Structured Settlements 4Real®Blog 2026

by John Darer CLU ChFC MSSC CeFT RSP CLTC

Some structured settlement and settlement planning firms advertise that stuctured settlements are “tax free”.  Is the statement “structured settlements are tax-free” true?

It depends on the type of tax. Read below for reasons why the statement “structured settlements are tax free” could be false and misleading.

Various types of taxes and their relevance to structured settlements

1. Value Added Tax– Tax on the value of a good, service or property Current relevance to structured settlements: None
2. Environment Affecting Tax Current relevance to structured settlements: None
3. Capital Gains Tax- the tax levied on the profit released from the sale of an asset Current relevance to structured settlements: None to fixed structured settlements for personal injury settlements, but may have relevance when structured settlement annuities are used for structured installment sale or settlement of construction defect cases
4. Consumption Tax– A tax on non-investment spending (e.g. sales tax) Current relevance to structured settlements: None.
5. Corporation Tax: a direct tax on the profits of companies or associations including capital gains.
6. Estate Tax or Inheritance Tax: a tax arising on the death of an individual Current relevance to structured settlements: If a structured settlement annuitant dies with remaining unpaid guaranteed or certain structured settlement payments the present value of such payments is included in the decedent’s gross estate. If the estate is suffiently large there may be estate taxes due.
7. Excise Tax: Tax based on the quantity of the product purchased. Current relevance to Structured Settlements: A 40% excise tax is levied on transferee of structured settlement payment rights if a “qualified order” is not obtained per IRC 5891(b)(1).
8. Income Tax: a tax levied on the financial income of of individuals, corporations, or other legal entities including trusts. Current relevance to structured settlements: IRC sections 104(a)(1), 104(a)(2)and IRC 130 provide the exclusions to otherwise taxable income that make most structured settlements work.  IRC 139F is another section that provides a tax exclusion for damages on account of wrongful incarceration.  See 26 U.S. Code § 139F – Certain amounts received by wrongfully incarcerated individuals | U.S. Code | US Law | LII / Legal Information Institute
9. Poll Tax: A per capita tax that levies a set amount per individual. Current relevance to structured settlements: None
10. Property Tax: A tax imposed on property by reason of ownership Current relevance to structured settlements: None.
11. Retirement Tax: Example FICA   Current relevance to structured settlements: None.
12. Sales Tax: a tax applied when a good or service is sold to its final consumer. Current relevance to structured settlements: None.

and the list goes on.

What are some instances where the statement “structured settlements are tax-free is false?

1. Structured attorney fees are neither exempt from income tax nor estate tax, and a retired attorney may also be liable for self-employment tax on such payments.
2. In structured settlements without a “qualified assignment,” the owner of the qualified funding asset, if a taxable entity such as a product manufacturer, must treat it as taxable income. Although payments to the structured settlement recipient (plaintiff) are income tax-free, the cost of the qualified funding asset cannot be deducted in full during the first year. Instead, the entity may need to deduct each payment as it is made to the recipient.
3. It is important to be mindful of certain very large settlements where, considering other assets, there may be estate tax exposure involving long guaranteed periods and substantial future lump sum payments. While this does not apply to every case, as additional factors must be considered, it is enough to render the blanket statement “structured settlements are tax-free” false.

Under the Federal Trade Commission Act

• Advertising must be truthful and not deceptive. According to the FTC, an ad is deceptive if it contains a statement-or omits information-that is “material” and is likely to mislead consumers acting reasonably under the circumstances. What claims are express or implied by the statement “structured settlements are tax free”? Can they be made in good faith as a blanket statement?
• Advertisers must have evidence to back up their claims
• Advertisements cannot be unfair

Given the potential for the statement “structured settlements are tax free” to be misleading a best practice would be to qualify the tax benefit.

A SAMPLING OF STRUCTURED SETTLEMENT INDUSTRY WEBSITES live at the time this blog was published

Examples of Accurate

• “Payments from a properly designed structured settlement is “income tax-free”
• ” periodic payments are completely free of federal and state income taxes”
• “The annuity payments received under such a structured settlement are not subject to federal income taxation”
• “Under current law, structured settlement payments are completely free from federal and state income taxes”

Examples of Somewhat Accurate/Somewhat Misleading

• “When you want the benefit of guaranteed tax-free income
• “Can rest assured that the injured party will receive a steady stream of tax-free income
• “the principal and interest generated from structured settlement annuties written in the resolution of a legal claim involving personal physical injuries are completely exempt from federal, state, and local taxation.”

Examples of Misleading

• “The tax-free nature of this instrument delivers a significantly higher after-tax benefit than a lump sum settlement”
• “The Internal Revenue Code (IRC) section 104(a)(2) allows plaintiffs involved in a personal injury lawsuit to receive their settlements in future periodic payments excluded from taxation“
• “Our brokers focus on achieving the best possible results for all parties using tax-free structured settlement annuities”
• “If a structured settlement is used to fund a personal physical injury claim, it provides the payments tax-free“
• “Structure your financial future tax-free”
• “The Internal Revenue Service determined that since the money you receive through a structured settlement is compensation for an injury, you will never pay taxes on any of the payments (principal or interest)”.
• “Structured payments received by your estate or by your heirs are also received tax free“
• “A structured settlement is an agreement between parties, pursuant to existing Internal Revenue Regulations, which provides tax-free payments for an agreed upon period of time or for the life of the claimant”
• “Tax free– guaranteed-secure”
• “A method of settling a personal injury claim in which the injured party receives tax-free payments in the future“

Best Practices and Professional Responsibility

1. This type of impact statement would be correct “Structured Settlements are Income Tax-free-Secure and Guaranteed!”
2. The word “income” should precede the words “tax free” in any discussion of structured settlements where the payments are for damages arising out of personal physical injury or physical sickness or out of workers compensation.
3. Periodic payment solutions for non qualified cases (i.e where damages do not fall within the exclusions from income under IRC 104(a)(1), 104(a)(2) and/or 130) are called non qualified assignments. See What are Non Qualified Structured Settlements and Non Qualified Assignments for Tax Deferral?
4. Note that damages for Wrongful Incarceration that may be excludable under IRC 139F cannot be structured using a qualified assignment under IRC 130, but can be structured using a non-qualified assignment.  
5. State insurance regulations governing professionals in the structured settlement and settlement planning industry are clear in the expectation that the advertised benefits of recommendations and  product solutions are articulated clearly and accurately
6. Illustrations of Rate of Return should at minimum, quote the Internal Rate of Return  (IRR). Where the damages that payments represent are income tax free, the internal rate of return is the “income tax-free rate”. Use of a taxable equivalent yield is acceptable if one shows the assumed tax bracket. A taxable equivalent yield however, is not a tax-free rate.  Where an IRR has been used for lifetime benefits one should show the number of years of assumed life expectancy. Life company quoting software or online platforms usually provide this. Take care not to omit this if you transcribe onto your branded presentation.

4structures® publishes a useful Tax Equivalent Yield Chart

4structures.com publishes a useful Taxable Equivalent Yield Chartthat shows numbers two ways to aid in the comparison with alternate choices..

• What the net after tax return is at different effective tax rates
• What you would have to earn to replicate an income tax exempt ratte of return at different tax rates and rates of return combinations

Tax Advantages of Structured Settlements | Taxable Equivalent Yield Chart

Last updated February 1, 2026