Tax Treatment and Benefits of Structured Settlements Flashcards
7 cards from real Structured Settlements practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Tax Treatment and Benefits of Structured Settlements flashcards as text
To preserve the tax-free status of structured settlement payments under IRC Section 104(a)(2), the annuity used to fund payments must be purchased by:
Answer: The defendant, insurer, or a qualified assignment company — not the claimant
If the claimant purchases the annuity directly, they have constructive receipt of the settlement funds and lose the tax exclusion; the annuity must be purchased by the defendant's side.
Under IRC Section 5891, when a structured settlement factoring transaction occurs without proper court approval, what excise tax is imposed on the factoring company?
Answer: 40% of the factoring discount
IRC Section 5891 imposes a 40% excise tax on the factoring discount (the difference between the present value of future payments and the purchase price paid to the payee) when court approval is not obtained.
The total stream of structured settlement periodic payments, including the portion attributable to earnings growth within the annuity, is:
Answer: Entirely excluded from the claimant's gross income under IRC Section 104(a)(2)
Unlike a direct investment, all structured settlement payments — including the interest and growth component — are fully excluded from gross income, providing a significant advantage over taxable investments.
Workers' compensation structured settlements derive their tax-free status from which IRC section?
Answer: IRC Section 104(a)(1)
Workers' compensation benefits are excluded from gross income under IRC Section 104(a)(1), which specifically covers amounts received under workers' compensation acts, not tort-based personal injury claims.
A plaintiff receives a structured settlement for a physical injury claim. Their attorney's contingency fee is paid directly from the settlement. How is this treated for tax purposes?
Answer: The attorney fee is taxable income to the attorney, and the claimant's full settlement remains excluded
Attorney fees from a physical injury structured settlement are taxable income to the attorney, while the client's entire settlement — including the portion paid as attorney fees — remains excluded from the client's gross income under IRC 104(a)(2).
The 'economic benefit doctrine' is relevant to structured settlement design because it:
Answer: Could cause the present value of future payments to be taxable if the claimant has a secured, vested economic interest
The economic benefit doctrine taxes a benefit when it is received, even if not yet paid; structured settlements use qualified assignments and unfunded promises to avoid triggering this doctrine.
When comparing a $1 million structured settlement to a $1 million lump sum invested in taxable accounts, the structured settlement's primary tax advantage is:
Answer: All earnings growth within the annuity accumulates and is paid out tax-free, whereas investment income on a lump sum is taxable each year
The core tax advantage is that all structured settlement payments — including the internal growth component — are tax-free, whereas a lump sum investor pays annual taxes on dividends, interest, and capital gains, significantly reducing net returns.