Tax Implications of Selling a Structured Settlement

Posted on Mon, Mar 27, 2017 ©2021 Drucker & Scaccetti

By: Ted Nebiolo and Bruce Benjamin, CPA, MT

 

College tuition, purchasing a home, starting a business.  These are all life events that may call for a large, upfront cash outlay.  If you are receiving a structured settlement payable as an annuity, it may be an attractive solution to sell it to obtain the cash for the lump-sum payment. If you are considering this route, know the tax implications and the process that determines the real value of your settlement.

 

What is a Structured Settlement?

Payments to settle a legal, financial, or insurance arrangement are usually negotiated to be paid in installments over time rather than in a single lump sum.  These are structured settlements typically created through the purchase of one or more annuities.  

 

How Are Structured Settlements Taxed?

Structured settlements awarded for personal injury or sickness are tax exempt.  The future sale of these structured settlement payment rights for a lump-sum is also not taxable. However, structured settlements that fall outside the scope of physical injury or sickness are not tax exempt.  The sale will also be a taxable event.  

 

How Do Companies Value Structured Settlements?

The structured settlement secondary market emerged because people wanted a way to sell future payments for a lump sum today.  Selling or “cashing out” a structured settlement for a lump-sum isn’t a dollar-for-dollar proposition. Companies who buy structured settlements use a discount rate to determine the present value of the annuity.   As companies that buy structured settlements use variable actuarial assumptions, one may benefit from approaching multiple companies to protect against low-ball offers.

 

Is Selling My Structured Settlement Right for Me?

Life’s circumstances sometime force us to liquidate assets of value.  Selling a structured settlement could provide the cash for a specific need, however, possible tax implications need to be addressed.

 

Before you decide on selling a structured settlement or any annuity, talk to your tax and financial advisors to determine if it is the best solution for your situation.  The Tax Warriors® at Drucker & Scaccetti will be happy to assist you if you are considering the sale of a structured settlement.  Call on us.  We are always prepared to help.

Topics: College, home mortgage, Tax, annuities, business start-up, Cash settlements, Structered settlements

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