Tax Perspectives

Qualified structured settlement annuity payments for personal physical injuries are income tax-free to the recipient. This makes structured settlements an attractive alternative to lump-sum settlements in personal injury suits or agreements.

The tax-exempt status is pursuant to the Internal Revenue Code (IRC) Section 104(a)(2). This provision of the tax law states:

Gross income does not include [...] the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness.

Revenue Ruling 79-220 points out that the recipient of a structured settlement must not have constructive or actual receipt or control over the funds or the annuity contract.

IRC Section 130(c) allows the liability for future periodic payments to be assumed by a third party, i.e., an "assignee," such as PASSCorp (Prudential's assignment company). The funds received for assuming this liability (and purchasing a "qualified funding asset") are excludable from the assignee's gross income, provided that:

• The assignee assumes the liability from a person (or entity) that is a party to the suit or agreement.
• The periodic payments are fixed and determinable as to amount and timing.
• The payments cannot be accelerated, deferred, increased, or decreased by the recipient.
• The assignee's obligation to make the periodic payments is no greater than that of the party who assigned the liability.
• The periodic payments are excludable from the gross income of the recipient under IRC Section 104(a)(1) or (2).

Payment Plans

Structured Settlement Annuities offer a wide variety of payment plans, such as:

• Designated Period Annuity—payments are guaranteed for a specific amount of time, up to 50 years.
• Life Annuity—payments are guaranteed during the lifetime of the annuitant.
• Life Annuity with Designated Period—periodic income is provided for as long as the annuitant lives, with a minimum of guaranteed payments for a designated period, up to 50 years.
• Lump-Sum Payments—guaranteed lump-sum payments are available to supplement annuity benefits.
• Life Annuity with Installment Refund—income is provided for as long as the annuitant lives, with a minimum guaranteed payout equal to the purchase price.
• Joint and Survivor Life Annuity—income payments are provided for the lifetime of two annuitants (e.g., a husband and wife). Upon the death of one annuitant, payments will continue during the lifetime of the survivor at 100% of the original benefit, or at a reduced percentage that you may select.

Why Choose a Structured Settlement?

Qualified structured settlement annuities facilitate settlements of personal injury claims and litigation by adding a dimension of future financial security for the claimant. They can also provide claimants with more money over time than lump-sum settlements.

• Qualified structured settlements have been used successfully in settling claims arising from personal injury suits, i.e., vehicular accidents, product liability, medical malpractice, and workers' compensation coverage.
• Future periodic payments are income tax-free to the claimant,² which makes a Structured Settlement Annuity an attractive alternative to taxable investments.
• Claimants avoid the risks and fees associated with other types of investments, including the risk of premature dissipation of the funds.
• At time of settlement, payments are tailored to meet the claimant's individual needs—whether income replacement, lump-sum payments for special equipment, or college funds for dependent children.

When to sell structured insurance settlements

For victims of personal injury, structured insurance settlements play an important role in providing long term care and compensation for loss of income. Most beneficiaries are content to receive these payments over time but many victims don't even realize they have the option of selling their structured insurance settlement payments for cash.

Occasionally, people find themselves in situations where having a lump sum of cash would be more desirable than a stream of annuity payments. Usually there is an event that triggers the need for a cash payment such as paying college tuition, buying a home, or starting a business. Other times it is a life event that triggers the need to sell a structured insurance settlement such as; getting a divorce, settling debts, paying unexpected medical bills. Some individuals may just want to take advantage of a lucrative investment opportunity. For these and other reasons more people are choosing to sell structured settlement payments and take a lump sum of cash vs. waiting for future insurance annuity payments.

Finding a Buyer of Structured Settlement Payments

Many people that are currently receiving a stream of monthly structured settlement payments do not realize that it is possible to sell all or a portion of their payments for a lump sum of cash. Access to these funds could provide funding to meet the current life needs of one's family instead of waiting for a future stream of inflexible payments structured over a long period of time. This process of entering into a contract to sell ones legal right of receiving future structured payments to settlement companies in exchange for the present value of the money is called factoring. A large number of companies now offer cash for a structured settlement payment. When evaluating your options, try to work with financially sound companies that are competent and ethical. These factors are important considerations to note of when you compare the knowledge and integrity of a company or corporation as well as their dollar offers.

