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A structured settlement for workers' compensation or physical injury tort claims is a special provision under the United States Internal Revenue Code [Sec. 104(a)(1) and (2), respectively] that exempts all payments from current year income taxation, whether received as a lump sum or over a period of time. If the entire settlement is taken as a cash lump sum, that amount is excluded from current year taxable income, but the first dollar earned on the award becomes a taxable event. The structured payments must be determined at the time of settlement and incorporated into the settlement agreement and release, not afterwards when it is too late. Once the cash is either actually or constructively received by the claimant, the benefit of tax free growth is lost forever.
Conversely, if the total settlement amount is taken as a cash lump sum, the growth from an investment will be subject to federal and state income taxes, which reduces the net performance of the investment by the marginal tax rates, which can approach 50%.
Dissipation Risk with Large Lump Sum Payments
Despite best intentions, lump sum payments are dissipated within a short time after the money is received by the claimant. It is believed that 90 percent of cash settlements are gone within five years. Tragically, when the money is intended to replace lost income for a disability or to care for a seriously injured or ill individual for a lifetime, that person may be left without the means of self-support or to receive appropriate care.
Origin-of-the-Claim Test Determines if Damages Are Nontaxable
When the federal tax code [IRC § 104(a)2)] was amended in 1996 (Small Business Job Protection Act), Congress preserved the right of family members to make derivative claims based on the physical injury or physical illness of another person, even though the claimant personally may not have suffered the injury or illness. All sums received (except for punitive damages) are excluded from the claimant’s gross income. This is known as the origin-of-the-claim test.
Claims on Behalf of Minors
For minors, structured programs have significant advantages over cash settlements. First, with a cash settlement, a minor may have immediate access to the funds upon reaching age 18. This could mean handing a very large check to an 18 year old. Next, the investment of the settlement proceeds may be governed by the probate court. The allowable investments may include annuities, bank CDs, U.S. Treasury obligations and municipal bonds. Currently, the structured program pays a higher after-tax rate of return than any of the allowable investments governed by the probate court, and there are no trust fees. Finally, with a cash settlement, tax returns must be filed, creating a paperwork nightmare every year between settlement and the minor reaching age 18. Additionally, if the taxes are paid out of settlement proceeds, an annual trip to the probate court will be necessary.
Rated Age Based on Health History of Payee
For individuals with serious health problems facing them, structured settlements have significant advantages over cash settlements. People with serious health problems, as a group, statistically will live shorter lives than the population as a whole. This fact allows the life carrier underwriting the structure to provide a greater monthly benefit to the person with health problems for a given premium payment than would be given to a person with a standard life expectancy. This is called mortality risk, and life insurance companies are in the business of assuming mortality risk. To prevent the life insurance company from reaping a windfall in the event the annuitant dies soon after payments begin, we generally recommend placing a minimum number of guaranteed payments in the structured settlement. In these instances we recommend and would be willing to submit medical records to the underwriters of several companies with the purpose of obtaining a rated age. This might result in higher benefit payments for the same cost.
Planning for Estate Taxes
The receipt of settlement proceeds, either by a lump sum or through periodic payments, when combined with the claimant's other assets, can create an estate in excess of $1,000,000 which would be subject to estate taxes at the death of the claimant. Estate tax rates range from 37 to 55 percent of amounts above $1,000,000, and payment generally is due in cash in nine months after the death. With proper planning, the impact of potential estate taxes can be minimized.
source:structuredsettlements.org/sub/structure-basics.jsp
This site is to help you better understand structured settlements, including:
1.The IRS Revenue Rulings that gave structured settlements their birth.
2.Further background on the tax code that separates annuities used for structured settlements from other types of annuities.
3.An explanation of how structured settlements have evolved to include structuring of taxable damages.
4.Why structured settlements offer significant advantages over cash settlements for people facing serious health problems.
5.A look at how recovery from a personal injury claim can impact social security benefits.
6.The importance of paying careful attention to the final release documents involved in structured settlements.
7.An in depth look at the case law behind attorney fee structured settlements.
8.Information about factoring, a transaction where payees sell their structured settlement payments.
source:structuredsettlements.org
4:49 AM
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Finding the Ideal Buyer For Your Structured Settlement and Annuity
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