by John Darer® CLU ChFC CSSC RSP CLTC
Taxation of Structured Settlement Payment Sales
According to JG Wentworth "the federal government has designated any money coming from a pain and suffering settlement as tax exempt. As long as the sale of your structured settlement payment stream complies with applicable federal and state laws, you should not incur tax penalties. However, you should always consult with an independent tax advisor regarding possible tax implications of your sale".
The JG Wentworth statement simply tells me that JG Wentworth recognizes its own shortcomings.
As I wrote the other day, "the tax treatment of structured settlement payments depends on the type of damages that the payments represent. It is not the structured settlement itself, the annuity or other qualified funding asset that triggers the tax treatment".
I'm not sure why JG Wemtworth chose to single out pain & suffering while omitting other elements of damages that may be excludable,
On June 10, 1999, the IRS issued guidance on the tax treatment to the payee in a structured settlement factoring transacton. In Private Letter Ruling 119273-97 the IRS concluded that the lump sum received from the sale of structured settlement payment rights retained the same tax treatment that it was accorded prior to the structured settlement factoring transaction. Download IRS PLR 119273-97 on Tax Treatment of Structured Settlement Factoring Lump Sum to Payee.
Note that an IRS PLR is a written statement issued to a taxpayer by an Associate Chief Counsel Office of the Office of Chief Counsel or by the Tax Exempt and Government Entities Division that interprets and applies the tax laws to a specific set of facts." A private letter ruling binds only the IRS and the requesting taxpayer. Thus, a private ruling may not be cited or relied upon as precedent by other taxpayers. [Mitchell Rogovin & Donald L. Korb, "The Four R’s Revisited: Regulations, Rulings, Reliance, and Retroactivity in the 21st Century: A View From Within", 46 Duquesne Law Review 323, 342 (2008)]
When Would The Sale of Structured Settlement Payment Rights Be Taxed?
One example of where the sale of structured settlement payment rights could be taxable in the year of transfer, is where the underlying structured settlement was created as part of the settlement of an employment case. Another example could be a personal injury case where a case is settled post-verdict,while an appeal is still pending and and the parties have agreed to compromise accrued interest by making an allocation and funding it with a structured settlement.
When you sell your structured settlement payment rights you are giving up tax benefits of one sort or another. If the origin of the damages in the case that led to the creation of your structured settlement would result in a tax exclusion then by selling you are giving up tax free growth, whereas if you are selling rights to a structured settlement that originated with taxable damages then you are giving up tax deferral. The lost tax growth or tax deferral lost compounds the discount that annuitants suffer when selling their structured settlement payments.
Going forward on the advice of someone without the knowledge and training to understand the transaction and effectively communicate these issues to you could be financially disasterous. I recommend that you only work with experienced credentialled settlement advisors.