Structured Settlement Tax Rules

Definition and Purpose

A structured settlement is a negotiated financial arrangement that pays out a predetermined series of periodic payments, typically over an extended period. It is designed to provide long-term financial security for the recipient, particularly in cases where a lump-sum payment may not be in their best interest.

2. Common Usage

Structured settlements are commonly used in personal injury and medical malpractice cases, as well as cases involving wrongful death, workers' compensation, and other legal disputes where a defendant (often an insurance company) agrees to compensate the plaintiff. They are designed to cover the cost of medical bills, ongoing care, lost income, and other expenses incurred due to the injury or loss.

3. Advantages of Structured Settlements

Structured settlements offer several advantages:

Tax Benefits: In many cases, the income received from a structured settlement is tax-free, making it more financially advantageous than a lump-sum payment.


Financial Security: Structured settlements provide a reliable stream of income over time, ensuring that the recipient's long-term financial needs are met.


Protection from Impulsive Spending: By receiving payments over time, recipients are less likely to spend the entire award quickly.


Customization: Structured settlements can be tailored to meet the individual needs of the recipient, with flexibility in payment frequency and duration.

4. Components of a Structured Settlement

A structured settlement typically consists of the following components:

Annuity: The core of the structured settlement is an annuity, a financial product that guarantees periodic payments to the recipient. The defendant or their insurer purchases the annuity to fund the settlement.


Payment Schedule: The payment schedule outlines when and how much the recipient will receive. Payments can be made monthly, annually, or at other intervals.


Duration: The duration of a structured settlement can vary, ranging from a few years to a lifetime, depending on the individual's needs and the terms negotiated.


Guarantees: Some structured settlements include guaranteed payments, ensuring that the recipient or their beneficiaries receive the full value of the settlement, even if they pass away before all payments are made.


Contingency Provisions: Structured settlements can include provisions for additional payments in case of specific contingencies, such as medical complications or changes in circumstances.

5. Criticisms and Considerations

While structured settlements offer many benefits, they also have some criticisms and considerations:

Lack of Liquidity: Once structured, these settlements are difficult to change or access for a lump-sum payout. This lack of liquidity may be a drawback in emergencies.


Inflexibility: Some recipients may find the structured payments inflexible, especially if their financial needs change over time.


Low Interest Rates: In a low-interest-rate environment, the return on structured settlements may be lower than alternative investment options.

6. Legal Requirements

Structured settlements are subject to federal and state laws, which regulate their use and ensure that they meet the needs of the injured party. Courts often oversee structured settlements to ensure they are fair and in the best interest of the recipient.

7. Selling Structured Settlement Payments

In some cases, recipients of structured settlements may choose to sell their future payments to a third party in exchange for a lump-sum cash payment. This is known as "structured settlement factoring" or "selling structured settlement payments." It can provide immediate access to funds but typically involves selling the payments at a discount.

Structured settlements are an important financial tool for providing long-term financial security to individuals who have suffered injuries or losses due to the negligence of others. However, they are not suitable for everyone, and recipients should carefully consider their financial needs and goals before agreeing to a structured settlement. Additionally, consulting with financial advisors and legal professionals is often recommended when entering into such agreements.

8. Legal Process for Structured Settlements

Structured settlements typically follow these steps:

Negotiation: After a lawsuit or settlement, the plaintiff and defendant negotiate the terms of the structured settlement. This includes determining the payment schedule, amount, and duration.


Court Approval: The structured settlement agreement is subject to court approval. This step ensures that the settlement is fair and in the best interests of the recipient, especially when minors or incapacitated individuals are involved.


Annuity Purchase: Once approved, the defendant or their insurer purchases an annuity contract from a life insurance company to fund the structured settlement.


Payments Commence: The structured settlement payments begin according to the agreed-upon schedule.

9. Types of Structured Settlements

Structured settlements can take various forms to suit the needs of the recipient:

Guaranteed Payments: These provide a guaranteed income stream for a specific period, ensuring that the recipient or their beneficiaries receive all payments, even if the recipient passes away.


