In 1982 Congress passed the Periodic Payment Settlement Tax Act creating Structured Settlements and expanded their use in 1997 with the Taxpayer Relief Act.
Structured Settlements are regular payments made over a period of time resulting from legal actions creating guaranteed payments from the annuities purchased to fund the settlement.
They are most commonly used in product liability, injury, and workman’s compensation cases.
However they can also be used for Attorney Fees, Installment Sales, Divorce Settlements, Construction Defects, Environmental litigation, Punitive Damage Awards, Sexual Harassment, Legal Malpractice, Property Disputes, False Arrest/ Imprisonment, Disability Policy Buyouts, Breach of Contract, Lottery Winners, Fraud Claims, and Psychological Damage Claims.
Structured Settlements also offer tax benefits. By utilizing a periodic payment arrangement and deferring settlement dollars over a period of time the results are likely less money paid at current tax rates. Payments can be tailored to specific needs.
Employment related damages and non-physical injuries are fully taxable in the year the settlement is received. With periodic payments from a structured settlement, the plaintiff is able to defer taxation on the entire amount and allow 100% of the funds to be invested. Remember, investing involves risk and you may lose your principal.
Structured Settlement Companies can provide overall case assessment and help with technical issues that arise and coordination with the life insurance carrier for annuity policy issuance.
The first step is to involve a Structured Settlement Company early in the process. A structured settlement annuity is irrevocable and cannot be done after any settlement funds are deposited in another account.
This article is for informational purposes and is not a recommendation nor is it intended to be used by anyone to avoid IRS penalties. The article supports the promotion of the matter discussed within and you should seek the advice of a tax or legal advisor to discuss your unique situation as it relates to your investment objectives and risk tolerance. Factors to consider prior to engaging in any financial transaction include commissions, fees and costs, tax consequences, legal restrictions, and risks such as interest rate risk, currency exchange risk and illiquidity. Annuities are long-term, tax-deferred investment vehicles designed for retirement purposes. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Withdrawals made prior to age 59 ½ are subject to 10% IRS penalty tax. Surrender charges apply. Guarantees are based on the paying ability of the issuing insurance company. Annuities are not risk free and investors should carefully review the risks associated prior to purchasing.
About the author: Charles Marsala is a Financial Advisor with Benchmark Investment Group with Securities offered through LPL Financial, a member FINRA/SIPC. He can be contacted at Charles.Marsala@lpl.com.