by John Darer CLU ChFC MSSC CeFT RSP CLTC
A common misconception about structured settlements is that structured settlements are annuities.
- Structured settlements are not annuities.
- Structured settlements are a form of settlement that may be partially funded with annuities, although they are not always funded with annuities.
Unfortunately the misconception is being proliferated by firms that should know better. What a pity!
Just Because They Say They Are Doesn't Mean They Are
Here are some examples of misinformation about structured settlements from a Google search performed on July 31, 2021:
- "Structured settlements are tax-free annuities that provide payment options to the Claimant" New York structured settlement broker website
- "All structured settlements are annuities..." and "Structured settlements are annuities" Structured Settlement factoring company..." associated with New York settlement planner. The same settlement planner refers to " investment backed structured settlements" in a November 2020 blog.
- "In fact, a structured settlement is an annuity" Boston area structured settlement broker
- "Structured settlements are annuities that receive special tax treatment" Florida Special Needs Law Firm website
- " A structured settlement is an annuity.." NJ Elder Law Firm
- " A structured settlement is an annuity" Las Vegas personal injury law firm
- " A structured settlement is an annuity" Boston personal injury law firm
- " A structured settlement is an annuity contract..." Workers Comp Help
- " A structured settlement is an annuity" Bellevue WA personal injury law firm
- "Structured settlements are annuities" Insurer 10-K
from which is borne a litany of misinformation by structured settlement factoring companies, tertiary market companies, financial advisors sourcing from secondary market and tertiary market companies and lead generators for such companies [ all below as of August 3, 2021]
- "Structured settlements are annuities awarded as recompense in a civil lawsuit" CBC Settlement Funding in the Conshohocken PA based JG Wentworth spinoff's tediously titled "Tax Implications of Structured Settlements Implications"
- " A structured settlement is an annuity" AnnuityExpertAdvice.com
- " A structured settlement is an annuity awarded to a plaintiff..." and " Investors can have peace of mind that their investment is safe when they purchase these types of annuities Totalstructuredsettlements.com [ the trifecta of B.S. (1) structured settlement is not an annuity; (2) structured settlements are not awarded (that's why it's called a settlement); and (3) investors in other people's structured settlement payments are not buying an annuity
Structured settlements are not funded by tax-free annuities
You can't simply buy a structured settlement annuity and receive payments tax-free. Actually a plaintiff or claimant cannot buy a structured settlement annuity at all. How Structured Settlements Work | Structured Settlements Explained (4structures.com)
Any tax benefit that may be realized on the payments is because of a settlement agreement that sets forth a periodic payment obligation and the nature of damages that the payments represent.
According to IRC 5891(c)(1), the term " structured settlement means an arrangement—
- The National Structured Settlements Trade Association states that ""structured settlements are an innovative and proven method of compensating injured plaintiffs in legal settlements".
- The Internal Revenue Service states "Structured settlements are settlements of tort claims involving physical injuries or physical sickness, and workers' compensation claims, under which settlement proceeds take the form of periodic payments, including scheduled lump sum payments. [ IRS Structured Settlement Factoring Audit Guide]