Life-Contingent Payments: These payments continue for the recipient's lifetime, ensuring financial support as long as they live. However, payments cease upon the recipient's death.


Indexed Structured Settlements: Payments are adjusted periodically to keep pace with inflation or rising living costs, helping protect the recipient's purchasing power.


Lump-Sum Payments: While structured settlements are primarily periodic, they can also include lump-sum payments at specific intervals to cover significant expenses.

10. Government Benefits Preservation

Structured settlements are often used in cases where the recipient may be eligible for government benefits, such as Medicaid or Supplemental Security Income (SSI). By structuring the settlement, the recipient can maintain eligibility for these crucial benefits, as the periodic payments typically do not count as income or assets.

11. Selling Structured Settlement Payments

In certain situations, recipients of structured settlements may choose to sell some or all of their future payments to a factoring company. This allows them to access a lump sum of cash, which can be beneficial in emergencies or for major financial expenses. However, selling structured settlement payments typically involves a discount, meaning the recipient will receive less than the total face value of the payments.

12. Protection from Creditors

Structured settlement payments are often protected from creditors and legal judgments. This can provide added security for the recipient, ensuring that their settlement funds remain available for their intended use.

13. Professional Guidance

Structured settlements are complex financial arrangements, and it's essential for recipients to seek professional advice before finalizing any agreements. Consultation with financial advisors, attorneys, and settlement experts can help recipients make informed decisions about the structure and terms of their settlements.

14. Taxation of Structured Settlements

In many cases, structured settlement payments are tax-free for the recipient. This favorable tax treatment is provided under federal law (Internal Revenue Code Section 104(a)(2)). However, it's essential to understand the tax implications of any structured settlement fully.

15. Flexibility and Customization

Structured settlements are highly customizable, allowing recipients to tailor the payment schedule and terms to their specific needs and financial goals. This flexibility ensures that the settlement aligns with the recipient's unique circumstances.

Structured settlements are a valuable financial tool that provides injured parties with financial security and peace of mind. While they offer many benefits, it's crucial for recipients to carefully consider their options and seek professional guidance to ensure the structured settlement meets their long-term financial needs and objectives.

If you have more specific questions or require further information about structured settlements or any related topics, please feel free to ask.

16. Structured Settlement Funding Options

Structured settlements are typically funded using annuities, but there are different funding options:

Fixed Annuities: These provide regular, predetermined payments over the life of the structured settlement. They offer stability but may not account for inflation.


Indexed Annuities: Payments are adjusted periodically based on an inflation index, such as the Consumer Price Index (CPI). This helps protect the purchasing power of the payments.


Variable Annuities: These allow the recipient to invest in various funds, potentially leading to higher returns but also carrying more risk. The value of payments may fluctuate.


Immediate Annuities: In some cases, immediate annuities may be used to fund structured settlements, providing a stream of payments that begins immediately after the settlement is established.

17. Role of the Annuity Issuer

The company issuing the annuity plays a crucial role in a structured settlement. Recipients should ensure that the annuity provider is reputable, financially stable, and capable of meeting its future payment obligations.

18. Periodic Payment Riders

Structured settlements may include periodic payment riders, which specify the payment terms and schedule. These riders detail the amount, frequency, and duration of payments. It's essential for recipients to thoroughly review and understand these riders.

19. Designated Beneficiaries

Structured settlement recipients can often designate beneficiaries to receive payments in the event of their death. This can provide additional financial security for loved ones.

20. Legal Requirements and Court Approval

Structured settlements are subject to legal regulations, and in many cases, they require court approval to ensure they are in the best interests of the recipient. Courts may appoint independent professionals, such as guardians ad litem, to assess the fairness of the settlement.

21. Advantages for Minors

Structured settlements are commonly used in cases involving minors who have received personal injury settlements. These settlements can include provisions for future educational expenses, ensuring that the minor's financial needs are met as they grow.

