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. These have been around for more than a decade and are common in taxable cases, such as employment agreements. The carrier then makes a series of periodic payments based on a pre-agreed term and amount.
However, accountants need to know the reasons behind the structured agreement to see if it was due to personal injury, wrongful death, or workers' compensation. 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. Once both parties have agreed on the details of the structured agreement, the plaintiff releases the defendant (or insurer) from liability. However, if the ownership of an annuity is assigned to a spouse or former spouse during a divorce agreement, the transfer is not taxable.
Accordingly, a benefit for customers who choose a structured settlement annuity is that they don't have to worry about reporting any future annuity payments as income in the year in which any payment is received. The decision to use a structured settlement must be made before finalizing the settlement agreement. However, with a structured settlement annuity, if a customer places all or part of their net settlement in a structured settlement annuity, the principal amount plus any interest accrued within the annuity is tax-free. The defendant or insurer then pays the settlement funds to a third-party assignment company, which assumes responsibility and purchases an annuity from a structured settlement insurance company.
However, if a structured insurance agreement involves money that would have been taxed under normal circumstances, such as a late payment agreement, divorce payments, punitive damages, lottery prizes, or liquidation damages, then it would be treated as normal income. Whether inherited payments are taxable or not depends on several factors, so it's a good idea to consult with a tax professional when planning your estate. Brokers can execute many financial projections based on a term of years, payments throughout your life, over your life in common with your spouse, etc. When it comes to settlement plans, lawyers and clients are most likely familiar with a structured settlement.