A Qualified Funding Asset -as far as matters involving Structured Settlements are concerned- means an annuity contract issued by an insurance company licensed in the United States of America, or any obligation of the United States of America -provided that the aforementioned annuity contract or obligation meets certain statutory requirements.

A Qualified Funding Asset (also sometimes known as a qualified annuity) is usually not subject to the rule requiring inclusion of the income on the contract -which almost always applies to annuity contract holder entities (e.g. corporate entities) and not natural persons.

Simply put, the term Qualified Funding Asset usually means any annuity contract issued by a company licensed to do business as an insurance company under the laws of any State, or any obligation of the United States of America -provided that:

• Said annuity contract or obligation is used by the assignee to fund periodic payments under any qualified assignments,
  
• the periods of the payments under the annuity contract or obligation are reasonably related to the periodic payments under the said qualified assignment,
  
• the amount of aforementioned payment under the annuity contract or obligation does not exceed the periodic payment to which it corresponds to,
  
• the aforementioned annuity contract or obligation is clearly designated by the taxpayer as being taken into account with respect to the aforementioned qualified assignment, and
  
• the said annuity contract or obligation is purchased by the taxpayer no earlier than 60 days prior to the date of the qualified assignment but no later than 60 days from the date of such an assignment.

Generally speaking, neither the amount received for agreeing to the qualified assignment of the liability to pay damages nor the income on the annuity that actually funds the liability to pay for the said damages, is subject to tax.

When the payments on the annuity are received by the structured settlement company (and are included in income), the company would then deduct the corresponding payments to the injured person. The Injured party, then would exclude the said payments from his or her income as allowed for within the scope of sec. 104. Therefore, there is no tax liability stemming from receipt of the payment for the qualified assignment of the liability to pay damages, as well as from the income on the annuity that funds the liability to pay damages. Considering how complex this can get under certain circumstances, you are better off speaking with a professional specializing in Structured Settlement Annuities.