A structured settlement annuity offers a flexible payment design, guaranteed payments, and no annual overhead or fee. Both capital and growth are income tax-free if the money used to purchase the annuity comes from a personal injury, workers' compensation, or wrongful death case. Because structured settlements for compensatory damages are exempt from tax, so are profits from the sale of future payments. Injured parties will never pay taxes on the structured settlement money awarded in these cases, regardless of whether they receive the money in a series of payments or if they sell their payments for a lump sum.
A structured settlement annuity may be ideal for many clients, including those customers in a higher tax bracket. For example, if you receive your settlement as a one-time payment and invest the money in the stock market, you will owe tax on dividends and accrued interest. Structured settlement payments and proceeds from the sale of these payments are also exempt from state taxes and taxes on dividends and capital gains. Although legislators prefer people to keep their structured agreements, there are no negative tax consequences to selling settlement payments.
Structured settlement brokers (a special type of insurance agent) consult when a case approaches liquidation. Just as personal injury settlements are not considered taxable income, so are future sales of these payments, provided that the terms of the contract do not change. These have been around for more than a decade and are common in taxable cases, such as employment agreements. Tax laws governing structured agreements were enacted to encourage the use of structured settlements in personal injury cases because they benefit the injured party, as well as federal and state governments.
One way to avoid this is to establish a structured settlement annuity for the client to receive their settlement funds. However, all structured settlements that fall outside of personal injury can be taxed, including sale. The long-term financial security they provide to settlement holders reduces the burden on public assistance programs. If you receive periodic payments from a structured lottery settlement, each payment is subject to current federal and state taxes.
When it comes to settlement plans, lawyers and clients are most likely familiar with a structured agreement. Payments received from a structured settlement annuity need not be reported on any tax return form (1040) or any tax document.
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