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

Structured Settlement Annuities Are Not Tax-Free Insurance Contracts | Wait! What?

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Tax-Free Structured Settlement Annuity |  No Such Thing

John Darer reviews the term "Tax Free Structured Settlement Annuity", which you may encounter on the Internet. Be mindful that there is no such thing as a Tax Free Structured Settlement Annuity. 

Don't worry annuitants, there IS a tax exemption, but not exactly the way it's being presented in many cases by competent settlement practitioners and reputable settlement companies that should know better. Please read on for clarification of what is tax-free.

Examples:

• One settlement planner's website says "Structured settlement annuities are not taxable — they're completely tax-exempt"
• Another settlement planner's website says "Tax-free Income: 100% of structured settlement annuity is tax-free – including the settlement award, principal, ongoing payments and interest earned".
• "a tax-free structured settlement annuity to meet medical and living expenses, or other financial planning tactics".
• "A tax-free structured settlement annuity qualifies for special tax treatment under IRC §§104(a)(2) and 130(c)"
• "A claimant cannot accept a cash settlement and then purchase an income tax-free structured settlement annuity on his/her own"
• The best time to start preparing for your financial future is right now. Consider the many advantages of a Tax-Free Structured Settlement Annuity.*"
• " I work with the Tax Free Structured Settlement Annuity Product and Various Trust products"
  

The Damages That the Structured Settlement Payments Represent is The Key

While some of the incorrect statements by some settlement planners may seem plausible, it is the nature of damages that the structured settlement payments represent that is a critical factor, not the structured settlement annuity contract itself. 

Think about the applicable tax code sections cited in every settlement agreement that involves a structure.  The word "annuity" does not appear in IRC Sections 104(a)(2) or IRC 130(c). 

"Annuity" appears in IRC 130(d), which  provides the requirements an annuity must meet to qualify as a qualified funding asset, including the requirements that (i) the periods of the payments under the
annuity contract are reasonably related to the periodic payments under the qualified
assignment, and (ii) the amount of any such payment under the contract does not
exceed the periodic payment to which it relates.

Furthermore, a structured settlement annuity is a versatile insurance contract that can be used for a variety of applications, including structured settlements being used as a funding vehicle for settlements involving periodic payment of taxable damages and structured installment sales. 

I encourage my industry colleagues to take greater responsibility, hopefully with the recognition that inaccurate statements end up getting parroted or cited by others.

See my comprehensive write up on Settlement News Network What's a "Tax-Free Structured Settlement Annuity"? (4structures.com)

Please note that other factors may apply such as avoiding constructive receipt.Constructive Receipt is Game Over for Structured Settlements (4structures.com)

Last updated July 17, 2024  

Tax Issues in Settlements of Claims with Allegations of Sexual Misconduct and Sexual Harassment

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

Victims could be left with a third or less of the settlement, depending on their attorney's contingency fee agreement thanks to Tax Cut and Jobs Act of 2017

Harvey Weinstein at the Tribeca Film Festival 2017 

Image: Dreamstime

Effective in 2018, the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated deductions for settlements or payments related to sexual harassment or sexual abuse when such settlements or payments are subject to a nondisclosure or confidentiality agreement.

If former Miramax CEO Harvey Weinstein, who has been accused by numerous women of sexual harassment (and in a few cases, assault) that have grabbed headlines recently, ends up negotiating settlements with any of his accusers, many of the settlements will be taxable, or have taxable elements. After paying attorney fees and applicable federal state and local income taxes, it could leave a third or less to the victim depending on their attorney's contingency fee agreement.

For example, the New York Times reported that actress Rose McGowan was offered $1 million by Weinstein (which it was reported she refused). If she had deemed it a fair value, she and Weinstein's people could have negotiated a custom stream of tax deferred payments, which Weinstein, or his company, would fund up-front. Structured settlements do not require the victim to be traumatized by receiving a check or having any ongoing interaction with the employer or defendant, if the matter is in suit.

Sexual Harassment Damages | How to Mitigate the Tax

For those with taxable damages, or with an element of taxable damages a non qualified structured settlement offers significant advantages.