22. Potential Downsides

While structured settlements offer many benefits, it's important to consider potential downsides:

Lack of Control: Recipients have limited control over their funds, as they cannot access the full lump sum. This can be a drawback in cases of unexpected financial needs.


Future Needs: Predicting future financial needs accurately can be challenging. A structured settlement may not adequately address unforeseen expenses.


Long-Term Commitment: Once established, structured settlements are difficult to change or terminate. This means that recipients are committed to the agreed-upon payment schedule for the duration specified in the settlement.

23. Negotiation and Professional Assistance

Negotiating the terms of a structured settlement is a critical process. It's essential for recipients to seek legal representation and financial advice to ensure they receive fair and suitable terms.

24. Changing Structured Settlements

In some cases, recipients may explore options for changing their structured settlements. This can include selling a portion of future payments or seeking court approval for changes due to changing circumstances.

25. Public Policy and Structured Settlements

Structured settlements have been encouraged by courts and policymakers as a means of reducing the burden on the public welfare system. They provide a measure of financial security without placing individuals at risk of quickly depleting their settlement funds.

Structured settlements are a valuable financial tool that can provide long-term financial security and stability for individuals who have experienced personal injuries or wrongful death. While they come with certain limitations, they offer significant benefits, particularly in preserving financial resources for the future. Recipients should carefully consider their financial goals, needs, and the advice of professionals when establishing structured settlements.







Certainly, here are some additional points and considerations regarding structured settlements:

26. Structured Settlement vs. Lump-Sum Settlements

Structured settlements are often compared to lump-sum settlements, where the plaintiff receives the entire settlement amount upfront. The choice between the two depends on individual circumstances:

Structured Settlements: Provide long-term financial security, tax advantages, and protection from impulsive spending. They are well-suited for covering ongoing medical expenses and ensuring a stable income stream.


Lump-Sum Settlements: Offer immediate access to the full settlement amount, which can be beneficial for paying off debts, making investments, or addressing immediate financial needs. However, they may come with tax implications and a lack of guaranteed long-term financial security.

27. Flexibility in Payment Schedule

Structured settlements can offer flexibility in designing the payment schedule:

Graded Payments: Payments can increase over time, reflecting changing financial needs or inflation.


Deferred Payments: Recipients can choose to defer payments to a later date, such as when they retire.


Customized Schedules: Structured settlements can be tailored to address specific financial goals and circumstances.

28. Taxation and Tax Benefits

The tax treatment of structured settlements can be advantageous:

Tax-Free Payments: In most cases, structured settlement payments are tax-free at the federal level, making them an attractive option for recipients.


State Tax Considerations: State tax laws can vary, so recipients should be aware of potential state tax implications.


Tax on Interest Gains: Any interest or investment gains on the annuity are typically not taxed until withdrawn.

29. Independent Professional Advice

Recipients of structured settlements are often advised to seek independent professional advice, including financial advisors and attorneys, to ensure that the terms of the settlement meet their financial goals and needs.

30. Contingency Provisions

Structured settlements can include contingency provisions, which allow for adjustments or additional payments based on specific events, such as medical complications or changing financial circumstances.

31. Inflation Protection

Indexed structured settlements can help protect against the eroding effects of inflation. Payments are adjusted periodically to maintain their real value.

32. Government Benefits Preservation

Structured settlements are designed to help maintain eligibility for government benefits, such as Medicaid and SSI, by spreading out payments and minimizing countable assets.

33. Selling Structured Settlements

While structured settlements are intended to provide long-term financial security, some recipients may consider selling their future payments in exchange for a lump sum. This option should be carefully evaluated, considering the potential loss of future income due to the discount applied to the sale.

34. Transferring Structured Settlement Payments

In some cases, structured settlement recipients may explore options for transferring or assigning their payments to a third party, such as a financial institution. This can provide recipients with more immediate access to funds, but it requires court approval and must be in the recipient's best interests.

35. Creditor Protection

Structured settlement payments are often protected from creditors and legal judgments, providing additional financial security to recipients.

