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.
However, if the client decides to invest their settlement funds, then the interest that grows on the investment is taxable. One way to avoid this is to establish a structured settlement annuity for the client to receive their settlement funds. All interest that grows within the structured annuity will also be tax-exempt. Payments received from a structured settlement annuity need not be reported on any tax return form (1040) or any tax document.
Both the principal amount and interest on the annuity are completely tax-exempt. The sale of annuity payments from a structured settlement will not be taxable as income, in general. However, in some cases there is a tax liability when selling those annuity payments, so it's important to plan accordingly. 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.
Structured settlement brokers (a special type of insurance agent) consult when a case approaches liquidation. Structured settlements are tax-efficient and can also have wasteful and asset protection advantages. While on paper the payment mechanism appears to be the same, annuity payments fall under a different set of tax laws. Additional investment options are available to claimants who are not interested in a structured settlement annuity.
This means that prizes derived from discrimination, mental distress and personal reputational injury can be taxed by the IRS. As long as you consider these issues before signing a settlement agreement in your case, you can structure as much or as little as you like and take the rest in cash. Although a payee has the ability to sell annuity payment rights for most types of annuities (excluding certain accounts, such as annuities in IRAs), the payee has to pay income taxes. However, if the ownership of an annuity is assigned to a spouse or former spouse during a divorce agreement, the transfer is not taxable.
Although legislators prefer people to keep their structured agreements, there are no negative tax consequences to selling settlement payments. 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. If another person is listed as a beneficiary, all you have to do is submit a death certificate and proof of identification to the company paying the annuity. However, with a structured settlement annuity, if a customer places all or part of their net settlement in a structured settlement annuity, the principal amount plus any interest accrued within the annuity is tax-free.
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