• Earn interest tax deferred.
  
• Earn in interest on the deferred taxes tax deferred.
  
• Earn interest on the interest tax deferred.

Many of Harvey Weinstein's accusers have significant incomes and could benefit from tax deferral.  If personal physical injury is an element of damages and qualifies within the meaning of IRC 104(a)(2),  then that portion of the damages will be tax exempt.  Check out the taxable equivalent yield chart to see the value of the structured settlement tax benefit.

Other settlement planning tools may be useful depending on the nuance of a particular case such as a Plaintiff Recovery Trust.  See Plaintiff Recovery Trust | Taxable Settlement Planning (4structures.com)

What is Sexual Misconduct?

Sexual misconduct is a broad term encompassing any unwelcome behavior of a sexual nature that is committed without consent or by force, intimidation, coercion, or manipulation. Sexual misconduct can be committed by a person of any gender, and it can occur between people of the same or different gender.  [ Source: University of Iowa Operations Manual]

Sexual Misconduct in the Workplace 

A 2008 study of 500 respondents and 92 companies found:

• 54% (272) had experienced some form of workplace sexual harassment.
• 27% of the 272 respondents experienced harassment by their colleague, while 17% were harassed by their superior
• 79% of the victims are women; 21% were men.
• 12% had received threats of termination if they did no comply with the requests of the sexual harassers.

While Hollywood scandals involving the "casting couch" are legion, the 2008 study found that sexual harassment occurs most often in the workplace in these 5 industries:

• Business, trade, banking and finance
• Sales and marketing
• Hospitality
• Civil Service
• Education, lecturing and teaching

Source:  Association of Women for Action and Research (AWARE)

What About Harassment in General?

According to the Equal Employment Opportunity Commission (EEOC), harassment is a form of employment discrimination that violates Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, (ADEA), and the Americans with Disabilities Act of 1990, (ADA).

Harassment is unwelcome conduct that is based on race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability or genetic information. Harassment becomes unlawful where 1) enduring the offensive conduct becomes a condition of continued employment, or 2) the conduct is severe or pervasive enough to create a work environment that a reasonable person would consider intimidating, hostile, or abusive. Anti-discrimination laws also prohibit harassment against individuals in retaliation for filing a discrimination charge, testifying, or participating in any way in an investigation, proceeding, or lawsuit under these laws; or opposing employment practices that they reasonably believe discriminate against individuals, in violation of these laws.

sexual harassment

 'Casting Couch': The Origins of a Pernicious Hollywood Cliché

 

 

 

LTD Structured Settlements for Disability Claim Settlements | Employer Paid LTD Claims

by John Darer® CLU ChFC MSSC RSP CLTC

Long Term Disability Claim Structured Settlements are a better way to settle employer paid LTD Claims

What is LTD Insurance?

LTD or long term disability insurance is an insurance policy that protects an employee from loss of income in the event that he or she is unable to work due to illness, injury, or accident for a long period of time. The ability to earn an income is a valuable asset and many people choose to protect it though disability insurance.  It can be paid for by an employer, partially paid for by the employee or an individual can purchase individual coverage. 

How Are LTD Benefits Taxed?

IRC §104(a)(3) provides a tax exclusion for amounts received through accident or health insurance (or through an arrangement having the effect of accident or health insurance) for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts (A) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (B) are paid by the employer)

Simply said, individually paid LTD benefit payments are tax exempt while Employer paid LTD benefit payments are taxable.

Group LTD Disability Settlement Offers Need to Be Reviewed Carefully

• Your employer or its group LTD insurer may offer a lump sum disability settlement. What this means is that you are being offered the present value of all or a portion of your future monthly disability benefits.
• This calculation provides the insurance company with a discount for paying you a lump sum settlement today, as opposed to paying out monthly benefits over the course of time.
• A lump sum settlement on an employer-paid Group LTD plan is also fully taxable. It’s important to take in to account that the discounted lump sum you are being offered, is further discounted by taxes and applicable attorney fees. For some people such a settlement could expose them to the Alternative Minimum Tax (AMT). An LTD Structured Settlement is one way to mitigate this problem.

