- In court cases, plaintiffs are given structured settlements. Individuals are able to acquire annuities.
- If you bought or inherited the annuity, you don’t need court permission to sell it.
- Annuity payments are generally easier to sell than structured settlement payments.
- You may be able to take a modest portion of your retirement income without incurring any penalties. Once finalized, structured settlement settlements allow little to no flexibility.
- The selling of structured compensation payments for personal injuries is not taxable. Selling other annuity contracts, on the other hand, has tax implications.
What is a structured settlement and how does it work?
A structured settlement is a series of payments made to a claimant following a court case or litigation. The settlement is meant to compensate for losses or injuries over time rather than in one big sum of money.
Is a structured settlement considered an annuity?
A structured settlement annuity (sometimes known as a “structured settlement”) enables a claimant to receive all or part of a personal injury, wrongful death, or workers’ compensation award in a series of tax-free annual installments.
Structured settlements can also be employed in non-physical injury settlements to provide our clients with tax-deferred income rather than a lump sum payout that is fully taxed right away.
A Sage settlement expert can explain the various structured settlement annuity alternatives available to you, including:
How Does a Structured Settlement Work?
Before the settlement agreement is finalized, the decision to use a structured settlement must be made. The claimant releases the defendant (or insurer) from liability if both parties have agreed on the terms of the structured settlement.
The settlement proceeds are subsequently paid to a third-party assignment firm, which assumes obligation and acquires an annuity from a structured settlement carrier. Following that, the carrier makes a series of recurring payments based on a previously agreed-upon schedule and amount.
Settlement revenues of nearly any size can be used to support structured settlements; in fact, several structured settlement providers will structure amounts as low as $10,000. The claimant has the last say, and many people think that a structured settlement is far better than a lump sum cash payment.
Benefits of a Structured Settlement
- Physical injury and wrongful death lawsuits are completely tax-free: Section 104(a) of the Internal Revenue Code exempts payments (including growth) for physical damage and wrongful death cases from state and federal income tax.
- Payments (including growth) for non-physical injury cases are tax-deferred to the extent possible.
- Guaranteed payments1: The payment schedule is established from the outset of the transaction, ensuring that the claimant has a consistent stream of safe and reliable income.
- Injured claimants can be certain that market volatility will not effect their structured settlement payments if they have a guaranteed rate of return.
- No overhead costs or expenses: Structured settlements can compete with regular investments because to the lack of overhead fees and favourable tax treatment.
Market-Based Structured Settlements
Claimants who aren’t interested in a structured settlement annuity can look at other financial choices. Visit our Market-Based Structured Settlements page to learn more.
- Are Annuities Covered by Insurance? Examining the Financial Stability of Providers of Structured Settlement Annuities
- Why Your Clients Should Consider Structured Settlements for Tax-Free Income and Competitive Returns
Is a structured settlement a good idea?
Structured settlements pay paid over time as a series of tax-free installments, rather than in one large sum. For those seeking guaranteed financial stability for future expenses, a structured settlement is a viable solution.
Who owns the annuity in a structured settlement?
Qualified assignment corporations, not structured settlement payees, own the majority of structured settlement annuities. A non qualifying assignment is utilized to support some structured settlement annuities intended to fund taxable damages or legal expenses.
Can you take money out of a structured settlement?
Whether it comes to deciding when to take money from your annuity, timing is crucial. If your contract allows it, you may be able to withdraw funds from your annuity, depending on when you bought it. If you just bought your annuity, selling future payments can be a better option.
Structured settlement recipients, unlike those who purchased annuities as part of a financial or retirement plan, are not permitted to take money out early. You do, however, have other choices, such as selling future payments.
Alternatively, if you haven’t received your settlement funds yet, you may be eligible for a cash advance to cover your expenditures while you wait.
How do structured annuities work?
- A structured annuity gives you access to the stock market, giving you the growth potential you need to reach your objectives.
- The performance of an underlying index will decide how much you can earn for each indexed account you choose (either up to a cap or subject to a fee).
- Each indexed account comes with a layer of protection that can help mitigate some of the risks of investing.
What do you mean by annuity?
An annuity is a contract between you and an insurance company in which you pay a lump-sum payment or a series of payments in exchange for regular payments, which can start right away or at a later date.
Are structured settlement annuities taxable?
Damages paid “on account of” a physical injury or wrongful death are exempt from income tax under Section 104(a)(2) of the US Internal Revenue Code. However, the investment income produced from a lump-sum settlement can be completely taxable, which is essential for people who rely on it.
Why are so many of your structured settlement payments tax-free? The highlights of federal tax policy in relation to accident compensation over the years are listed below. This timeline is based in part on Patrick Hindert, Daniel Hindert, and Joseph Dehner’s book Structured Settlements & Periodic Payment Judgments (Law Journal Press). The NSSTA appreciates their participation.
In Eisner v. Macomber, Supreme Court Justice Mahlon Pitney, writing for the majority, rules that a stock dividend is not a realization of income for purposes of the Sixteenth Amendment:
We are clear that a stock dividend does not only take nothing from the corporation’s property and add nothing to the shareholder’s, but that the antecedent accumulation of profits evidenced by it, while indicating that the shareholder is wealthier as a result of an increase in his capital, also shows that he has not realized or received any income in the transaction.
IRC Section 130 was also enacted by Congress to make it easier for bodily damage victims to get safe, long-term funding through annuity contracts or Treasury securities.
The sum obtained in settlement of a claim for backpay and liquidated damages under the Age Discrimination in Employment Act does not qualify for the 104(a)(2) exception, according to the United States Supreme Court in Commissioner v. Schleier. In creating an excludability requirement, Justice John Paul Stevens, writing for the Court in a 6-3 decision, held, among other things, that the taxpayer must show that the underlying cause of action giving rise to the recovery is:
Second, the taxpayer must establish that the losses were received “on account of physical injury or disease.”
NSSTA successfully campaigned to keep wrongful death claims and derivative claims of family members in physical injury cases tax-free under Code section 104(a)(2).
This rule, which permits an employer/workers’ compensation carrier to deduct the whole amount of the lump payment paid to the structured settlement company on a current basis, was heavily supported by NSSTA.
NSSTA supports a number of consumer protections in the law, including disclosure requirements and court approval.
Do you have a structured settlement and need cash now?
If you need more money than your structured settlement payments can supply right now, you can sell all or part of your future payments for a lump sum. There are various options available if you want to sell a portion of your payments. It might be a time-consuming process to sell payments.
How long does a structured settlement last?
Given its form and function, it’s almost limitless because it’s locked in for the recipient. However, a person may elect to receive it in the form of a lump-sum payment in the future, such as after 20 years. It might be paid regularly or in lump sums over a set length of time. Assume you and the defendant have reached an agreement on a structured settlement. For the next ten years, you will receive $100,000 per year. Payments to your heirs will continue until the tenth year, as promised. You and your heirs will receive $1,000,000 during the stated time period as a result of this.
