Structured Settlement Taxation: Key Stats Retirees Need to Know

Why Are Structured Settlements on the Rise?

Structured settlements have seen significant growth in recent years, driven by the need for long-term financial stability and the appeal of tax-free annuity payments. 

These steady payments offer a level of security that a one-time lump sum settlement often cannot match.

According to the National Structured Settlements Trade Association (NSSTA), 2024 marked a record year, with $9.48 billion in structured settlement proceeds. That’s a 10 percent increase from $8.6 billion in 2023 and a 58 percent jump from $6 billion in 2022.

In 2023 alone, the industry helped nearly 30,000 injured individuals secure reliable income through structured settlements. This rise reflects a growing preference for predictable, long-term financial support, especially among claimants who want to avoid quickly spending or mismanaging a lump sum settlement.

Structured settlements are particularly valued during uncertain economic times, offering a dependable income stream for covering ongoing medical expenses and day-to-day costs. For many, the tax advantages and financial discipline that come with annuity-style payments make them a preferred alternative to traditional cash settlements.

Structured Settlement Tax Treatment

Structured settlements are often chosen as an alternative to lump-sum payouts, especially in personal injury cases. They allow claimants to receive some or all of their settlement through tax-free, guaranteed periodic payments, which offer both long-term security and peace of mind.

General Tax Rule

Under the Internal Revenue Code, all income is generally considered taxable income unless specifically excluded. This is outlined in Code Section 61, which includes most damages received from lawsuits or settlements. 

However, Code Section 104(a)(2) provides an important exception for structured settlement payments made due to:

• Personal physical injury
• Physical sickness
• Wrongful death
• Workers’ compensation

In these situations, all annuity payments, including interest or investment earnings within the settlement, are completely exempt from federal and state income taxes. 

This protection is reinforced by the Periodic Payment Settlement Act of 1982, which ensures these payments remain tax-free when structured properly.

Not all settlement types qualify for this exemption. Payments for emotional distress unrelated to physical harm or for punitive damages are typically treated as taxable income. 

Likewise, settlements resulting from non-physical injury, such as employment disputes or reputational harm, do not qualify for tax-free treatment under Code Section 104.

Understanding the distinction between tax-free and taxable components is essential when navigating the legal and financial implications of a settlement.

Estate and Inheritance Tax Considerations

While structured settlement payments are typically not counted as gross income during the recipient’s lifetime, they can become part of the taxable estate if the recipient passes away before all payments are made.

 In this case, the present value of the remaining structured settlement annuity may be included in the estate and could trigger estate taxes.

As of 2024, the federal estate tax exemptions are:

• $13.61 million for individuals
• $27.22 million for married couples

These elevated thresholds were introduced under tax changes passed in 2017 but are set to expire at the end of 2025. After that, the exemptions are expected to drop to around:

• $7 million for individuals
• $14 million for married couples

This change could increase the estate tax burden for families inheriting structured settlement payments, especially when combined with other assets, such as life insurance payouts or real estate.

In addition to federal estate taxes, several states impose their own estate or inheritance taxes, which may further reduce the value passed on to beneficiaries. For example:

• Oregon has one of the lowest estate tax exemption thresholds at $1 million
• Massachusetts and Washington follow with limits around $2 million
• New York offers a higher exemption at $6.94 million, but it’s still well below the federal level

Selling Structured Settlements: Tax Implications

Selling future structured settlement payments can offer fast access to cash, but it also involves important legal steps and potential tax consequences. It’s important to consider the rules, risks, and impact on your financial future before making a decision.

Court Approval

Most states require court approval under their Structured Settlement Protection Acts to complete a sale. This process is designed to ensure that the transaction is in the seller’s best interest and that the terms are fair. Without approval, the sale may be invalid and can carry significant tax penalties.

Federal Tax Penalties for Improper Transfers

According to IRC Section 5891, any sale made without proper court approval may result in a 40% federal tax (excise tax) on the profit from the transaction. This can dramatically reduce the net payout and increase your tax liability.

Impact on Tax-Free Status and Tax Benefits

Payments for physical injury or illness are usually tax-free under a properly structured settlement agreement, particularly when a qualified assignment is used and funded by a life insurance company. 

Selling these future payments may turn them into a taxable lump sum, since the tax benefits do not carry over to the purchaser. This change in status can impact your long-term tax position.

Discount Rates and Financial Impact

Most structured settlement companies purchase future payments at a discount. According to the National Association of Settlement Purchasers, average discount rates range from 9% to 18%, though rates can be much higher for payments scheduled far into the future. 

The larger the discount rate, the less value you receive from the sale, which can weaken your long-term financial security. It’s important to evaluate the company carefully, compare multiple offers, and understand the full financial impact of the discount rate before agreeing to sell your payments.

Bottom Line

Structured settlements provide steady, reliable income that many retirees count on for long-term financial security. Knowing how these payments are taxed helps protect that income and avoid unnecessary surprises.

Tax rules, court approval requirements, and estate considerations all play a role in how much value you keep. A little planning now can make a big difference in how structured settlements support your future.

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Sources

1. “Record Use of Structured Settlements Offering Safety and Returns.” Forbes. Accessed May 14, 2025.
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2. “NSSTA Announces Record-Breaking $8.623 Billion Industry Milestone – 2023.” National Structured Settlements Trade Association. Accessed May 14, 2025.
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3. “Tax Implications of Settlements and Judgments.” Internal Revenue Service. Accessed May 14, 2025.
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4. “Tax Benefits of Structured Settlements.” 4structures.com. Accessed May 14, 2025.
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5. “’Tis the Season for Structured Settlements.” Claims & Litigation Management Alliance. Accessed May 14, 2025.
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