When it comes to placing settlement proceeds or attorney fees in an annuity, claimants and attorneys may find themselves confused about the tax implications associated with the annuity payments. They may hear the words “qualified” and “non-qualified” discussed—but how do those terms relate to settlement proceeds?
Structured Annuities: How They Work
If a claimant decides to utilize a structured settlement, the defendant (or insurance company) “assigns” its obligation to pay to a third-party assignment company. The assignment company then uses the settlement proceeds to purchase a structured settlement annuity that provides regular payments to the claimant based on a schedule previously chosen by the claimant.
When an attorney chooses a fixed annuity as the financial vehicle for their attorney fee deferral, the process is essentially the same: the defendant or insurance company directs the fees to an assignment company, which then uses the funds to purchase an annuity. The attorney receives the annuity payments on a pre-determined schedule.
A “qualified assignment” simply means one that qualifies for income tax exclusion based on the criteria defined in Internal Revenue Code §§104(a)(2) and 130. Settlement proceeds from personal injury, wrongful death, and workers’ compensation cases all fall under this designation. Not only are the settlement proceeds income-tax free, but if placed in a structured settlement annuity, the growth on the proceeds is also income tax-free.
A “non-qualified” assignment is—you guessed it—one that does not qualify for income tax exclusion. However, certain types of non-injury settlements do still have the option for tax-favored treatment. If placed in a structured annuity, taxes are only due on the proceeds as they are received. Rather than getting hit with a large tax bill for a cash lump sum payment, the tax obligation can be spread out over time.
A non-qualified assignment can be used for attorney fee deferrals and for a multitude of legal settlements, including: age discrimination, Americans with Disabilities Act, athletes’ endorsement fees, celebrity endorsement fees, construction defects, divestment, divorce settlements, environmental settlements, legal fee disputes, legal malpractice/professional errors and omissions, race discrimination, sexual harassment, structured sales, and wrongful termination.
Contact Traci Kaas to learn more about your options