Molestation cases and structured settlements. Finally someone shows some leadership.

In an email yesterday to the brokers and settlement community the life market for AIG, American General, laid out the policy that I and several others in the settlement business have been waiting for.

Specifically American General, who is the largest underwriter of structured settlement annuities in the US, acknowledge the fact that most sexual abuse cases, molestation cases and Catholic Church settlements do NOT qualify for assignment under section 130 of the IRC and as such can NOT be underwritten as tax free settlements. This is pretty ground breaking news in the settlement world as the topic of taxability post Murphy vs. IRS has generally been off limits in the life companies as this potentially huge source of structured settlements was hanging out there. The general perception in the legal community has been that they are tax free, a dangerous and incorrect perception post Murphy v IRS and there was no shortage of settlement brokers angling to write these cases on the false promise that they could be done so income tax free and under the protective umbrella of section 104 and section 130.  My fear was, and continues to be, that some life markets would give in to the temptation of underwriting these cases as tax free and let the clients worry about the tax ramifications later.

The policy as outlined yesterday by American General is essentially an acknowledgement of what I and Rob Wood have been saying for months, which is that these cases MUST be underwritten from a tax basis first by examining the pleadings, cause of action and case history to guarantee there is a documented physical injury in the case. While there is no clear guidance in the tax law, there has been plenty of indication from the IRS in private memorandums that they deem a physical injury in a sexual abuse or assault case to require " outward physical indication of injury such as bruises, broken bones and bleeding" to qualify as physical injury. Lurid yes, but the facts are that in many sexual abuses cases that while the physic and emotional harm is far worse to the victims then a one time physical injury, that Congress in it's infinite wisdom has refused to amend or clarify section 104 and 130 to clearly define what a physical injury is.

I can say that I am appreciative of the leadership AIG/American General is showing here by out lining a policy that is fair, reasonable and reflects that while SOME assault cases might qualify for tax free underwriting, that many will not and that the plaintiffs and claimants need to know this right now as they make decisions. Attorney's who simply hand over checks to clients on the assurance that " its most likely not taxable" are doing their clients a grave disservice and thankfully the life markets in the settlement industry are starting to recognize their potential liability if they choose to blindly underwrite these on the assertions of brokers who claim the case is a physical injury case.

If you are the victim of a sexual assault or are part of the various diocese sex abuse cases you need to get with your attorney to determine what documents and evidence you have to clearly indicate whether or not your case qualifies as tax free, and if it doesn't, what your options are going forward. The facts are the claimants still can structure their income and get tax relief using non-qualified annuities, but this requires even greater advance work and preparation to get it done.

Posted on December 4, 2007 .