Most plaintiff attorneys know that a structured settlement can provide tax-free income and a host of benefits for personal injury claimants. But what about cases in which the settlement is taxable—do structured settlements still make sense?
Non-Qualified Structured Settlements
Unlike personal injury settlements, a non-qualified settlement is ineligible for tax exclusion under Internal Revenue Code Section 104. However, a claimant can elect to place all or a portion of a non-qualified settlement into a structured settlement annuity, thereby deferring income tax liability until the periodic payments are received. The option to utilize a non-qualified structured settlement must be agreed upon before settling, and the settlement agreement must include specific language allowing the claimant to structure.
Why would a claimant want to structure a taxable settlement?
The ability to defer payments can be very beneficial when it comes to maximizing the settlement proceeds and potentially minimizing the claimant’s tax burden. By placing funds into a non-qualified structured settlement, the claimant receives future periodic payments while earning interest on the pre-tax funds that have not yet been distributed. Claimants can then avoid paying taxes on the entire lump sum (and potentially getting bumped up into a higher tax bracket that year). Instead, claimants are only liable for income taxes received within a given year.
In addition to the tax benefits, carefully planned periodic payments are guaranteed1, providing the claimant with a reliable source of long-term income.
What types of cases are eligible for a non-qualified structured settlement?
Non-qualified structured settlements can be used to resolve a broad range of case types and business transactions, including, but not limited to:
Employment, Professional, and Business Cases:
- Wrongful Termination
- Sexual Harassment
- Mental Anguish
- Age, Gender or Race Discrimination
- D&O and E&O Claims
- Breach of Contract
- Construction Defects
- Intellectual Property
- Workers’ Compensation (Pre-August 5, 1997)
Personal or Individual Cases:
- Divorce (including maintenance payments and child support)
- Property Division
- Punitive Damages
- Property Damage
- Non-Bodily Injury
Other Transactions:
- Contingency-Based Attorney Fee Deferrals
- Structured Installment Sales
- Environmental Claims
- Long-Term Disability
- Fraud
Contact Sage Settlement Consulting
Involving a settlement consultant as early as possible will ensure that your client has the best financial options available. Contact our team today for more information on non-qualified structured settlements.
1Guarantees are subject to the claims-paying abilities of the issuing insurance company.
Disclaimer: Neither Sage Settlement Consulting, LLC nor its affiliates (collectively, “Sage”) provides legal, tax, or accounting advice or services. Any discussion of legal or tax matters contained herein is for illustrative purposes only and is not intended or written to be used, and cannot be used, as legal advice or for avoiding any penalties that may be imposed under Federal tax laws.