Structured Settlements Tax Treatment and Benefits of Structured Settlements 2

Question 1

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:

Accepted Answer

The defendant, insurer, or a qualified assignment company — not the claimant

Answer

The claimant using proceeds from a separate investment account

Answer

The claimant's attorney on behalf of the claimant

Answer

A government-approved trustee designated by the court

Question 2

Under IRC Section 5891, when a structured settlement factoring transaction occurs without proper court approval, what excise tax is imposed on the factoring company?

Accepted Answer

40% of the factoring discount

Answer

10% of the discounted present value

Answer

25% of the face value of transferred payments

Answer

15% of the gross purchase price

Question 3

The total stream of structured settlement periodic payments, including the portion attributable to earnings growth within the annuity, is:

Accepted Answer

Entirely excluded from the claimant's gross income under IRC Section 104(a)(2)

Answer

Taxable only for the earnings portion above the original principal

Answer

Subject to the 3.8% net investment income tax on the earnings portion

Answer

Taxable if payments extend beyond 30 years

Question 4

Workers' compensation structured settlements derive their tax-free status from which IRC section?

Accepted Answer

IRC Section 104(a)(1)

Answer

IRC Section 104(a)(2)

Answer

IRC Section 105(a)

Answer

IRC Section 130(c)

Question 5

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?

Accepted Answer

The attorney fee is taxable income to the attorney, and the claimant's full settlement remains excluded

Answer

The attorney fee is tax-free to the attorney as part of the physical injury exclusion

Answer

The claimant must include the attorney fee in gross income under the assignment of income doctrine

Answer

The attorney fee reduces the claimant's excludable amount dollar-for-dollar

Question 6

The 'economic benefit doctrine' is relevant to structured settlement design because it:

Accepted Answer

Could cause the present value of future payments to be taxable if the claimant has a secured, vested economic interest

Answer

Requires payments to provide a measurable economic benefit to the claimant

Answer

Mandates that structured settlements outperform alternative lump sum investments

Answer

Sets minimum payment amounts to satisfy the economic benefit test

Question 7

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:

Accepted 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

Answer

A one-time tax credit equal to 10% of the settlement amount

Answer

Structured settlement payments are exempt from state income taxes in all 50 states

Answer

The claimant pays only long-term capital gains rates on structured settlement growth