Was Your Structured Settlement Tax-Free In 1918? An article by Patrick Farber

Most of us think the availability of a tax-free settlement option for injured parties began in the early 1980s. In fact, its roots go back to the Income Act of 1918. At that time, Congress stated that income resulting from “personal injury or illness” was exempt from taxation.

1979: Fast forward to 1979 when the IRS issued guidelines that state recurring payments to personal injured parties are tax-free. There were still some questions about how the payments could be disbursed over time while still maintaining their tax-free status.

1982: That question was resolved with the Periodic Settlement of Payments Act of 1982. In it, Congress laid out specific tax rules encouraging the use of structured settlements in physical injury cases. Section 104(a)(2) of the Internal Revenue Code agreed and noted that the full amount of structured settlements, even when paid over years, was tax-free to the injured party. The defendant or insurance company turns over the obligation to an assignee that then purchases an annuity for the settlement amount and makes payments to the claimant.

Other notable structured settlement milestones include:

1994:  Childs v. Commissioner enables attorneys to structure their continency fees. The funds accumulate tax-free in the structure’s annuity but are taxable once withdrawn.

2014: Index-Linked Annuity Payment Adjustment Rider (ILAPA) – the IRS allows structured annuity payments to be adjusted annually for inflation based on changes to the S&P 500 (up to 5 percent) and still be tax-free.

2020: Assura Trust begins combining a fixed annuity with Vanguard Growth Mutual Funds for plaintiffs and deferred attorney fees. Structured payments from both the annuity and the mutual funds are distributed tax-free to plaintiffs and tax-deferred to attorneys

When it comes to protecting the settlement proceeds of injured parties, much has happened over the last 100 years. Today, injured individuals have a variety of options to help ensure their settlement is safe and adequately covers their medical and living expenses. Despite all the gridlock in Washington, D.C., Congress and the IRS managed to get this one right.

If you’d like to discuss structured settlements in general or a particular case, please give me a call.

Pat Farber

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