Sell Structured Settlement Structured Settlement Basics 1 — Questions and Answers
Question 1: What is a structured settlement?
- A lump-sum payment from a lawsuit
- A series of periodic payments made to a plaintiff following a legal settlement (Correct answer)
- A type of retirement savings account
- A government benefit program
Correct answer: A series of periodic payments made to a plaintiff following a legal settlement
A structured settlement is an arrangement where a defendant pays a plaintiff through a series of scheduled periodic payments rather than a single lump sum.
Question 2: Structured settlements are most commonly established as a result of which type of case?
- Bankruptcy proceedings
- Criminal cases
- Personal injury lawsuits (Correct answer)
- Contract disputes
Correct answer: Personal injury lawsuits
Structured settlements are most frequently created to resolve personal injury lawsuits, providing long-term financial security to the injured party.
Question 3: Which financial instrument is typically used to fund a structured settlement?
- Municipal bond
- Annuity contract (Correct answer)
- Certificate of deposit
- Money market fund
Correct answer: Annuity contract
An annuity purchased from a life insurance company is the standard funding mechanism for structured settlements, guaranteeing the periodic payments.
Question 4: Who typically purchases the annuity that funds a structured settlement?
- The plaintiff
- The plaintiff's attorney
- The defendant or their insurer (Correct answer)
- The court
Correct answer: The defendant or their insurer
The defendant or their liability insurance carrier purchases the annuity from a life insurance company to fund the structured settlement payments.
Question 5: Structured settlement payments are generally treated how under US federal tax law?
- Fully taxable as ordinary income
- Subject to capital gains tax
- Tax-free to the recipient (Correct answer)
- Taxable only above a threshold
Correct answer: Tax-free to the recipient
Under IRC Section 104(a)(2), periodic payments from structured settlements for physical injury or sickness are excluded from the recipient's gross income.
Question 6: The Periodic Payment Settlement Act of 1982 did which of the following?
- Required all lawsuits to use structured settlements
- Provided federal tax incentives encouraging the use of structured settlements (Correct answer)
- Banned lump-sum lawsuit payments
- Created a federal registry for structured settlements
Correct answer: Provided federal tax incentives encouraging the use of structured settlements
The Periodic Payment Settlement Act of 1982 codified federal tax exclusions for structured settlement payments, making them attractive as a settlement tool.
Sell Structured Settlement Structured Settlement Basics 1
What is a structured settlement?