Group LTD Structured Settlement Using a Non-Qualified Assignment

We offer a solution for both insured and sell-insureds through Liberty Life Assurance Company of Boston, in conjunction with BARCO Assignments Ltd. (BARCO), utilizing a non-qualified assignment for all structured long-term disability settlements.

• Allows the Group LTD insurer/employer to be fully released from the future periodic payment obligation
• Provides the claimant with a customized stable income stream.
• The periodic payments are funded through the purchase of an annuity from Liberty Life Assurance Company of Boston. A Liberty Mutual Insurance Company guarantee backs up Liberty Life Assurance Company of Boston
• Liberty Life is able to accommodate scenarios where the insurance is fully or partially employee paid and will provide applicable tax reporting. If a claimant is to receive both taxable and non-taxable payments, two contracts will be issued, one for each type.

Benefits of Structured Settlements on LTD Claims

For both taxable and nontaxable disability settlements, structured long-term disability settlements

• may assist both claimant and insurer in successfully bringing resolution to a claim.
• customized payout. Payment can be made monthly, annual, immediate, deferred, fixed cost of living adjustments and lifetime income streams.

For taxable disability settlements, structuring long-term disability settlements

• an opportunity to receive income in a more tax-efficient manner.
• greater overall payout than would otherwise be achieved with a single, lump sum settlement
• avoidance of escalation into higher tax brackets
• preservation of deductions that may be lost at higher income levels
• avoidance of the alternative minimum tax (AMT)

How Do You Deal with Tax Reporting When an Employer Paid Disability Settlement is Structured?

• Per IRC §3504, Liberty Life Assurance Company of Boston will execute an agent agreement with each employer or disability carrier who enters into settlement agreements funded by Liberty Life annuities via Form 2678. Many disability insurers already have these in place with Liberty Life.
  
• Estimated turnaround time with the IRS, if there is no Form 2678 in place. Please contact us in advance so we can verify whether an agent agreement is already in place with a particular insurer.
• In accordance with IRC Section 3504, Liberty Life will complete a quarterly filing of Form 941 and Schedule R to report wages paid.
• Liberty Life will issue a Form W-2 annually in connection with the payments to the claimant.

 For more information call John Darer at 888-325-8640

Tax Benefits of Structured Settlement Payments in Physical Injury and Non Physical Injury Settlements

by John Darer® CLU ChFC MSSC RSP CLTC

Following is a brief summary of the tax benefits of structured settlements in physical injury and non physical injury settlements.

Personal Physical Injury/Physical Sickness Cases  (including Wrongful Death)

Structured settlement payments that are payable as damages, within the meaning of IRC 104(a)(2) and IRC 130, are income tax free.  Such damages payments are income tax free whether the qualified funding asset is a structured settlement annuity, treasury obligations or an indexed linked structured settlement payment [such as the ILAPA offered by Pacific Life Insurance Company and Pacific Life and Annuity Company (in NY)]

Workers' Compensation Claims (post-August 1997)

Structured settlement payments that are payable as damages, within the meaning of IRC 104(a)(1) and IRC 130, are income tax free.  Such damages payments are income tax free whether the qualified funding asset is a structured settlement annuity, treasury obligations or an indexed linked structured settlement payment [such as the ILAPA offered by Pacific Life Insurance Company and Pacific Life and Annuity Company (in NY)]

Wrongful Conviction/Wrongful Incarceration Settlements

Structured settlement payments that are payable as damages, within the meaning of IRC 139F, are income tax free.  Note that since damages subject to the IRC 139F exclusion are not currently covered under IRC 130, the structured settlement transaction must be done as a non qualified assignment even though the payments will be income tax free.

Employment Settlements [Settlement of Wrongful Termination, Sexual Harassment, Failure to Promote,  Gender, Ethnic, Sexual Orientation based lawsuits]

Tax deferred structured settlement payments flowing from a properly drafted release and executed non qualified assignment provided tax breaks for the plaintiff make offers more attractive and there are advantages for both parties.

