by Structured Settlement Watchdog
Forbes Advisor published inaccurate "Expert Reviewed" Holey Moly from a UCLA law professor, only months after publishing Jeremy Babener's excellent Forbes Advisor contribution about structured settlements.
A. Two Key Takeways Holey Moly
- A structured settlement means the plaintiff gets a series of payments over time rather than a single lump-sum payment.
- The defendant can purchase an annuity from an insurance company to pay the structured settlement
Commentary
- A structured settlement is a (1) negotiated, (2) customized stream of periodic payments, (3) paid as damages as part of the consideration (4) in exchange for a release of liability to resolve a claim, lawsuit, or dispute.
- A structured settlement is not an either/or binary.
- A structured settlement may be funded with a structured settlement annuity [see IRC 130(d)]
- The majority of structured settlement annuities are purchased by qualified assignment companies. See Step 2 of Structured Settlement Flow Chart (Annuity) below. Qualified assignmments have been the standard since President Ronald Reagan signed the bipartisan Periodic Payment Settlement Act into law in January 1983. For a deep dive on qualified assignments, see What is a Qualified Assignment? (4structures.com)
- Regardless of whether a structured settlement annuity is purchased, or if purchased by a self insured Defendant, a Defendant's or Respondent's liability insurer, or a qualified assignment company, where an annuity is purchased it is purchased from a life insurance company. Under the laws of most states an annuity "is issued by a life insurance company in exchange for a premium" For example California Code, Insurance Code - INS § 10509.913(a) | FindLaw,
B. In discussion about Taxation and Pros of structured settlements Bieber and co. write:
1."the money from the settlement is tax-exempt, if the plaintiff invests the money from the settlement, interest earned could be taxed. However, the rules are different for plaintiffs who receive a structured settlement as an annuity. The principal and interest received are generally tax-exempt in this situation" [see First Bullet Point for Commentary]
2."If a plaintiff receives compensation for physical personal injury, generally the settlelment is tax-exempt if the settlement is for:
- Physical injuries or sickness (except for medical expenses that were deducted on the plaintiff’s taxes)
- Mental anguish or emotional distress related to a physical injury or sickness (if not related, it is taxable)
- Discrimination that does not include lost wages
- Lost property value if the settlement is less than or equal to the basis of the property" (see Third Bullet Point in Commentary below)
3."While the money from the settlement is tax-exempt, if the plaintiff invests the money from the settlement, interest earned could be taxed. However, the rules are different for plaintiffs who receive a structured settlement as an annuity. The principal and interest received are generally tax-exempt in this situation"
4. "Structured settlements provide a continuous stream of tax-free income. Payees will not need to worry about owing the IRS or their state any money from the settlement".
Commentary
- Whether a structured settlement is funded with an annuity has no independent bearing on the taxability of the settlement. Certain financially distressed hospitals in the New York City area have entered into agreements to pay over a short period of years with or without annuity funding.
- The damages that settlement payments represent (as reflected in the settlement agreement executed by the parties, reflecting the intention of the parties) do have a bearing on taxation.
- Lost property value of the settlement is less than or equal to the basis of the property is listed as representative of tax exempt. I strongly suggest anyone exploring this type of structured settlement read this. Construction Defect Structured Settlements (4structures.com)
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