by John Darer CLU ChFC MSSC CeFT RSP CLTC
Tax Exempt Applies to the Payments, not the Annuities, and Flows from the Type of Damages Payments Represent
There is a false narrative concerning structured settlement annuities that claims that structured settlement annuities are tax exempt. Structured settlement annuities are not tax exempt.
Where used as a “qualified funding asset” the structured settlement payments may be tax exempt, but the essential reason for the tax exemption is the damages that the payments from the structured settlement annuities represent.
Examples of Tax Exemptions for Damages
- Payments for workers compensation see IRC 104(a)(1)
- Payments for damages on account of personal physical injury, physical sickness and wrongful death, see IRC 104(a)(2) [and IRC 104(c) for Alabama wrongful death]
- Payments for wrongful imprisonment, see IRC 139F
Structured settlement annuties can also be used to fund deferred payments of many types of taxable damages
When periodic payments for an obligation related to taxable damages are funded through a structured settlement annuity or annuities, and are properly established as consideration for the release of liability for such damages, each payment is subject to taxation in the year it is received.
I’m sure that the false narrative is not intentional, but what is surprising is the false narrative is articulated in public facing communications by certain people and companies with credentials and experience. Those who spread the false narrative, even unintentionally, may be used as sources of “validation” for content barfers in (or serving) the structured settlement secondary market, or less than diligent media. Clearly this does not serve the greater good for consumers or the industry.