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

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.

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

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.

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

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.

Question 4

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

Accepted Answer

IRC Section 104(a)(1)

Answer

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.

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

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).

Structured Settlements Practice Test

Structured Settlements Practice Test

Structured Settlements Tax Treatment and Benefits of Structured Settlements 2