Long Term Disability Settlements

Tax deferred structured settlement payments flowing from a properly drafted release and executed non qualified assignment provided tax breaks for the plaintiff make offers more attractive and there are advantages for both parties.

Other Non Physical Injury or Physical Sickness Claim Settlements

Tax deferred structured settlement payments flowing from a properly drafted release and executed non qualified assignment provided tax breaks for the plaintiff make offers more attractive and there are advantages for both parties. By deferring compensation over time, plaintiff defers in three ways and effectively earns interest tax deferred on

• principal
• accumulating interest
• the taxes deferred in the year of settlement.

Punitive Damages

Lump sum settlements risk plaintiffs exceeding the Alternative Minimum Tax (AMT) threshold which can, in some cases, be mitigated by spreading the settlement payments over time.

With a qualified assignment or a non qualified assignment the Defendant or its insurer receives a novation of the future payment obligation at the time the assignment is completed.

New York Structured Attorney Fees in New York and New York Taxes for Retired Lawyers

by John Darer® CLU ChFC MSSC RSP CLTC

Can retired New York State lawyers with structured attorney fees take an exclusion of up to $20,000 intended for retirees on the structured attorney fees income? 

According to a 1982 tax memorandum concerning Chapter 1043 of the Laws of 1981, enacted on November 11, 1981, amended sections 612(c)(3-a) and T46-112.0(c)(3-a), these amendments provide for the exclusion of up to $20,000 of pension and annuity income received by an individual 59½ years of age and over Pension or annuity income received by an individual before the age of 59½ does not qualify for the exclusion.

How do you qualify for New York's $20,000 retiree exclusion?

• To qualify for the exclusion, this pension and annuity income must be included in federal adjusted gross income.
• It must also be attributable to personal services performed by such individual prior to his or her retirement as an employee or from contributions to a retirement plan which are deductible for federal income tax purposes.

What is a structured attorney fee?

A structured attorney fee is an arrangement in which attorneys elect to defer their receipt of contingent fees from settling legal cases. The structured attorney fee payments must be set forth in the settlement agreement and release between the settling parties. If structured properly, the structured attorney fees are taxable only when received.   By structuring attorney fees, an attorney or law firm can augment retirement income, levels cash flow over future years to make a contingent-fee practice more predictable, or to fund costs for future cases. And it saves money by deferring tax until future years.

Can a New York attorney or law firm structure his/her/its attorney fees if the settlement proceeds are sitting in an IOLTA account?

No

Can a New York legal partnership deduct attorney fees paid to partners?

No

Can a New York lawyer and sole proprietor deduct attorney fees paid to himself or herself?

No

Is a Structured Attorney Fee Subject to ERISA?

No

Is a Structured Attorney Fee a qualified "pension plan"

No

What is qualifying pension and annuity income for the purpose of the up to $20,000 exclusion in New York?

Qualifying pension and annuity income includes:

• periodic payments for services you performed as an employee before you retired; 
• periodic and lump-sum payments from an IRA, but not payments derived from contributions made after you retired;
• distributions from government (IRC section 457) deferred compensation plans, after December 31, 2003; 
• periodic distributions from an annuity contract (IRC section 403(b)) purchased by an employer for an employee and the employer is a corporation, community chest, fund, foundation, or public school;
• periodic payments from an HR-10 (Keogh) plan, but not payments derived from contributions made after you retired;
• lump-sum payments from an HR-10 (Keogh) plan, but only if federal Form 4972 is not used. Do not include that part of your payment that was derived from contributions made after you retired;
• distributions of benefits from a cafeteria plan (IRC section 125) or a qualified cash or deferred profit-sharing or stock bonus plan (IRC section 401(k)), but not distributions derived from contributions made after you retired.

Some New York personal injury lawyers have raised the interesting question of whether "periodic payments for services you rendered as an employee before you retired" means that they are eligible for the $20,000 exclusion, however the June 21, 1982 Technical Service Bulletin TSB-M-81(19)Rev.1 suggests otherwise.  

 

 

 

Why Name a Beneficiary on a Large Structured Settlement For a Minor?

by John Darer® CLU ChFC MSSC CeFT RSP CLTC

The Estate of the Minor is the default beneficiary designation for structured settlements payable to minors.  Generally minors cannot make a change of beneficiary until they reach the age of majority.

