Structured Settlement Federal Law

Key Federal Laws Governing Structured Settlements

Periodic Payment Settlement Act of 1982

The Periodic Payment Settlement Act of 1982 (Public Law 97-473) was enacted to encourage the use of structured settlements for tort victims. It provides significant tax benefits for both payees and qualified assignees under:

  • IRC § 104(a)(2)Excludes damages received on account of personal physical injuries or sickness from gross income.
  • IRC § 130Allows qualified assignments of periodic payment obligations, enabling third parties to assume payment responsibilities without adverse tax consequences.

This law ensures that structured settlement payments are tax-free to the recipient and promotes long-term financial security for injury victims.

Structured Settlement Protection Act of 2002

The Structured Settlement Protection Act of 2002 (SSPA) was enacted as part of the Victims of Terrorism Tax Relief Act. It requires court approval for any transfer (sale) of structured settlement payment rights. Key provisions include:

  • IRC § 5891Imposes a 40% excise tax on any transfer of structured settlement payment rights that is not approved in advance by a court or responsible administrative authority under applicable state law.
  • Best InterestEnsures that transfers are in the "best interest" of the payee and their dependents, and that the payee has received independent professional advice.

This law protects structured settlement recipients from predatory practices and ensures judicial oversight of all transfers.

Victims of Terrorism Tax Relief Act of 2001

This Act includes provisions that further protect structured settlement holders, especially those affected by terrorism or certain disasters. It clarifies and strengthens the requirements for court approval and the tax treatment of structured settlements.

Court Approval Process

To sell or transfer structured settlement payment rights, federal law (and most state laws) require court approval. The process generally involves:

  1. Filing a petition with the appropriate state court outlining the terms of the transfer.
  2. Notifying all interested parties, including the original annuity issuer and any dependents.
  3. Attending a court hearing where a judge will determine if the transfer is in the "best interest" of the payee and their family, considering their financial needs and circumstances.
  4. Obtaining a court order approving (or denying) the transfer.

Note: Transfers made without court approval are subject to a 40% excise tax and may be void under federal law.

Tax Implications

  • Tax-Exempt Status: Structured settlement payments are generally tax-free to the recipient under IRC § 104(a)(2).
  • Transfers: If a payee sells their payment rights, the lump sum received may be taxable, and the transfer must be court-approved to avoid excise tax under IRC § 5891.
  • Qualified Assignments: Payments made by a qualified assignee remain tax-free if all requirements are met.

References & Further Reading

Additional Resources