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

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).

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

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.

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

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.

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

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.

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

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.

Structured Settlements Practice Test

Structured Settlements Practice Test

Structured Settlements Tax Treatment and Benefits of Structured Settlements 3