Introduction of Annuity Settlements
Plaintiffs injured in an accident can often opt for monthly payments rather than a lump sum settlement payment, either permanently or for a limited duration.
In most instances, defendants or casualty insurance carriers purchase qualified funding assets such as an annuity or government bond to meet payment obligations and guarantee future obligations – this practice is commonly known as structured settlement.
Annuity Settlements Tax-Free Income
An annuity is a popular wealth transfer tool that can serve as an alternative to lump sum death benefits by offering gradual income payments that stretch over a specific time or indefinitely, which may help lower tax bills while providing savings in legal, estate administration and probate costs.
Structured settlement annuities for personal injury and workers’ compensation cases are exempt from tax, helping protect clients against large lump sum payouts pushing them into higher tax brackets.
Congress and state laws known as Structured Settlement Protection Acts have instituted stringent rules for purchasers who purchase annuities from people settling injuries or deaths claims in order to prevent factoring companies from exploiting annuitants with guaranteed term contracts (single life with a certain period). If inherited structured settlement payments become fully taxable at some point during life expectancy, then such annuity payments become fully taxable payments.
Annuity Settlements: Tax-Free Growth
The government does not consider settlements from personal injury and wrongful death cases to be income, so annuity payments made as part of them are exempt from taxes – this includes capital gains as well as any interest earned during its life span.
An annuity can be tailored to pay out over multiple lifetimes or the certain number of years; some plans even feature annual cost-of-living adjustments (COLA). Furthermore, an annuity allows plaintiffs to select how their payments are deposited as well as when and how a lump sum payout should occur.
An annuity can also provide more returns than traditional investments by selecting an indexed annuity, which bases its payouts on the performance of a financial index and has no management fees or commissions attached to its purchase or sale. Selling structured settlement annuities may incur taxes; however, selling them typically requires consulting a licensed financial advisor beforehand to understand all potential implications before proceeding with their transaction.
Annuity Settlements: Tax-Free Expenses
Structured settlements are increasingly popular among attorneys, judges, and disability advocates because they help injury victims cover known expenses like rent and ongoing medical bills through guaranteed monthly payments. Congress has recognized this financial strategy by making structured settlement annuity payments tax-exempt; your attorney will need to transfer your lump sum payment into an assignment company, which then sells and pays you regular payments without taxes being withheld from them.
Your payment plan can also be tailored to fit your lifestyle by offering weekly, monthly, quarterly, or annual payments with cost-of-living adjustments built into it to help ensure you never outlive your funds. Likewise, these features promote responsible spending while still enabling nonexempt investments with dividends and interest as an avenue to earning extra income—something not possible with lump-sum investments like stocks or real estate.
Tax-Free Transfers
One of the most frequently asked questions by annuity owners is whether it is possible to transfer structured settlement payments. Although this can often be beneficial, it’s essential that all tax implications associated with any transfer strategy be thoroughly explored before committing.
Structured settlements have earned the support of attorneys, legislators, judges and disability advocates for helping injury victims manage expenses such as rent and medical bills with regular annuity payments. Congress recognized the importance of periodic payment plans by making structured settlement earnings exempt from taxes.
Avoiding taxes on structured settlements requires refraining from transferring the contract for any reason, as rules surrounding its transfer can be complex and ever-evolving. Consult an experienced advisor prior to making decisions relating to this area. There are multiple strategies available, including placing it into an irrevocable trust to shield it from estate taxes while still permitting access to funds and investing elsewhere.