What are Some of the
Federal Tax Rules
That Make Structured
Settlements Beneficial?In The Periodic Payment Settlement Act of 1982 (P.L. No. 97-473), Congress adopted specific tax rules to encourage the use of structured settlements to resolve physical injury tort actions.

First, Section 104(a)(2) of the Internal Revenue Code was amended to clarify that the full amount of the periodic payments constitutes damages, which are tax-free to the victim unlike the investment earnings on a lump sum, which are fully taxable.

Second, Congress adopted IRS Code section 130 to provide a mechanism under which badly injured tort victims suffering harm well into the future could receive the stream of damage payments from a financially secure and experienced institution through the "qualified assignment" process described above.

In order to protect the public, Congress specified in Section 130 the requirements to establish a qualified assignment:

• The assignee assumes the liability from a party to the suit or agreement;
• The payments are fixed and determinable;
• The payments cannot be accelerated, deferred, increased or decreased, or otherwise changed after the agreement is reached;
• The assignee's obligation is no greater than the obligation of the assignor;
• The periodic payments are excludable from the recipient's gross income under Section 104(a)(2);
• The injury must be a physical sickness or injury;
• A qualified funding asset (an annuity or U.S. Government obligation) must be used to fund the periodic damage payments.