Structured Settlement – Definitions, Do’s and Don’ts
Settlement services are available for injured Americans to secure their future by funding the purchase of a structured settlement. Theses "structures" typically pay retirees an income and also provide tax-deferred payments. Structured settlements are often used in cases of life-threatening injuries or chronic conditions because the payments are guaranteed, and they can be funded with pre-tax dollars, unlike other forms of disability compensation that must come from company funds, personal savings, or other benefits.
In order to set up a structured settlement agreement in your case, you will need to approach your financial advisor who has experience in these types of plans for help setting one up. Your financial advisor may help you find an investor who will purchase the structured settlement and also help with the tax reporting. The process of selling your structured settlement will vary with each state, so research your specific state laws and regulations to determine what steps must be taken in order to sell a structured settlement.
The sale of a structured settlement is subject to federal and state laws and regulations, including the federal Tax Code, as well as states' taxation rules. State law governing structured settlements can vary greatly from one jurisdiction to the next. Tax consequences of selling a structured settlement are fairly complex due to their nature of being taxed as well as non-taxable income at different points in time.
The following information has been reviewed by qualified legal, tax, and investment advisors and is intended to provide general information about structured settlement sales in your state. It should not be considered legal or tax advice or a substitute for obtaining such advice from an advisor. No attorney-client relationship is created by this document. In addition, you should consult with your attorney and/or accountant, as they are the appropriate professionals to assist you in making all necessary decisions in connection with selling a structured settlement. Please review your specific state laws governing structured settlements before proceeding with this transaction.
Before selling a structured settlement, you should review the following state statutes and their corresponding regulations:
Types of Structured Settlements in the United States (and the individual states within which they are sold):
State Statute Description AK/HI State Laws | Other Taxes Alaska Legislative Bill 23 (SB 89) eliminates the deductions for fines and penalties imposed by Alaska courts. AL Tax Laws - Taxable Distributions, Generation-Skipping Transfer Restrictions; Real Estate, Other Property. Alaska Stat. ANN. §§ 17.30(a)(2), 30.02; AL Admin Regs § 11A-17-311 to -315; 22 USCS § 203 (2000). AR Tax Laws - Taxable Distributions, Generation-Skipping Transfer Restrictions; Real Estate, Other Property. Alaska Stat. ANN. §§ 17.30(a)(2), 30.02; AL Admin Regs § 11A-17-311 to -315; 22 USCS § 203 (2000). CA Tax Laws - A Registered Investor can make a single payment of $250,000 per year (in the year of the payment) on their 1040 Schedule A and itemize deductions for it as an interest expense under the maximum standard deduction available to all taxpayers regardless of income level or marital status. California does not allow for an exclusion from distribution to certain trusts pursuant to Section 409A. CA Tax Laws - Garnishment and Other Proceedings, Individual Retirement Arrangements, Bank Accounts, Life Insurance & Death Benefits: In a proceeding in which a judgment debtor's wages are subject to attachment or garnishment or in which a third party has money or property in his possession or control belonging to the judgment debtor, unless the party seeking to enforce the judgment shows that it has obtained a prior court order authorizing garnishment of the judgment debtor's interest in an individual retirement account (IRA) or in ERISA-qualified benefits maintained for him by others, or unless there is no such interest, this section does not permit the attachment or garnishment of any such interest. California Labor Code §§ 706.542-706.547. CO Tax Laws - A Registered Investor can make a single payment of $250,000 per year (in the year of the payment) on their 1040 Schedule A and itemize deductions for it as an interest expense under the maximum standard deduction available to all taxpayers regardless of income level or marital status. Colorado does not allow for an exclusion from distribution to certain trusts pursuant to Section 409A. CO Tax Laws - Garnishment and Other Proceedings, Trusts, Individual Retirement Arrangements, Bank Accounts, Life Insurance & Death Benefits: In a proceeding in which a judgment debtor's wages are subject to attachment or garnishment or in which a third party has money or property in his possession or control belonging to the judgment debtor, unless the party seeking to enforce the judgment shows that it has obtained a prior court order authorizing garnishment of the judgment debtor's interest in an individual retirement account (IRA) or in ERISA-qualified benefits maintained for him by others, or unless there is no such interest, this section does not permit the attachment or garnishment of any such interest. Colorado Labor Code §§ 7-76-101 to -103. CT Tax Laws - A Registered Investor can make a single payment of $250,000 per year (in the year of the payment) on their 1040 Schedule A and itemize deductions for it as an interest expense under the maximum standard deduction available to all taxpayers regardless of income level or marital status. Connecticut does not allow for an exclusion from distribution to certain trusts pursuant to Section 409A. DE Tax Laws - A Registered Investor can make a single payment of $250,000 per year (in the year of the payment) on their 1040 Schedule A and itemize deductions for it as an interest expense under the maximum standard deduction available to all taxpayers regardless of income level or marital status. Delaware does not allow for an exclusion from distribution to certain trusts pursuant to Section 409A.
AL Tax Laws - Taxable Distributions, Generation-Skipping Transfer Restrictions; Real Estate, Other Property. Alaska Stat. ANN. §§ 17.30(a)(2), 30.02; AL Admin Regs § 11A-17-311 to -315; 22 USCS § 203 (2000). AK/HI State Laws | Other Taxes Alaska Legislative Bill 23 (SB 89) eliminates the deductions for fines and penalties imposed by Alaska courts. AL Admin Regs § 11A-17-311 to -315; 22 USCS § 203 (2000). AR Tax Laws - Taxable Distributions, Generation-Skipping Transfer Restrictions; Real Estate, Other Property.
CA Tax Laws - A Registered Investor can make a single payment of $250,000 per year (in the year of the payment) on their 1040 Schedule A and itemize deductions for it as an interest expense under the maximum standard deduction available to all taxpayers regardless of income level or marital status.
Conclusion: This article is the first in a series of articles about Structured Settlements.
To access the full body of Federal and State Law about Structured Settlements please browse our comprehensive Federal and State Law Archives. To request an interpretation of Federal or State law, please consult us.
About the Author: Scott Kannenberg is a CPA, attorney and author.