Structured settlements can be a valuable tool for individuals and families facing the financial challenges associated with personal injuries, wrongful death, and other legal claims. While they offer many benefits, they also require careful consideration and professional guidance to ensure they align with the recipient's financial goals and needs.

36. Structured Settlements for Minors

Structured settlements are commonly used in cases involving minors. They are especially beneficial because they can provide financial support over the long term. Courts may appoint guardians or conservators to ensure that the structured settlement is in the best interest of the minor.

37. Protection from Financial Mismanagement

Structured settlements can protect recipients from financial mismanagement. Since the funds are distributed over time, there is less risk of recipients spending the entire award hastily or making poor financial decisions.

38. Negotiating Structured Settlement Terms

Recipients have the opportunity to negotiate the terms of their structured settlements, including the payment schedule, frequency, and duration. This negotiation process allows for customization based on individual needs and financial goals.
39. Mediation and Settlement Structuring

Mediation can play a significant role in structuring settlements. Mediators work with all parties involved to reach a fair agreement that may include a structured settlement as a resolution to the legal dispute.

40. Flexibility for Special Needs Trusts

Structured settlements can be designed to fund special needs trusts. These trusts are used to ensure that recipients with disabilities maintain eligibility for government benefits while receiving additional financial support from the structured settlement.

41. Pooled Trusts

Some structured settlements involve the use of pooled trusts, which are managed by nonprofit organizations. Pooled trusts can be particularly useful when structured settlements are meant to cover long-term care and living expenses.

42. Structured Settlement Disclosure Requirements

Federal and state laws often require disclosure of the structured settlement terms to the court. This ensures transparency and helps protect the interests of the recipient.

43. Structuring Attorney's Role

Structured settlement attorneys play a crucial role in advising recipients on the legal and financial implications of their settlements. They help ensure that the structured settlement meets the recipient's needs and complies with applicable laws.

44. Guardianship and Conservatorship

In cases involving incapacitated adults, guardians or conservators may be appointed by the court to oversee the structured settlement and make decisions in the recipient's best interest.

45. Disability Insurance and Structured Settlements

Structured settlements can work in conjunction with disability insurance policies. These policies can provide additional income and financial security in the event of disability, complementing the structured settlement payments.

46. Life Expectancy Considerations

Structured settlements often take into account the life expectancy of the recipient. Payments may continue for the recipient's lifetime or for a specified period based on life expectancy calculations.

47. Qualified Assignment

In structured settlements, a "qualified assignment" is often used. This legal arrangement involves the assignment of the defendant's obligation to make future payments to a third-party assignment company, which is responsible for making the periodic payments to the recipient.

48. Monitoring the Annuity Provider

Recipients of structured settlements should periodically monitor the financial health and stability of the annuity provider. This ensures that the company remains capable of meeting its future payment obligations.

Structured settlements are a powerful financial tool designed to provide long-term financial security and stability for individuals who have experienced personal injuries, wrongful death, or other legal claims. While they offer numerous advantages, they require careful planning, professional guidance, and consideration of individual circumstances to ensure they meet the recipient's unique needs and goals.

49. Partial Structured Settlements

Structured settlements can be structured in various ways, including partial structured settlements. In such cases, a portion of the settlement may be structured to provide periodic payments, while the remainder is paid as a lump sum. This offers recipients a degree of flexibility to address immediate financial needs while still securing long-term income.

50. Combination of Structured and Lump-Sum Payments

Recipients have the option to structure only a portion of their settlement while receiving the remaining amount as a lump sum. This combination approach allows for a balance between immediate financial needs and long-term financial security.

51. Transfer of Structured Settlement Payment Rights

In addition to selling structured settlement payments, recipients may also consider transferring their payment rights in exchange for lump-sum cash through a structured settlement transfer. These transfers often require court approval and must be in the best interest of the recipient.

52. State-Specific Structured Settlement Laws

Structured settlements are subject to state-specific laws and regulations. These laws may vary significantly from one state to another, impacting the negotiation, approval, and administration of structured settlements.

