Because structured settlements for compensatory damages are exempt from tax, so are profits from the sale of future payments.
Structured settlementpayments and proceeds from the sale of these payments are also exempt from state taxes and dividend and capital gains taxes. If a structured settlement is sold in exchange for a lump sum, those funds are generally not taxable. By law, in most cases, the IRS cannot tax revenues from a structured settlement, regardless of whether they are paid in a series of payments or in a single lump sum.
The policy behind this law is that structured agreements are intended to provide financial stability and security for beneficiaries. However, it should be clear that several taxes come into play with respect to specific types of structured settlement transfers. Nearly all structured insurance settlements are completely tax-free. This includes federal state taxes &, taxes on interest, dividends and capital gains, and the AMT.
The reason for this is that the government believes that receiving compensation for physical injury, wrongful death, or workers' compensation is not an income gain. It is a restoration of the state before the loss. Instead of paying a large lump sum, courts establish a system where the payer makes regular payments over a period of time. Accordingly, a benefit for customers who choose a structured settlement annuity is that they don't have to worry about reporting any future annuity payments as income in the year in which any payment is received.
While on paper the payment mechanism appears to be the same, annuity payments fall under a different set of tax laws. A structured settlement annuity (“structured settlement”) allows a claimant to receive all or part of a settlement for personal injury, wrongful death, or workers' compensation in a series of periodic income tax-free payments. A structured settlement annuity may be ideal for many clients, including those customers in a higher tax bracket. However, accountants need to know the reasons behind the structured agreement to see if it was due to personal injury, wrongful death, or workers' compensation.
If someone wants to sell a structured insurance agreement, which is usually done to receive the remaining lump sum, that money is also not taxable until the original contract is modified. Under tax law, the recipient of a structured settlement annuity can choose to purchase an annuity contract with a different company and transfer the funds from the original annuity without incurring tax liabilities on the exchange. These have been around for more than a decade and are common in taxable cases, such as employment agreements. The choice is ultimately up to the plaintiff, and many consider a structured settlement to be much more beneficial than a lump-sum cash payment.
Additional investment options are available to claimants who are not interested in a structured settlement annuity. Structured settlement brokers (a special type of insurance agent) consult when a case approaches liquidation.