Structured Settlements Tax Treatment and Benefits of Structured Settlements 3

Question 1

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:

Accepted Answer

Taxable to the life insurer but excluded from the claimant's income

Answer

Taxable annually to the claimant as passive income

Answer

Tax-free to both the life insurer and the claimant under IRC 104

Answer

Passed through to the claimant and taxed as ordinary income

Question 2

For a qualified assignment under IRC Section 130 to be valid, the assigned obligation must require periodic payments that:

Accepted Answer

Are fixed and determinable as to amount and time of payment, and cannot be accelerated, deferred, increased, or decreased

Answer

Can be accelerated or deferred at the claimant's election

Answer

Must begin within 90 days of the assignment and continue for at least 10 years

Answer

Cannot exceed the original settlement amount

Question 3

A claimant sells future structured settlement payments to a factoring company for immediate cash. The IRS generally treats the proceeds from this sale as:

Accepted Answer

Ordinary income taxable in the year received

Answer

Completely tax-free under IRC Section 104(a)(2)

Answer

Long-term capital gains if the original settlement was held more than one year

Answer

Tax-deferred until the original payment dates would have occurred

Question 4

Under current IRS guidance, structured settlement payments for wrongful death claims are generally:

Accepted Answer

Tax-free under IRC Section 104(a)(2) because they arise from a personal physical injury or physical sickness of the deceased

Answer

Fully taxable as the claimant is not the injured party

Answer

Taxable to the extent they exceed the decedent's final medical expenses

Answer

Exempt from federal tax but subject to state inheritance taxes

Question 5

Which of the following structured settlement features specifically prevents the claimant from triggering the constructive receipt doctrine?

Accepted Answer

The claimant's complete inability to accelerate, transfer, or borrow against the payment stream

Answer

Using a life insurance annuity instead of a trust

Answer

Requiring all payments to be made by direct deposit

Answer

Having the settlement approved by a federal court

Question 6

The IRC Section 130 deduction available to the assignment company is equal to:

Accepted Answer

The amount paid to purchase the annuity funding the assigned obligation

Answer

The face value of all future payments to be made

Answer

The present value of future payments at the prevailing discount rate

Answer

The original gross settlement amount before attorney fees

Question 7

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:

Accepted Answer

The structured settlement is preferable because both the monthly payments and the embedded $460,000 of growth are entirely tax-free

Answer

The lump sum is preferable because it is also tax-free and provides more flexibility

Answer

The lump sum is preferable because the extra $460,000 in structured payments represents taxable interest

Answer

Both options provide identical after-tax results because all personal injury proceeds are tax-free