by John Darer CLU ChFC MSSC RSP CLTC
Are Treasury Funded Structured Settlements Tax Free? The answer is, it depends on what you are using TFSS for. Treasury Funded Structured Settlements can be used to pay for both qualified and non qualified settlements. Said another way, damages for both taxable and non taxable settlements can be funded with Treasury obligations.
What makes things work tax wise on qualified settlements are two sections of the Internal Revenue Code of 1986, as amended. The two Sections are IRC 104 and IRC 130.
IRC 104, provides an income tax exclusion for damages paid on account of physical injury or physical sickness, and workers compensation.
IRC 130 provides an income tax exclusion for payments received by a substitute obligor (assignee) of a future periodic payment obligation) subject to certain requirements.
IRC 130(d) describes the requirement to be considered a "qualified funding asset". Per IRC 130(d) a qualified funding asset may be either an annuity, or an obligation of the United States government.
Most cases that resolve with structured settlements use a form of assignment, qualified assignment or non qualified assignment. This is because defendants and insurers do not want a long term contingent liability on their books. They want to pay and buy their peace.
A personal injury plaintiff cannot literally buy a structured settlement themselves and achieve the same tax benefits. Plaintiffs can buy a recycled structured settlement cash flow from the tertiary market (or incorporate one as part of their settlement plan), but that entails a certain degree of additional risk and that is not really a structured settlement in the true sense of the word. At this point our understanding is that such cash flows would be tax deferred at best.