Tax Treatment and Benefits of Structured Settlements Flashcards
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A structured settlement annuity is purchased by a qualified assignment company to fund periodic payments. The investment earnings generated by the life insurer on reserves backing this annuity are:
Answer: Taxable to the life insurer but excluded from the claimant's income
The life insurance company pays ordinary corporate taxes on the investment earnings from its reserves, but the claimant's periodic payments remain fully excluded from income under IRC Section 104(a)(2).
For a qualified assignment under IRC Section 130 to be valid, the assigned obligation must require periodic payments that:
Answer: Are fixed and determinable as to amount and time of payment, and cannot be accelerated, deferred, increased, or decreased
IRC Section 130(c) requires that the periodic payments under a qualified assignment be fixed and determinable, with no right of the recipient to accelerate, defer, increase, or decrease the payments.
A claimant sells future structured settlement payments to a factoring company for immediate cash. The IRS generally treats the proceeds from this sale as:
Answer: Ordinary income taxable in the year received
When a claimant sells structured settlement payment rights, the IRS treats the proceeds as ordinary income because the claimant is monetizing a tax-exempt income stream, and the sale proceeds do not retain the IRC 104 exclusion.
Under current IRS guidance, structured settlement payments for wrongful death claims are generally:
Answer: Tax-free under IRC Section 104(a)(2) because they arise from a personal physical injury or physical sickness of the deceased
Wrongful death structured settlements qualify for the IRC Section 104(a)(2) exclusion because they are paid on account of the personal physical injury or death of the decedent, making payments to survivors tax-free.
Which of the following structured settlement features specifically prevents the claimant from triggering the constructive receipt doctrine?
Answer: The claimant's complete inability to accelerate, transfer, or borrow against the payment stream
Constructive receipt requires that the taxpayer have the right to demand funds; by permanently restricting the claimant's ability to accelerate or borrow against payments, structured settlements ensure the claimant never has constructive receipt.
The IRC Section 130 deduction available to the assignment company is equal to:
Answer: The amount paid to purchase the annuity funding the assigned obligation
Under IRC Section 130, the assignment company excludes from income (effectively deducting) the amount it pays for the annuity contract that will fund the periodic payment obligation, not the present value or face value of future payments.
A claimant in a physical injury case has the option of receiving either a $500,000 lump sum or a structured settlement paying $4,000 per month for 20 years (total $960,000). From a federal income tax perspective:
Answer: The structured settlement is preferable because both the monthly payments and the embedded $460,000 of growth are entirely tax-free
The structured settlement's $460,000 of embedded earnings is paid out completely tax-free, whereas a lump sum investor would owe taxes on earnings each year, making the structured settlement significantly more valuable on an after-tax basis.