by John Darer CLU ChFC CSSC RSP CLTC
A structured settlement whose payments represent damages on account of personal physical injury, physical sickness, workers compensation or wrongful death, provides income that is tax free to the recipient of the structured settlement payments. [see IRC 104(a)(1) amd IRC 104(a)(2) as applicable].
Structured settlements may be an appropriate vehicle to be used in conjunction with a Special Needs trust (generally referred to as a Supplemental Needs Trust in New York) to provide investment stablity and reduced expenses of the recovery.
On its website, one of my industry colleagues also purports that using a structured settlement will be useful in "preventing the taxation of interest income within the SNT". This is untrue.
A structured settlement has absolutely no bearing on the taxation of interest income within the Special Needs Trust. Absent an investment in tax exempt investments, once structured settlement payments are deposited in to the SNT, the interest subsequently earned on the structured settlement payments is taxable.
The use of a structured settlement created outside a Special Needs Trust with payments feeding into the SNT, may be helpful when comparing the potential outcome of the investment of a comparable amount to the cost of the structured settlement by the trustee of the SNT in a permissible taxable investment.