This could be a major estate planning dilemma where the child's parent already has (or parents  have) sizable assets, is (are) already a beneficiary of their own parent's sizable estate  and/or is/ are high income earners (or potential earners) in their own right. 

If an annuitant dies while receiving a structured settlement,  the present value of any remaining future payments due to be paid after the death of the primary annuitant is included in the annuitant's estate. 

[ See generally 26 U.S. Code § 2039]

If under the laws of intestate succession, the beneficiary of a large minor's structured settlement is the Estate of the Minor,  the resulting inheritance might not only be subject to Estate Tax , but the net inheritance would first amplify the parent's estate, with the resulting growth in present value on that inheritance as payments get closer to their due date creating a potentially major tax issue for THEIR beneficiaries.

Consider the following:

The Federal Estate Tax exemption is $5,430,000 for 2015. The Federal Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death (Refer to Form 706 (PDF)).

States also have Estate Tax exemptions

For example:

A. New York Basic Exclusion Amount

Dates of Death

April 1, 2015-March 31, 2016       $3,125,000

April 1, 2016-March 31, 2017        $4,187,500

April 1, 2017-March 31, 2018       $5,250,000

B. Connecticut Applies Estate Taxes at a Lower Amount of Taxable Estate

Over $2,000,000 but not over $3,600,000                 7.2% of the excess over $2,000,000

Over $3,600,000 but not over $4,100,000                 $115,200 plus 7.8% of the excess over
$3,600,000

Over $4,100,000 but not over $5,100,000                 $154,200 plus 8.4% of the excess over
$4,100,000

Over $5,100,000 but not over $6,100,000                 $238,200 plus 9.0% of the excess over
$5,100,000

Over $6,100,000 but not over $7,100,000                 $328,200 plus 9.6% of the excess over
$6,100,000

Over $7,100,000 but not over $8,100,000                 $424,200 plus 10.2% of the excess over
$7,100,000

Over $8,100,000 but not over $9,100,000                 $526,200 plus 10.8% of the excess over
$8,100,000

Over $9,100,000 but not over $10,100,000               $634,200 plus 11.4% of the excess over
$9,100,000

Over $10,100,000                                                      $748,200 plus 12% of the  excess over $10,100,000

How big is this potential  problem?

There are two major generational wealth transfers in play right now. 

An estimated $12 Trillion will pass from those born in the 1920s and 1930s  to Baby Boomers and their children. A larger wealth transfer will flow from Baby Boomers to their children over the next 40 years.  One cannot just ignore the issue.  Their children and family members suffer personal physical injuries in accidents,  are victims of malpractice,  or product defects, just like everyone else.

Can't you just gift it away?

Depends on the size of your case and the estate.  You would need a lot of donees!  There is an “annual gift exclusion” of $14,000 per recipient in 2015  ($28,000 per couple). The provision sets the amount that an individual can give, tax-free, to another person who isn’t a spouse. (Transfers between spouses are often tax-free.)  There is no limit on the number of such gifts a taxpayer can make, as long as each is to a different person.   One could give money to charity if so inclined.

Won't a Commutation Rider Solve the Problem?

Commutation Riders have been around for about 20 years and were originally designed to provide liquidity to pay estate taxes upon the death of the structured settlement annuitant.   In 1995 we were looking at much lower exemptions. In the last 22 years, in New York for example, it has been also used to provide liquidity to pay of liens when a special needs/supplemental needs trust is used.  Liquidity in a large settlement however,  still places a large net amount that amplifies what may already be sizable assets which will then be compounded by future growth. Sounds like a nice problem to have except when you consider the pain the family or individual went through to get such a sizable recovery.

Petitioning the Court to Approve an Infant Compromise Order With Sibling Beneficiary

Some opine that a possible solution is to name a sibling, contemporary in age to the minor annuitant in lieu of the Estate, where a sizable chunk would default to the parents. There is still a potential estate tax due if the present value of the injured minor's remaining annuity at death exceeds the exemptions, but it may be an effective way to deal with the amplification and growth issue discussed above.  Under the natural order of things the sibling will outlive the parents.

