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).