What Do You Own/What About Taxes?

September 6, 2012 – If you are receiving structured settlement payments as a result of litigation, then you own the right to receive payments flowing from an annuity.  You do not own the annuity; instead, you own payment rights that have real/long-term value.  These payments are tax free to you as is a lump sum flowing from the sale of all or a portion of those payments.

IRS Code 104 and 130 in brief:

Section 104 of the Internal Revenue Code governs the tax treatment of structured settlements.  This section of the Code allows individuals to exclude from the calculation of gross income money received as a result of physical injuries or sickness regardless of whether the award is the result of a favorable judgment from a court of law or an out of court agreement between parties.  In 1982 the Periodic Payment Act amended this section of the IRS code for all payments whether from a suit or settlement agreement, whether paid all at once or in the future.  Of most importance for recipients of structured settlement payments was the advent of section 130 of the IRS code.  IRC Section 130 specifically allows money used to purchase an annuity or government obligation to fund personal injury settlement payments to be excluded from gross income.  In other words, Congress excluded from taxation future payments originated to compensate an injured person.  What if those payments are sold for a lump sum?  Does the receipt of this lump sum unwind the tax benefits of payments?

As covered in previous post:  Income Taxes & Your Structured Settlement, the definitive answer is NO.

IRS Code 5891, summarized:

Structured settlement factoring companies reference section 5891 of the Internal Revenue Code when purchasing the right to receive future periodic payments out of the annuity issued on your behalf.  Section 5891 allows for the imposition of a 40 percent excise tax on any sale NOT approved by an applicable state court.  Today most states have enacted laws governing the transfer process.  The most common element of each state law is the requirement that the transaction be in the best interest of the payee (you) taking into account the welfare and support of dependents and that the sale, approved in the appropriate court,  not violate any previous federal or state court order.  In other words, if you were a minor at the time of settlement, and the court included language in the settlement barring future assignment of the payments, then the future sale/assignment requires approval of the original court.  Failure to request approval to assign payments from the original court would contradict the original court’s ruling and possibly trigger the excise tax.  The seller of structured settlement payments is excepted/protected from any liability should the buyer not follow the law.   The law is written to protect the seller, not the buyer.

We realize the level of detail in the IRS code can be confusing.  Here at Annuity Transfers, Ltd. we are happy to answer any questions that you may have regarding the present value of your future annuity payments or taxes associated with the sale.  Feel free to give us a call toll-free at 888-638-0900.

September 6th, 2012

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