Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and John Darer Reviews

2011 NCOIL Model Act Required Life Insurers To Notify Policyholders About Secondary Market But Missed Opportunity to Deal With Structured Settlement Factoring

by John Darer CLU ChFC MSSC RSP CLTC

As we continue to comment on the Cordero vs Transamerica matter, it's worth revisiting some of my commentary from 2011 as yet another example of the strategic failure of state legislatures to address a reasonably forseeable problem related to structured settlement factoring when a parallel problem was being addressed with life settlements.

Who is NCOIL?

NCOIL is a legislative organization comprised principally of legislators serving on state insurance and financial institutions committees around the nation. NCOIL writes Model Laws in insurance, works to both preserve the state jurisdiction over insurance as established by the McCarran-Ferguson Act in 1945, to serve as an educational forum for public policy makers and interested parties.

Founded in 1969, NCOIL works to assert the prerogative of legislators in making state policy when it comes to insurance and educate state legislators on current and perennial insurance issues. It's tag line is Sound Public Policy in 50 States for 50 Plus Years

In 2011, the National Conference of Insurance Legislators ("NCOIL")  took a stand on strong life insurer disclosure to policyholders in its passage of a Life Insurance Consumer Disclosure Model Act. The purpose is to assure that policyholders are aware of their options, including secondary market options such as life settlements.

 “It is imperative that policyholders understand that they have alternatives to merely lapsing or surrendering their policy. The model would require a clear notice to consumers, listing eight available options, including accelerated death benefits, conversion to long-term care, and the possibility of a life settlement.”  NCOIL President Robert Damron

The NCOIL Model Act  Was Deemed Controversial According to 2010 Press Release

"The controversial model was the subject of extensive debate in 2010, including multiple Life Insurance & Financial Planning Committee hearings and conference calls and enjoyed input from a panoply of interested parties including legislators, regulators, and representatives of the American Council of Life Insurers (ACLI), Coventry, Institutional Life Markets Association (ILMA), Life Care Funding Group, Life Insurance Settlement Association (LISA), Life Settlement Institute (LSI), Mass Mutual, MetLife, and Prudential Financial". The latter two companies have subsidiaries that issued and still issue structured settlement annuities.

The 2011 model applies to policyholders over the age of 60 or terminally/chronically ill.

NCOIL's Abject Failure on Structured Settlement Disclosures

Although structured settlement annuities are a segment of the life insurance industry and while NCOIL and its members were aware of the structured settlement secondary market, it has been slow to adopt disclosure of secondary market options. 

Before, I took a break from the Society of Settlement Planners from late 2005 through early 2011, there was talk about speaking to NCOIL. I don't know whatever happened with that. What happened though is that by 2008-2009

Settlement Planners Strongly Objected to Allstate's Efforts

Allstate Life Insurance Company (and Allstate Life Insurance Company of New York), which stopped writing new structured settlement annuities in 2013, were first movers in overtly addressing the structured settlement factoring dilemma.

Pressure from a number of settlement planners and structured settlement brokers contributed to an Allstate Life Insurance Company decision to temporarily stop sending annual notices to structured settlement annuitants about its AFEN liquidity option.  The result, as I've previously written, is that a number of liquidity seeking Allstate structured settlement annuitants were hosed by effectively paying higher than necessary discount rates on structured settlement factoring transactions than they might have, had they been notified by Allstate as had been the custom and practice prior to 2007.  On several occasions I was contacted by Allstate structured settlement annuitants armed with a quote from one of the big "cash now pushers" where the effective discount rate exceeded Allstate's AFEN rate and there was no disclosure by the cash now pusher that such an option from Allstate was even available. 

A classic example of this was an outrageously unsuitable 2013 deal engineered by now defunct Client First Funding in connection with a then Wells Fargo investment adviser that was caught early enough that the Florida structured settlement transfer order could be vacated and the annuitant's cash flows from the structure were restored. The annuitant, who was unemployable single father of two dependent toddlers was receiving about $60,000 annually with a COLA for life from Allstate. The unsuitable Client First deal had a discount rate that exceeded the Allstate AFEN rate.

