by John Darer CLU ChFC MSSC CeFT RSP CLTC
A prominent settlement industry website states that Section 104(a)(2) of the Internal Revenue Code clarifies an important fact. The full amount of the structured settlement payments is tax-free. This advantage applies to the victim. The investment earnings on a lump sum payment are usually fully taxable.
What Does IRC 104(a) actually say?
This is an excerpt of Section 104 of the Internal Revenue Code:
“(a) In General
Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include –
(1) amounts received under workmen’s compensation acts as compensation for personal injuries or sickness;
(2) the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness;
So you see, IRC Section 104(a)(2):
- Does not mention structured settlements at all
- Does not mention estate or inheritance taxes at all
It’s about the damages the structured settlement payments represent
The facts are that:
- IRC Section 104(a)(2) provides an exemption from gross income for payments which represent damages received (workers compensation exemption under IRC 104(a)(1) is for amounts received)
- The only place in the Internal Revenue Code where ‘structured settlement” is specifically mentioned is IRC 5891. This section deals with the imposition of an excise tax on the “factoring discount” in structured settlement factoring transactions. The definition that appears there is expressly denoted as being solely for that section of the Internal Revenue Code
- When a structured settlement payee dies, the present value of any remaining guaranteed periodic payments is included. These payments are part of the taxable estate. This value is included in the decedent’s estate.
In this day and age, the term “structured settlement” is often used to describe non qualified (taxable) periodic payments. It also describes structured attorney fees and lottery payments. Factoring companies use it falsely. So do “pay per post” non experts and “mommy bloggers”. They conflate it with a “structured settlement factoring transaction”. Financial literacy is important in the structured settlement profession.
HOW ABOUT IT FOLKS?
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