by John Darer CLU ChFC CSSC RSP CLTC
A.M. Best has released a video featuring several members of the National Structured Settlements Trade Association (NSSTA), including John McCulloch, Jamie Kormann, Len Blonder and NSSTA outside counsel Craig Ulman of Hogan Lovells.
While I am always pleased to see good publicity for structured settlements. the video contains some inaccurate information about the world before structured settlements. Specifically the commentator in the video states that prior to structured settlements, the only option for paying damages was a taxable lump sum. In the context of a personal injury case this is not true.
The fact is that there is a long standing tax exclusion for damages on account of personal injuries, personal sickness or workers compensation. The Revenue Act of 1918, § 213(b)(6), 40 Stat. 1057, 1065-66 (1919) states that "for purposes of this title . . . the term “gross income”—
. . .
(b) Does not include the following items, which shall be exempt from taxation under this title:
. . .
(6) Amounts received, through accident or health insurance or under workmen’s compensation
acts, as compensation for personal injuries or sickness, plus the amount of any damages received
whether by suit or agreement on account of such injuries or sickness . ."
While a lump sum itself would be income-tax-free the interest derived from any investment of the "cash now" lump sum would be taxable. That is unless the lump sum were invested in tax exempt securities.
For settlements of claims, lawsuits or disputes that do not involve physical injury, physical sickness, workers compensation or wrongful death, or such settlements with elements of taxable damages, the cash lump sum at the time of settlmeent would be taxable. In such a cases, solutions such as nonqualified assignments, periodic payment reinsurance (where an insurer is payer) and other customized vehicles and/or solutions exist to provide relief.