53. Structured Settlements in Employment Lawsuits

Structured settlements are not limited to personal injury cases. They are also used in employment-related lawsuits, such as wrongful termination or discrimination claims. In these cases, structured settlements can provide income replacement for lost wages and other financial losses.

54. Life Care Plans

Structured settlements may be tailored to fund life care plans for recipients with severe injuries or disabilities. These plans outline the medical and caregiving needs of the recipient and ensure that funds are available to cover those expenses over time.

55. Structured Settlement Brokers

Structured settlement brokers are professionals who assist in arranging structured settlements. They can help negotiate terms, compare annuity providers, and ensure that the settlement meets the recipient's financial objectives.

56. Structured Settlement Disclosure Statements

Structured settlement disclosure statements provide detailed information about the terms of the structured settlement, including payment amounts, schedules, and any applicable costs or fees. Recipients should carefully review these statements.

57. Structured Settlement Riders

Structured settlement riders are additional agreements that can modify the terms of the structured settlement. They may address specific contingencies, such as changes in the recipient's health or financial circumstances.

58. Settlement Preservation Trusts

Recipients may choose to establish settlement preservation trusts to hold and manage structured settlement funds. These trusts can help ensure that funds are used responsibly and according to the settlement terms.

59. Structured Settlement vs. Structured Annuity

Structured settlements are funded through structured annuities, but it's important to distinguish between the two. A structured settlement is the legal arrangement, while a structured annuity is the financial product that generates the periodic payments.

60. Ongoing Monitoring and Review

Recipients of structured settlements should periodically review their financial goals and circumstances to ensure that the structured settlement remains appropriate. Adjustments or changes to the structured settlement may be considered if circumstances warrant.

Structured settlements are a versatile financial tool that can provide long-term financial security and stability in a wide range of legal scenarios. Whether used in personal injury cases, employment disputes, or other legal matters, structured settlements offer recipients a degree of flexibility and customization to meet their unique needs and objectives. Professional advice is essential to navigate the complexities of structured settlements effectively.

61. Structured Settlement Funding Sources

Structured settlements are funded by the defendant or their insurance company. This funding is typically in the form of an annuity purchased from a life insurance company. The defendant or insurer makes periodic payments to the annuity provider to fund the settlement.

62. Structured Settlement Costs and Fees

In most cases, there are no direct costs or fees associated with establishing a structured settlement for the recipient. The defendant or insurer is responsible for the costs, including the purchase of the annuity. This means that the full settlement amount is available to provide for the recipient's financial needs.

63. Structured Settlements for Non-Physical Injuries

Structured settlements are not limited to cases involving physical injuries. They can also be used in cases where the plaintiff has suffered non-physical harm, such as emotional distress, defamation, or invasion of privacy. Structured settlements can provide compensation for psychological and emotional suffering.

64. Structured Settlements for Punitive Damages

In some cases, structured settlements can include compensation for punitive damages. Punitive damages are awarded to punish the defendant for particularly reckless or malicious conduct. Including punitive damages in a structured settlement can provide additional financial support for the recipient.

65. Structured Settlements and Minor Settlements

Structured settlements are commonly used in cases involving minors. Courts often require that a portion of the settlement be structured to ensure that the minor receives financial support as they grow. These structured settlements may be tailored to cover educational expenses, future medical needs, and other costs associated with raising a child.

66. Annuity Payments for Structured Settlements

The payments made under a structured settlement are typically funded through a single-premium immediate annuity or a deferred annuity. The annuity is purchased by the defendant or insurer, and the annuity provider guarantees the payment schedule outlined in the structured settlement agreement.

67. Structured Settlement Termination

Structured settlements are generally irrevocable once established. However, there may be provisions for changing or terminating the structured settlement in the event of exceptional circumstances, such as a recipient's extreme financial hardship or medical deterioration.

68. Structured Settlements for Medical Malpractice

Structured settlements are frequently used in medical malpractice cases to ensure that injured patients receive ongoing compensation for medical expenses, future care, and lost income. They provide a financial safety net for patients coping with the consequences of medical errors.