Was Client First Settlement Funding Show Of 8% Investment Projection to Structured Settlement Annuitant A Permissble Inducement? - Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and Commentary (typepad.com)

We've observed a similar style of caper in February 2021, this time involving a New York resident, a Florida factoring company and the same Boca Raton investment adviser who was once with Wells Fargo making investment projections without taking into account taxes.  Judge in Niagara Foils Structured Settlement Factoring Last Stand, Citing Bob Dylan in Reject of Boca Broker - Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and Commentary (typepad.com)

Settlement Planners Also Objected to Berkshire Hathaway's Hardship Exchange Program

NCOIL Press Release on Life Insurance Consumer Model Act  Download 11242010LifeDisclosurePR

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

John Darer Reviews | Are Structured Settlements Tax-Free?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

 

Are Structured Settlements tax free?  That is the question.

 

One answer appearing on the Internet from a settlement planning firm states:

 

1. Income tax exemption: Structured settlement payments—including growth—are 100% income tax-free. 

 

Comment: TRUE, if the payments represent damages that qualify for an exclusion from gross income set forth in IRC 104(a)(1), IRC 104(a)(2) or IRC 139F. Generally, worker's compensation, personal physical injury or physical sickness, wrongful death and wrongful incarceration. It is not the structured settlement payments themselves that drives the tax treatment, it is what the parties agree the damages the structured settlement payments represent compensation for and how that is applied in the tax code.

 

2. While lump sum cash settlements are income tax-free for physical injury cases, if the money is placed in a traditional investment, then any growth is subject to income taxes.

 

Comment:  Not exactly. The answer fails to recognize capital investments that produce capital gains.

The term capital gain refers to the increase in the value of a capital asset when it is sold from what you paid for it. 

A short term gain or loss is when the asset is disposed of in one year or less. A long term capital gain or loss occurs if an asset is sold after holding for more than one year. The asset must be disposed of (sold) in order to realize a capital gain or loss.  In other words, unrealized gains and losses that reflect an increase or decrease in the value of an investment are not considered a taxable capital gain.

So it would be inaccurate to say that "if the money is placed in a traditional investment, then any growth is subject to income taxes".

 

 

 

 

Are Structured Settlement Annuities Taxable? It's All About The Damages

by John Darer CLU ChFC MSSC CeFT RSP CLTC

“Is a structured settlement annuity taxable? And is the initial amount that I get from the settlement taxable?”

Asked by a rhetorical question posed by a settlement planning firm.

Here is their response:

"If the origin of the claim is based on a personal physical injury, Section 104[a][2] of the Internal Revenue Code states that the initial principal amount on the settlement that the client receives is not taxable. It is tax-exempt at the state, local, and federal levels. however, if the client decides to invest their settlement funds, then the interest that grows from the investment is taxable. One way to avoid this is to establish a structured settlement annuity for the client to receive their settlement funds. All of the interests (sic) that grow inside of the structured annuity will also be tax-exempt. Payments received from a structured settlement annuity do not need to be reported on any tax return form (1040) or any tax document. Both the principal amount and interests (sic) in the annuity are completely tax exempt".

Here's the thing...

1. The Internal Revenue Code is Federal tax code. While there may be state and local tax laws that are modeled after federal tax law, those are the dominion of the individual states or local governments and their respective departments of revenue. 
2. IRC Section 104 (a)(2) permits a taxpayer to exclude from gross income "the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or physical sickness" Source: Internal Revenue Service irs.gov

Key Structured Settlement Takeaway

The key take away is that under IRC 104(a)(2) it is the damages are tax exempt not the annuity

With a properly established structured settlement, that starts with an obligation to make future periodic payments as damages on account of personal physical injury, where the obligation is generally assigned by way of a qualified assignment, and then funded with a structured settlement annuity or structured settlement annuities as a qualified funding asset, each of the future payments is tax exempt.

Taxes and Structured Settlements. It's All About the Damages!

