Wondering about the tax liabilities stemming from assignment of a Structured Settlement or a Structured Payment Arrangement revenue stream?

Well, you are not alone. Almost all of our readers/members have landed here while looking for answers to those very same issues.

Here is the short answer to this question: In most cases, sale (assignment or transfer) of your right to a structured revenue stream is likely to result in a significant tax liability. Read on for additional information on this subject matter.

A Structured Settlement generally provides for periodic payments. In many cases, such periodic payments are provided for as compensatory or punitive damages in legal settlements involving personal physical injuries, or physical sickness. In some cases, it may be awarded to compensate for claims involving workmen's compensation cases for work related personal injuries, or a sickness caused by occupational hazards.

Provided certain requirements are met relating to such payments, they are usually excludable from income by the recipient -especially when it is in the form of periodic payments.

Considering that the Federal government forgoes taxation of the earnings component of each year's annual payment, there is an economic benefit in the structured settlement (periodic payment) arrangement. If one were to opt for a lump sum payment for the settlement, therefore, one must carefully examine any tax liabilities that may potentially result from opting for a one-time payment for such a settlement.

Generally speaking, the federal tax law allows for an exclusion from gross income to be provided for amounts received for agreeing to a qualified assignment, but only to the extent that the amount so received does not exceed the aggregate cost of any qualified funding asset.

It is interesting to note, however, that despite the implicit tax subsidy that most structured settlements provide, the majority of personal injury awards are paid as lump sum payments and not through structured settlement arrangements.

If you (the individual recipient of a structured settlement) wish to sell your rights at a later date, you must carefully compare the your true cost of selling your structured settlement (including any tax liabilities thereof) in lieu of a lump sum payment.

Considering the aforementioned (potential) tax liabilities, it is highly advisable that you carefully weigh the value of the purchase price being offered to you and compare it to the expected present discounted value of the income stream that you are considering to sell. Consulting with a professional specializing in sale of a structured revenue stream is highly recommended.

It must also be noted that not all structured settlements can be assigned (i.e. transfer of structured settlement payment streams) -especially if such sales are deemed inconsistent with the purpose of the tax provisions.