69. Structured Settlement and Taxation

Structured settlement payments are typically considered tax-free at the federal level. However, it's essential to consult with a tax professional to understand the tax implications fully. State tax laws can vary, and there may be exceptions to the tax-free treatment.

70. Review and Planning

Structured settlement recipients should periodically review their financial situation and goals. They may consider working with financial advisors to develop a comprehensive financial plan that takes into account the structured settlement and any other assets or income sources.

Structured settlements offer recipients a reliable and secure source of income to address their immediate and long-term financial needs. They are versatile and adaptable to various legal situations, providing financial stability and peace of mind for individuals and families affected by personal injuries, wrongful death, or other legal claims. It's essential for recipients to be well-informed about the terms and implications of their structured settlements to make the most of this financial arrangement.

71. Structured Settlements and Periodic Payments Tax Act (PPTA)

The Periodic Payments Tax Act of 1982 established the tax treatment of structured settlements at the federal level. This legislation clarified the tax-exempt status of structured settlement payments for personal injury or wrongful death claims.

72. Attorney Involvement in Structured Settlements

Attorneys play a crucial role in the negotiation and establishment of structured settlements. They advocate for their clients' best interests, ensure compliance with legal requirements, and draft the necessary legal documents.

73. Lifetime Payment Guarantees

Structured settlements can include lifetime payment guarantees, ensuring that recipients receive payments for the rest of their lives. These guarantees provide a level of financial security and peace of mind, particularly for individuals with long-term medical needs.

74. Structured Settlements and Workers' Compensation

Structured settlements are commonly used in workers' compensation cases. Injured workers may receive structured settlements to cover medical expenses, lost wages, and rehabilitation costs.

75. Notification and Reporting Requirements

Structured settlements may require periodic reporting to authorities or insurance regulators, depending on state laws and regulations. Compliance with reporting requirements is essential to ensure that the structured settlement remains valid and tax-free.

76. Guaranteed Minimum Payments

Some structured settlements include guaranteed minimum payments, regardless of whether the recipient is alive to receive them. This provides financial protection to the recipient's beneficiaries in case of premature death.

77. Court-Ordered Structured Settlements

In some cases, structured settlements may be ordered by the court, particularly when it involves minors or incapacitated individuals. The court oversees the establishment and administration of these settlements to ensure they are in the best interests of the recipients.

78. Structured Settlement Protection Acts

Many states have enacted Structured Settlement Protection Acts (SSPAs) to regulate the sale or transfer of structured settlement payments. These laws are designed to protect recipients from unscrupulous buyers and ensure that any sale is fair and in the recipient's best interest.

79. Structured Settlements for Employment Benefits

Structured settlements can also be used to provide retirement or pension benefits to employees. Employers may opt for structured settlements to fund post-employment benefits, ensuring financial security for retirees.

80. Governmental Structured Settlements

Government entities, such as municipalities or state governments, may use structured settlements to address legal claims or liabilities. These structured settlements can help governments manage financial obligations over time.

81. Structured Settlements and Guardianship Funds

Structured settlements may fund guardianship funds for individuals with disabilities who require court-appointed guardians. These funds can provide ongoing financial support for the care and well-being of the incapacitated individual.

82. Structured Settlements for Mass Tort Litigation

In mass tort cases involving multiple plaintiffs, structured settlements can be used to ensure fair compensation and financial security for all injured parties. These settlements can be highly complex and may involve multiple annuity contracts.

83. Structured Settlements and Legal Malpractice Claims

In cases where legal malpractice leads to financial harm, structured settlements can be used as a means of compensating clients for the negligence of their attorneys. These settlements can provide financial restitution for legal errors.

Structured settlements remain a valuable financial tool in various legal contexts, offering recipients a stable and tax-advantaged income stream. They are versatile and adaptable to a wide range of situations, providing recipients with financial security and flexibility in addressing their unique needs and goals. However, it's essential for recipients to fully understand the terms and implications of their structured settlements and seek professional guidance when necessary.