The courts that have reviewed attempts to purchase IRA payment streams have consistently upheld the annuity issuer’s objection. See, e.g., DRB Capital v. Perez, 2019 Cal. App. LEXIS 517 (Super. Ct. Cal. 2019). Courts must give effect to anti-assignment terms in a contract where, as here, the parties’ intentions are clear. Cordero v. Transamerica Annuity Service Corporation, 2021 WL 1198705 S.D. Fla. (2021) (applying New York law and holding that anti-assignment clause was for benefit of annuity issuer); Johnson v. First Colony Life Ins. Co., 26 F. Supp. 2d 1227 (C.D. Cal. 1998) (applying California law and upholding anti-assignment language in structured settlement and denying declaratory judgment relief to settlement payee) and Johnson v. J.G. Wentworth Originations, LLC, 284 Ore. App. 47, 54-58 (Ore. Ct. App. 2017) (applying California law and upholding the settlement obligor’s right to enforce anti-assignment language in structured settlement contract).
This interpretation is consistent with the overall intent of the annuity, which unambiguously provides that neither the contract nor any interest therein, including the right to receive the annuity payments, may be assigned or forfeited, and that the annuity is exclusively for the benefit of the payee. This contractual language, which among other things, was intended to ensure compliance with section 408, is enforceable.
Independent of the contractual language prohibiting the proposed transfer, the transfer should be prohibited as a matter of law because it would materially change the risks and burdens imposed upon both the annuity issuer and the payee.
Section 317(2) of the Restatement (Second) of Contracts provides that assignments of contract rights are valid unless “(a) the substitution of a right of the assignee for the right of the assignor would materially change the duty of the obligor, or materially increase the burden or risk imposed on him by his contract, . . . or (c) assignment is validly precluded by contract.” See Restatement (Second) of Contracts § 317(2).
Here, as discussed supra, the annuity expressly states that it is an individual retirement annuity under Section 408(b) of the Internal Revenue Code See IRA Endorsement. The term “individual retirement annuity” means an annuity or endowment contract, issued by an insurance company, which meets, inter alia, the following requirement: (1) “the contract is not transferable by the owner.” 26 U.S.C. § 408(b)(1); 26 CFR § 1.408-3(b)(1). Thus, to qualify as an IRA, the entire interest of the individual for whose benefit the IRA is established must be nonforfeitable. See 26 U.S.C. § 408(b)(4); 26 CFR §1.408-2(b)(4). An IRA is “for the exclusive benefit of an individual or his beneficiaries.” 26 U.S.C. § 408(a) and (h).
According to the regulations promulgated under Section 408, in support of the non-transferability requirement,
[t]he annuity . . . must not be transferable by the owner. An annuity . . . is transferable if the owner can transfer any portion of his interest in the contract to any person other than the issuer thereof. Accordingly, such a contract is transferable if the owner can sell, assign, discount, or pledge as collateral for a loan or as security for the performance of an obligation or for any other purpose his interest in the contract to any person other than the issuer thereof.
See 26 CFR §1.408-3. (Section 408’s non-assignability requirement is intended to prevent taxpayers from enjoying all of the tax benefits of the contract and then transferring the contract to another party, thereby frustrating the policy purpose of encouraging taxpayers to save for retirement.) Significantly, IRAs are exempt from income taxation only so long as they do not cease to exist as an IRA. See 26 U.S.C. § 408(e)(1).
Accordingly, if the annuity is transferred, an amount equal to the fair market value of the annuity would be includable in the payee’s gross income for the taxable year in which the assignment occurs, and the tax qualification of the annuity would be destroyed. 26 U.S.C. § 408(e)(3); 26 CFR § 1.408-3(c). (Historically factoring companies purchase tax-free payment streams from personal injury victims, which are regulated by Structured Settlement Protection Acts (“SSPA”). However, the SSPA does not apply because the proposed transfer involves taxable payments under a personally owned IRA annuity. In the absence of the consumer protections afforded by the SSPA, including among other things the disclosure requirements and the required finding that the transfer be in the payee’s best interest, the factoring company is engaging in the sort of overreaching and exploitation of periodic payment payees that the SSPA was designed to prevent.) As such, any such transfer would violate existing tax laws and regulations.
The proposed transfer, if allowed to procced, would unfairly impose additional tax reporting and withholding responsibilities for the annuity issuer. In addition, if the annuity issuer permits a transfer of the annuity despite the anti-assignment provisions, the Internal Revenue Service may take the position that the contract has not since its inception met the requirement that the contract must not be transferable. If the IRS were to take that position, the annuity issuer may be obligated to pay taxes on any gains since the IRA’s inception. Further, if the annuity issuer routinely allows such transfers, the Internal Revenue Service may conclude that none of the contracts issued by the annuity issuer as individual retirement annuities satisfy the non-transferable requirement, thereby destroying this financial product.
Independent of these financial considerations, the proposed transfer increases the annuity issuer’s burdens and risks by causing it to have to review and analyze the proposed assignment; redirect payments; and face exposure to double liability if it pays the wrong party and the prospect of becoming embroiled in litigation. See, e.g., In re Transfer of Structured Settlement Payment Rights by Brenda S. Campbell, Cause No. 2009-04982, 2009 Tex. Dist. LEXIS 2358 *27-28 (Tex. Dist. Ct. Feb. 26, 2009) (noting the burdens and risks assignments impose on payment obligors associated with reviewing, analyzing, and processing assignments); Johnson v. First Colony Life, 26 F.Supp.2d at 1229 (stating that the view under California law is that “clauses restricting assignability are for the benefit of the obligor,” and determining that the defendant insurer included a contractual non-assignment clause to diminish uncertainty regarding the tax risk associated with the periodic payment recipient’s assignment) (citation omitted); Liberty Life Assurance Co. v. Stone Street Capital, Inc., 93 F.Supp.2d 630, 637 (D. Md. 2000) (recognizing that the contractual anti-assignment clause improved the payment obligor’s ability to predict its tax liability and was enforceable under the principles of the Restatement (Second) of Contracts § 317)); Grieve v. General Am. Life Ins. Co., 58 F.Supp.2d 319, 321 (D. Vt. 1999) (finding that Section 317(2) applied to bar the assignment of periodic payments because, inter alia, the risk that an assignment would cause the payment obligor to lose its eligibility for favorable tax treatment in connection with a tax-free structured settlement resulted in a material reduction of the value of the contract); Mercedes-Benz of W. Chester v. Am. Family Ins., No. CA2009-09-244, 2010 Ohio App. LEXIS 1898, *21 (Ohio Ct. App. May 24, 2010) (“The threat of facing increased litigation certainly raises the burden and risk under any contract should the anti-assignment [language] be invalidated.”). Such increased obligations were never contemplated when the annuity issuer entered into these agreements and it would be patently unfair to unilaterally impose further commitments and legal exposure, especially when they were never contemplated by the parties at inception.
The anti-assignment provisions included in the typical annuity were designed to prevent the issuer to assume unreasonable and unbargained for risks and burdens. In short, assignments would not only have significant adverse tax consequences for payee but would also materially increase the annuity issuer’s burdens and risks and reduce the value of the IRA annuity product in general.