 

Last updated May 11, 2024

Structured Settlement Annuities Are NOT Tax Exempt but the Damages May Be

by John Darer CLU ChFC MSSC CeFT RSP CLTC

There is a false narrative concerning structured settlement annuities that claims that structured settlement annuities are tax exempt. Structured settlement annuities are not tax exempt.

Structured settlement annuities are not tax exempt. The focus is on the damages

Where used as a "qualified funding asset"  the structured settlement payments may be tax exempt, but the essential reason for the tax exemption is the damages that the payments from the structured settlement annuities represent.

For example:

1. Payments for workers compensation  see IRC 104(a)(1)
2. Payments for damages on account of personal physical injury, physical sickness and wrongful death, see IRC 104(a)(2)   [and IRC 104(c) for Alabama wrongful death]
3. Payments for wrongful imprisonment, see IRC 139F

Structured settlement annuities can be used to fund the payment of damages in settlement of lawsuits comprised of many types of taxable damages

Even though they are funded with structured settlement annuities, if established properly each payment in such cases is taxed in the year received.

I'm sure that the false narrative is not intentional, but what is surprising is the false narrative is articulated in public facing communications by certain people and companies with credentials and experience. Those who spread the false narrative, even unintentionally, may be used as sources of "validation" for content barfers in (or serving) the structured settlement secondary market. Clearly this does not serve the greater good for consumers or the industry.

 

 

Does a Court Have to Set Up a Structured Settlement to Avoid Taxes?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Courts do not set up structured settlements. Therefore a Court does not have to set up a structured settlement to avoid taxes

Don't get Verklempt! Structured settlements are tax exempt for payment of damages under IRC Sections 104, 130 and 139F. Court approval is not necessary for the tax exemption

In some cases, a Court must approve a settlement, regardless of whether it includes a structured settlement.  Here are some examples of where court approval of a settlement is generally required:

1. Settlements involving payments to minors
2. Settlements involving payments to incompetents
3. Wrongful death settlements

Damages are a sum of money paid as compensation for a loss or an injury. It is the type of damages that govern the taxation.

These types of damages are tax exempt:

Internal Revenue Code Section 104(a)

(1)

amounts received under workmen’s compensation acts as compensation for personal injuries or sickness;

(2)

the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as perioidic payments) on account of personal physical injuries or physical sickness;

 

Internal Revenue Code Section 139F

    (a) In the case of any wrongfully incarcerated individual, gross income shall not include any civil damages, restitution, or other monetary award (including     compensatory or statutory damages and restitution imposed in a criminal matter) relating to the incarceration of such individual for the covered offense     for which such individual was convicted.

 

 

 

Structuredsettlements.com Unreliable and Illiterate on Tax Status of Structured Settlements

by Structured Settlement Watchdog

CBC Settlement Funding feasts off the structured settlement payment rights of gullible people who read the unreliable and inaccurate information published by their marketing partners Annuity.org and Structuredsettlements.com.

Today's CBC's lead generation company poo poo stew is about the taxation of structured settlements.

Structuredsettlements.com "Crap on Crostini" about Taxation of Structured Settlements

Do I have to pay taxes on my structured settlement? 

Structuredsettlements.com answers:

"The short answer is typically no. The tax status of your structured settlement payments is set when your settlement issuing company structures the settlement and rarely changes. Money you receive from a personal injury or medical event isn’t considered income and so it isn’t taxed like income, according to Section 104(a)(2) of the Internal Revenue Service’s code."

