Because structured settlements for compensatory damages are exempt from tax, so are profits from the sale of future payments. Structured settlement payments and proceeds from the sale of these payments are also exempt from state taxes and dividend and capital gains taxes. If a structured settlement is sold in exchange for a lump sum, those funds are generally not taxable. By law, in most cases, the IRS cannot tax revenues from a structured settlement, regardless of whether they are paid in a series of payments or in a single lump sum.
The policy behind this law is that structured agreements are intended to provide financial stability and security for beneficiaries. However, it should be clear that several taxes come into play with respect to specific types of structured settlement transfers. Nearly all structured insurance settlements are completely tax-free. This includes federal state taxes %26, taxes on interest, dividends and capital gains, and the AMT.
The reason for this is that the government believes that receiving compensation for physical injury, wrongful death, or workers' compensation is not an income gain. It is a restoration of the state before the loss. The decision to use a structured settlement must be made before finalizing the settlement agreement. But more importantly for those who rely on this agreement, investment income earned from a lump-sum agreement may be subject to full taxation.
A structured settlement annuity is an excellent vehicle for those receiving a personal injury settlement and. It should also be noted that a gift tax may apply if the amount of the transferred annuity exceeds the current exclusion rate (which is the amount above which taxes apply). However, if the ownership of an annuity is assigned to a spouse or former spouse during a divorce agreement, the transfer is not taxable. When it comes to settlement plans, lawyers and clients are most likely familiar with a structured agreement.
Instead of paying the cash to you or your lawyer, the defendant will send the money for the structure to a subsidiary of the life insurance company called the cession company. As such, the injured or sick worker is allowed to sell future settlement payments and the funds received for that sale will not be taxable. Structured settlements are tax-efficient and can also have wasteful and asset protection advantages. As long as you consider these issues before signing a settlement agreement in your case, you can structure as much or as little as you like and take the rest in cash.
If another person is listed as a beneficiary, all you have to do is submit a death certificate and proof of identification to the company paying the annuity. In addition, if an annuity is sold that was not part of a court-approved agreement, those earnings will be taxable. Additional investment options are available to claimants who are not interested in a structured settlement annuity.