What Is a Structured Settlement Payment?

Formally recognized by the federal government since 1983, structured settlement payments are specified in voluntary settlement agreements between and injury victims and defendant(s). A settlement payment or annuity comes as the result of a contract between a victim and a defendant whereby the injured victim receives a stream of tax-free settlement payments as an annuity tailored to meet their future needs instead of receiving one lump sum. Once a structured settlement payment agreement is reached, the plaintiff cannot make changes.

Structured settlement payments are used more frequently these days because they offer substantial benefits to all parties involved in the structured settlement agreement. Victims receive tax-free payments and defendants get an end to litigation as the result of reaching a structured settlement agreement.

Settlement Companies

In recent years, a complete settlement funding industry has been created. Companies will offer to pay for the rights to receive future annuity payments under structured agreements. These companies offer customers the benefit of direct access to cash.

To gain immediate access to their money, a person can sell their right to receive all or part of their future structured annuity payments to a settlement buyer. The factoring company acquires the right to receive future structured settlement monies in exchange for a cash payout. Reasons to sell a series of payments include gaining access to financial capital during a family emergency. Some people choose to repay a debt or to use the cash for investment purposes such as starting a business or buying a home. Others use the money to fund an entire college education.

Selling Future Payments

Many individuals receiving a stream of monthly payments under a settlement agreement don't realize that they can sell all or a portion of their annuity payments and be paid a cash sum. Access to this money could provide funding to meet the current life needs of your family instead of waiting for a future stream of inflexible payments structured over a period of a year or more. This process of entering into a contract to sell ones legal right of receiving future structured payments to settlement companies in exchange for the present value of the money is called factoring. A large number of companies now offer cash for a structured settlement payment. When evaluating your options, try to work with financially sound companies that are competent and ethical.

Cash Payments or a Structured Settlement?

In traditional settlements, compensation for damages has usually consisted of a single cash payment. Alternative arrangements know as structured settlements were created in the 1980's. Under these arrangements the beneficiary would receive cash structured settlement payments on a periodic basis. This guaranteed stream of annuity payments could be paid over a period of months, years or a complete lifetime.

What are Structured Settlements?

Historically, personal injury or product liability lawsuits were settled by the exchange of a single lump sum cash payment in return for the release of claim in a lawsuit. Under this arrangement, it was up to the individual and their families to manage the large initial sum and to use it to provide for the victim's medical and income needs over their entire lifetime. Structured settlements laws were created to help reduce the difficulties faced in these types of situations and to help provide the claimant and their families with long-term financial security.

Structured settlement payment agreements are unique in that they focus more on the beneficiary's financial needs and may provide payments for a certain period of time or throughout the injured persons life time. Formally recognized by the U.S. Congress in 1982, structured settlements are voluntary compensation agreements between the injured person and a defendant(s).

Structured settlements enable the beneficiary to receive a series of periodic payments instead of a cash lump sum. Most settlement agreements are entered into privately (e.g., a pre-trial settlement) while others, usually involving minors or persons deemed mentally unfit, may be created by a court order.

Structured settlements are a creative solution in that the payment amounts and the future annuity timetable are completely up to the parties negotiating the structured agreement. Rather than receiving a single lump sum, victims can receive a customized stream of annuity payments. Using structured settlements, annuity payments may be in equal amounts at regular intervals, or they may be paid in periodic lump sums. Larger intermittent payments are sometimes used to provide for anticipated future needs such as funding; a college education, medical equipment replacement (motorized wheelchairs), or planning for retirement. It is important to note however, once the parties have agreed to the structured settlement annuity amounts and timetable, the plaintiff cannot make changes. When unexpected financial emergencies arise individuals may consider selling all or some of their payments for a lump sum of cash. To receive more information please fill out the form on the right.

Properly structuring payment benefits is very important. Most victims and their lawyers know that structured settlements are tax-free to the injured party. There are other factors however that you and your financial advisor should consider. Special tax ramifications on the investment income of the settlement proceeds need to be considered. In some cases, receipt of a large sum can result in loss of public benefits. It is important for the victim that the structured settlement benefits are properly structured so that the principal can be invested, and that the investment income remains tax free to the injured party. Structuring payments properly can also avoid the loss of public benefits. These are all important financial considerations.