11 Reasons Why StructuredSettlements.Com is A Load of BS

1. The Internal Revenue Service does not have a code, except perhaps a figurative "nudge nudge, wink wink" when its enforcement team is about to storm the offices of a factoring company that is not in compliance with a structured settlement protection act.
2. The Internal Revenue Code, formally the Internal Revenue Code of 1986, is the domestic portion of federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code. It is organized topically, into subtitles and sections, covering income tax, payroll taxes, estate taxes, gift taxes, and excise taxes; as well as procedure and administration. Its implementing agency is the Internal Revenue Service  [ Source:  CCH Tax Law Editors ]
3. There is no such thing as a "settlement issuing company".
4. A structured settlement is a form of settling a claim or lawsuit.
5. A settlement is a compromise between adverse parties in the claim or in the lawsuit.
6. A structured settlement annuity is one of the permissible qualified funding assets as set forth in IRC 130(d).
7. A structured settlement annuity issuing company does not structure the settlement, the compromising parties do.
8. How structured settlement payments are taxed has to do with the nature of the damages the payments represent.
9. Structuredsettlements.com represents that the tax status rarely changes. What would be the rare instance where the structured settlement was tax free and then it changed? 
10. On August 21, 1996, President Clinton signed the Small Business Job Protection Act of 1996. Taxation of damages was affected by this bill. The Act changed the exclusion from gross income of damages received on account of personal injury or sickness to apply only to damages which are received on account of a physical injury or physical sickness.  If the claim resulting in damages or settlement payments has its origin in a physical injury or sickness, then all damages (other than punitive damages) that flow from that injury or sickness are treated as payments on account of that physical injury or sickness. If, however, the claim has its origin in emotional distress, even if subsequent physical injury or sickness is alleged, damages or any settlement payment made is taxable because it stems from a nonphysical injury. (Damages which reimburse the cost of medical treatment are not taxable).  
11. What is a medical event?  If you break wind is it a qualifying medical event, or go to the podiatrist to remove an ingrown toe nail is that a medical event that gives you the ability to structure?  Of course not.  None of them represent damages which are received on account of physical injury or physical sickness.

Click structured settlement tax benefits for more information

 

Workers Compensation Structured Settlements | Qualified Assignments On or AFTER August 5, 1997 Filings?

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

Workers Compensation Qualified Assignments for Structured Settlements

Qualified assignment only became available for workers compensation cases filed AFTER August 5, 1997.

The Taxpayer Relief Act of 1997 amended the Internal Revenue Code, adding workers’ compensation payments under IRC § 104(a)(1) to the language of IRC §130, making them eligible for qualified assignment the same as physical injury or physical sickness tort claim payments under IRC § 104(a)(2), but applicable to claims under workmen’s compensation acts filed after the date of the enactment of the Taxpayer Relief Act (August 5, 1997).

On or prior to August 5, 1997, workers compensation parties could only make limited use of structured settlements where the future periodic payment liabilities were assigned (at the Safeco Life's SAFECO National facility) or through reinsurance, where the employer was insured.

 

 

IRC 104(a)(2) Tax Exclusion Denied Because Settlement Agreement Did Not Address Physical Injury

by John Darer® CLU ChFC MSSC CeFT® RSP CLTC

The Ninth Circuit Court of Appeals has affirmed a Tax Court decision, that concluded that a settlement was not

Pay attention to settlement documentation

excludable from the gross income because neither the settlement agreement nor the facts and circumstances of the case demonstrate that the settlement was based on a plaintiff's physical injury or physical sickness, or her loss of consortium arising from her husband's physical injury or physical sickness.

See

JOSE M. DULANTO; ANA M. DULANTO, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Tax Ct. No. 19123-12 MEMORANDUM Appeal from a Decision of the United States Tax Court Submitted November 15, 2017

The Appellate Court stated in its ruling:

"Jose M. Dulanto and Ana M. Dulanto appeal pro se from the Tax Court's judgment concluding that a payment that Ana M. Dulanto received in a settlement agreement was not excludable from their gross income and assessing penalties. We have jurisdiction under 26 U.S.C. § 7482(a)(1). We review de novo the Tax Court's conclusions of law and for clear error its findings of fact. Rivera v. Baker West, Inc., 430 F.3d 1253, 1256 (9th Cir. 2005). We affirm.