Assuming the court approves, the strategy could be implemented using two or more structured settlement annuities, the first with a commutation rider to provide liquidity help pay the estate taxes if the injured minor dies and the second to continue to help provide the asset growth and/or a guaranteed income stream.

This is not meant to be an exhaustive discussion on the subject. It is meant to stimulate thoughtful discussion on the topic. There may be other solutions. Always seek advice from qualified professionals

Do You Have to Pay Taxes When Selling Your Structured Settlement?

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.

Index Linked Structured Settlement Annuity | IRS Publishes PLR Affirming Tax Status

by John Darer® CLU ChFC MSSC RSP CLTC

The favorable tax treatment of index linked structured settlement payments, was affirmed by the IRS in Private Letter Ruling 201435006,  published on August 29, 2014. 

As I reported here on April 16, 2014, the Private Letter Ruling was requested by Pacific Life Insurance Company and received in April 2014 just prior to the release of its Index Linked Annuity Payment Adjustment Rider  (ILAPA).

The IRS ruling's specific findings on the Pacific Life ILAPA Rider were:

1. The periodic payments of damages that Claimant will receive are fixed and determinable as to amount and time of payment within the meaning of § 130(c)(2)(A) even though they are calculated pursuant to an objective formula based on the performance of the S&P 500 Index.

2. The Structured Settlement Indexed Annuity which Assignee will acquire from
either Issuer 1 or Issuer 2 will not fail to qualify as a qualified funding asset under
§ 130(d) solely by reason of annuity’s variable payments.

3. The possibility of a commutation by Claimant pursuant to the Notice of Hardship
Conversion will not affect whether the structured settlement assignment satisfies
the requirements of a qualified assignment under § 130(c).

4. The annuity purchased by Assignee will not fail to be a qualified funding asset
under § 130(d) by reason of the Notice of Hardship Conversion.

Read about the differences between Index Linked Structured Settlement Payments and Equity Indexed Annuities.

 Copy of PLR 201435006  Download PLR 201435006 Index Linked Structured Settlement

The Notice of Hardship Conversion is not currently offered by Pacific Life but this appears to be a stage setter for its future introduction in the near future.

Is Selling Your Structured Settlement Taxable?

by John Darer® CLU ChFC CSSC RSP CLTC

Taxation of Structured Settlement Payment Sales

Do you have to pay any taxes if you sell all or a portion of your structured

settlement payments in exchange for a lump sum of "cash now"?

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 credentialed settlement advisors. 

 

Are Structured Settlements / Structured Settlement Annuities Taxable?

by John Darer  CLU ChFC MSSC CeFT RSP CLTC

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.

Structured settlement payments are income tax free to payees, provided that the payments are for damages that qualify under Internal Revenue Code Section 104(a)(2)  [physical injury or physical sickness] or 104(a)(1)  [workers compensation]. Payments retain their income tax status when later paid to beneficiaries.

Structured settlements for damages that do not qualify under these sections of the Internal Revenue code offer tax deferral. Payments are generally taxed when received. For example, in an employment setting,  structured settlements can be used in legal cases involving sexual harassment, wrongful termination, failure to promote and disicrimination
 settlements. There is a wide variety of lawsuits and disputes where a non qualified structured settlement or a reinsurance  structuredsettlement can be very helpful in resolving cases.

Structured settlement documents must be meticulously prepared to reflect periodic payments as consideration for the structure portion of the settlement.

Structured settlement payment rights, sometimes mislabeled as annuities, are in some cases  being peddled by licensed insurance agent and financial advisors as well unlicensed intermediaries who mislabel themselves structured settlement brokers. It is important to distinguish structured settlement payments received from a lawsuit in which you were the plaintiff, or the beneficiary of someone who was a plaintiff and was receiving structured settlement payments, from structured settlement payments acquired from such people pursuant to a structured settlement factoring transaction.

Work with a credentialed structured settlement advisor to be sure that your structured settlement is established correctly.

Image: Stuart Miles/Dreamstime.com