Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1999-12-30
2003-06-10
Rice, Kenneth R. (Department: 3627)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
Reexamination Certificate
active
06578016
ABSTRACT:
BACKGROUND OF THE INVENTION
I. Field of the Invention
The invention generally relates to the field of financial investing, and, more specifically, to a tax advantaged transaction structure and method for investing future receivables and other assets with ascertainable economic gain.
II. Description of the Related Art
People have historically sought ways to obtain a combination of a higher rate of return, while also decreasing the risks on their investments. Traditional sources of investment capital have recently given way to new concepts of property that can be bought, sold, and invested to realize a profit. The holders of these new concepts of property desire to 1) diversify their investment in a manner designed to produce a greater overall rate return; 2) reduce risk of loss associated with having their funds invested with only a single obligor or in a single asset; 3) alter the timing of their existing payment stream which may be inflexible and incongruent with their current economic needs; and 4) accomplish these desires in a manner that results in a deferral tax. These desires represent fundamental investment objectives sought by ordinary investors; however, the holders of the new concepts of property are deprived of these fundamental investment objectives due to the peculiarities of the property they hold and the heretofore available techniques for disposing of such assets.
One example of a new resource for investing has arisen from what is known as the structured settlement. Each year more and more people are receiving structured settlements as a result of compensation for tort injuries. Historically, tortfeasors paid damages as a lump sum to the claimant, but recent trends have shifted compensation to tort victims to a periodic schedule. This phenomena has been magnified by the insurance industry that receives federal tax incentives for establishing structured settlement arrangements with tort victims as opposed to lump sum settlements. It is commonplace for insurance companies to shift the payment obligation to a related but third party corporation. The related corporation then purchases a commercial insurance annuity often from a related insurance company that will make periodic payments to the tort victim based on a fixed schedule, as well as pay a nominal rate of interest that is frequently less than 5%. The initial principal of the annuity is a fraction of the original settlement amount, but interest earned on the annuity over the settlement payment period generates the remainder of the future payments due. In effect, the tort victim is making a low interest loan to the insurance company. The insurance company is then enabled to invest the funds of the annuity in more profitable investments and realize a profit in the difference between the annuity percentage that they must pay to the tort victim and the actual return on the annuity investment. Thus, insurance companies have a vested interest in promoting structured settlements for tort victims.
Unfortunately, the tort victim or claimant who is to receive the settlement is locked into a rigid payment scheme over a fixed number of years and receives a nominal rate of interest over the life of the annuity. For example, suppose a tort victim was awarded damages totaling $100,000. If the tort victim accepts a lump sum payment, the insurance company must immediately outlay the entire $100,000 of its own money payable to the tort victim. However, if the tort victim is to receive the money in a structured settlement directing payment of $10,000 a year for ten years, the insurance company will not have to outlay $100,000 of its own money. Instead, the insurance company can establish an annuity and make a one time initial principal deposit into the annuity that is a fraction of the total settlement amount. By reducing the $100,000 to a present value amount and relying on the generated interest to create the difference between the present value and the $100,000 amount, the insurance company only actually outlays a percentage of the entire settlement. Thus, the tort victim not only has to wait to receive payments over the life of the structured settlement, but the tort claimant is also penalized by inflation on the future payments since the value of the future payments will be less than any previous payment. Moreover, the tort claimant effectively has no diversification in the investment such that the tort claimant may earn a greater rate of return than the fixed nominal rate of interest on the annuity; the tort claimant has 100% of her investment at risk with a single obligor; and her payment schedule is fixed and inflexible for a period of years, often in excess of twenty years.
Another recent investment opportunity has arisen in the form of lottery payments. Similar to the structured settlements, a lottery recipient receives a fixed amount of money each year over a set period of years. When a person wins a lottery, the organization that is to pay the lottery—usually a state government—establishes an annuity to satisfy its obligation to make the future lottery payments. The state initially invests a fraction of the total winnings into an annuity and relies on a nominal interest rate return to satisfy the future prize payments. State governments purchase commercial insurance annuities or treasury bonds, either of which earn a low percentage rate. Thus, the lottery winner's prize is effectively invested in a single asset earning an extremely conservative rate of return. The lottery winner's rate of return could be significantly improved with a diversified investment portfolio composed of various investments generating yields greater than that achievable from a 100% investment in a single annuity with a single obligor.
Many lottery winners recognize that they could achieve greater diversification and greater rates of return on their lottery winnings if they were able to receive their lottery winnings in a single lump sum as opposed to the periodic payments. In accommodation, many states, as well as third party finance companies have offered lottery winner recipients the opportunity to take a lump sum settlement upon winning the lottery. However, the majority of lottery winners decline the lump sum offer since choosing this option results in the incidence of a substantial tax because the recipient must pay tax on the entire lump sum which typically is calculated using the highest income tax bracket. Because of this penalty, the majority of lottery winner recipients forgo the opportunity to take a lump sum payment to avoid loosing a substantial amount of the lottery winnings to taxes; however, a significant number of lottery prize winners still choose the lump sum option because of an immediate financial need.
Deferred compensation has generated another investment opportunity for professional athletes, executives and others entitled to receive such payments. Due to salary caps and other restrictions, professional sports teams often defer a portion of an athlete's compensation to a period of time several years into the future. Many corporations offer executive employees various forms of deferred compensation for a variety of reasons as well. The athlete or executive often earns a nominal rate of interest on the deferred amount, but is otherwise deprived of any ability to diversify the investment to earn a greater rate of return or minimize the risk associated with having a single obligor, such as the professional sports team in the athlete's case or the corporation in the executive's case.
Another recent investment opportunity has developed from life or senior settlement payments. A great number of individual holders of life insurance policies allow their policies to lapse prior to death. A lapsed policy typically generally returns a de minimis cash value, if any. In a life settlement, an individual assigns his life insurance policy to a third party in exchange for current consideration. The third party assumes ownership of the policy, including the right to the death benefit as well as the obligation t
Terlizzi James Dominic
Trankina Timothy Joseph
LandOfFree
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