The Tax Court properly concluded that the settlement was not excludable from the Dulantos' gross income because neither the settlement agreement nor the facts and circumstances of the case demonstrate that the settlement was based on Ana M. Dulanto's physical injury or physical sickness, or her loss of consortium arising from Jose M. Dulanto's physical injury or physical sickness. See 26 U.S.C. § 104(a)(2) (exempting from taxation a settlement payment based on personal physical injuries or physical sickness); Rivera, 430 F.3d at 1257 (to determine whether a settlement is based on physical injury or physical sickness, courts consider the settlement agreement and the facts and circumstances of the case). Read the underlying Tax Court Decision in Dulnato v IRS here

The Tax Court did not clearly err in concluding that the Dulantos failed to produce sufficient evidence that they acted with reasonable cause and in good faith, and thus properly found that the accuracy-related penalty was appropriate for the Dulantos' understated taxes. See 26 U.S.C. § 6662(a), (d)(1) (authorizing penalty for substantial understatement of taxes when understatement exceeds the greater of ten percent of the tax required to be shown on the tax return or $5,000); DJB Holding Corp. v. Comm'r, 803 F.3d 1014, 1022, 1028-31 (9th Cir. 2015) (setting forth standards of review and discussing penalties under § 6662 based on substantial underpayment and circumstances for applying exception under § 6664(c)(1) regarding whether taxpayer had reasonable cause for his position and acted in good faith).

The Tax Court did not abuse its discretion in denying the Dulantos' motion to continue because it was filed within 30 days of the trial date and the Dulantos were aware of Ana M. Dulanto's disability before that period. See Tax Ct. R. 133 (a motion for a continuance is granted only in exceptional circumstances, and if filed within 30 days of hearing, it ordinarily will be deemed dilatory and will be denied unless the ground therefor arose during that period or there was good reason for not making the motion sooner); see also Woods v. Saturn Distribution Corp., 78 F.3d 424, 427 (9th Cir. 1996) (standard of review)."

While the decision is not specifically about structured settlements, it does underscore the importance of good settlement documentation.

Structured Settlement Tax Rules Untouched in Tax Reform Proposal

by John Darer CLU ChFC MSSC RSP CLTC

House Ways and Means Committee Chairman, Congressman Kevin Brady, released a comprehensive 429 Page tax reform proposal titled the "Tax Cuts and Jobs Act."  The House Ways and Means Tax Reform Proposal just released leaves the current law structured settlement tax rules in place and untouched!
Click here to read the Tax Reform Proposal and Tax Cuts and Jobs Act Section by Section.

Structured settlements have received bipartisan support from Congress for over 35 years, a clear testament to perceived value of structured settlements by legislators.

Thank you to members of Congress who seek out information about structured settlements and participate in the Structured Settlement Caucus with the National Structured Settlements Trade Association.

Structured settlements are status quo in proposed tax reform

 

 

 

Structured Settlement Constructive Receipt | Avoid This Fatal Settlement Document Mistake

by John Darer® CLU ChFC MSSC RSP CLTC

What is Destructive Receipt?

If a General Release has been signed and delivered to the defendant's legal representative, the tax benefits of a structured settlement may be lost. The ramifications may be costly for both the plaintiff his or her lawyers. Constructive Receipt is "destructive receipt" from a financial standpoint.

Why Would a General Release Be Fatal to a Structured Settlement?

A standard general release fails to satisfy the requirements to establish a structured settlement because of the fatal words "receipt of which is hereby acknowledged". Even though money has not yet changed hands constructive receipt has occurred.  Where constructive receipt has occurred in a case involving taxable damages such as an employment or commercial damage case, there is potential for tremendous tax exposure that could have been easily avoided and a potential malpractice exposure for the attorney.

A promise to pay future periodic payments to establish a periodic payment obligation is a critical component to establish a structured settlement

A promise to pay future periodic payments to establish a periodic payment obligation is a critical component to establish a structured settlement, regardless of whether the structured settlement is (1) qualified (medical malpractice, wrongful death, workers compensation, auto, product liability involving damages on account of personal physical injury or physical sickness); or (2) non qualified structured settlements (wrongful termination, harassment in the workplace, discrimination in workplace, intellectual property and other commercial claims. Even in mass torts where a qualified settlement fund has been established to aggregate settlement money in a big pot for claimants similarly situated, an obligation to pay on the part of the QSF is a critical component of the establishment of a structured settlement.