by John Darer ® CLU ChFC MSSC CeFT ® RSP CLTC
The lump sum you receive from selling your structured settlement payments will have the same tax treatment as the payments you receive from your structured settlement.
If your structured settlement was established to pay for damages for physical injury, physical sickness, wrongful death, the money you receive from selling your payments will be income tax-free. In such cases your structured settlement annuity payments are tax-free because the underlying transaction qualified for tax-free treatment under sections 104(a)(2) and 130 the Internal Revenue Code.
Federal legislation that became effective in 2002 and established IRC 5891, is intended to protect payees who choose to sell their structured settlement payments. IRC Section 5891 requires the sale of structured settlement payments be approved by a court in accordance with the relevant State statutes, which require that such a transaction be in the best interest of you and any applicable dependents, making the lump sum payment you receive from the sale of your payments income tax-free as well.
Sellers need to be aware that a transactions that do not comply with federal or state statutes, may put the tax treatment on the table for discussion. For example what if a mentally competent seller accepted a bribe from a settlement purchaser and willingly participated in a forum shopping expedition and lied on a court document submission about their true state of residence?
Do You Have to Pay Taxes on the Sale of Structured Settlement Payments from Non Physical Injury Settlements
Structured settlements that were created using a non qualified assignment (non qualified structured settlements) provide tax deferral to payees. However, please understand that such payments [which include structured settlements that were established to pay for attorney fees (Structured attorney fees) or to pay for otherwise taxable damages in employment settlements] may result in a taxable event.