the plaintiff does not also structure at least a part of her or his damage recovery - with varying explanations for this policy from different companies. Some companies will allow lifetime payments to an attorney, based on the attorney being the "measuring life," while others restrict to periodic payments for a fixed number of years or deferred lump sums. There is a growing trend of more life insurance companies willing to accept assigned attorney fee structures - a sign that the companies are becoming more confident that they will not endure an adverse tax ruling.

Some companies will provide a liquidation of the present value of future guaranteed payments at the death of the attorney, for estate planning purposes - others will not. This is called a cash refund option. If an attorney warrants a rated age based on the attorney's health history, which can increase life-contingent payment amounts, the funding asset should be purchased from a company that will assign rated ages. And, companies that offer reinsurance assumption contracts and offshore annuity ownership provide options when the damage recovery is taxable to your client. Not all companies are equal in financial strength, making the ratings by the independent analysts an important consideration. Secondary guarantees of the payment obligation are also worthy selection criteria. Therefore, annuity pricing is not the only consideration when selecting a company.

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*This article was written by Richard B. Risk, JD
**This article does not purport to give legal or tax advice.