The Settlement Alliance

Can Non-Injury Settlements Be Structured?

Can Non-Injury Settlements Be Structured?

Oct 13, 2017

Structured settlements are often associated with settlements resulting from personal injury, wrongful death, and workers’ compensation cases. While the federal tax code permits income tax exclusion for structured settlements used in these types of cases, what about non-injury cases? Is a structured settlement still a good option?

Qualified vs. Non-Qualified Assignments

In a structured settlement transaction, the defendant (or insurance company) “assigns” its periodic payment obligation over to a third-party assignment company. The assignment company uses the funds to purchase the structured settlement annuity, which then provides payments to the claimant based on a pre-determined schedule. The assignment for personal injury, wrongful death, and workers’ compensation cases is considered “qualified,” meaning it qualifies under Internal Revenue Code §§104(a)(2) and 130 for income tax exclusion.

A “non-qualified assignment” is used for non-injury settlements—for example, divorce or wrongful termination—and while the structured settlement payments are not tax-free in this case, they are still tax-favored because the taxes are deferred on the settlement proceeds and any earned interest.

Example:

Joan is a single mom living in Syracuse, New York with her two young children. She works as a Behavior Technician and makes $45,000/year. After complaining about a superior at work, she was unjustly fired from her job. Joan’s lawyer filed a wrongful termination lawsuit for which Joan will be receiving a $100,000 settlement after paying her attorney’s fees. Joan has two options for handling her settlement proceeds: 1) accept the entire settlement as a lump sum, or 2) divert the funds into a structured settlement. After being fired, Joan found another job that pays her $40,000/year, keeping her in the 25% federal tax bracket. Because she lives in New York State, Joan also pays 6.45% in state income tax.

Option #1: Lump Sum

If Joan accepts her proceeds in the form of a lump sum, the money will be taxed at the highest applicable tax rate. The $100,000, when combined with Joan’s current taxable income of $40,000, will bump her into the 28% federal and 6.65% state tax brackets. That puts Joan’s total marginal tax rate for the year at 34.65%, so Joan can say goodbye to a large chunk of her settlement.

Option #2: Structured Settlement

If Joan decides to place the proceeds into a structured settlement annuity, she could choose how often to receive payments and how large the payments will be. Let’s say, for instance, that she wants to supplement her new $40,000/year income with an extra $20,000 broken down over 12 months. Instead of paying a higher tax rate on the full $100,000 lump sum, Joan will only be paying taxes on the $20,000 in structured settlement payments that she receives each year. When combined with her $40,000 income, Joan will be able to remain in the 25% federal and 6.45% state tax bracket. Translation: more money in Joan’s pocket.

Which types of cases can utilize a non-qualified assignment for structured settlements?

There are many types of cases that can leverage structured settlements via a non-qualified assignment, including:

  • Divorce
  • Employment Disputes
  • Sexual Harassment
  • Wrongful Termination
  • Discrimination
  • Psychological/Emotional Damage
  • Punitive Damages
  • Attorney Fees (including stand-alone)
  • Breach of Confidentiality
  • Breach of Contract
  • Construction Defects
  • Environmental Claims
  • Pre-August 6, 1997 Workers’ Compensation
  • Select other types of claims

Contact us to learn more

Our experienced settlement planning team will walk claimants through all of their settlement options. If you or your client will be receiving a settlement in a non-injury case, contact us today at 800-464-2500 or info@settlement-alliance.com

We are proud to partner with the highest rated structured settlement providers in the industry:

  • American general Life Companies
  • Berkshire Hathaway Structured Settlements
  • Liberty Life Assurance Company of Boston
  • MetLife
  • Mutual of Omaha
  • New York Life
  • Pacific Life
  • Prudential