Income received from court awards as a result of personal injury is normally not taxable. For this reason, many personal injury awards are set up as structured settlements, usually in the form of an annuity, to totally avoid paying taxes on the income. This is one of the primary advantages of structured settlements where you receive payments over a specific period of time.

However, the income tax treatment can change completely when a structured settlement is sold. There are quite a few companies out there now who will offer to purchase structured settlements from individuals wanting to obtain a lump sum of cash in exchange for periodic payments. Once the periodic payments from a structured settlement are sold, the proceeds normally lose their tax-free status.

As you can imagine, with companies competing to buy structured settlements for lump sums of cash, abuse is a serious concern. So, in 2002, President Bush signed legislation that attempts to stop companies from abusing individuals who are selling part or all of their structured settlement. Most states now enforce very strict requirements and even require court approval before any structured settlement sale can take place, otherwise a substantial additional tax is placed on the proceeds of the sale. These new laws are intended to protect people from selling a structured settlement for considerably less than its true value.

Structured settlement agreements are extremely complicated. Your best bet is to have a competent personal injury attorney with experience in these matters review your structured settlement contract and advise you of your options.

One of the advantages of structured settlements is the payments are tax free. But, following your death, any lump sum or additional payments to your survivors may not be tax free, so you should also consult with a qualified tax attorney about the tax consequences to your survivors of inheriting your structured settlement payments

See also my article on: How To Sell Your Structured Settlement Payments

About the author:

Michael Thompson is a freelance article publisher. To read the rest of his articles on structured settlements visit: http://ukandoit.us/MoneyMatters/StructuredSettlements-MainPage.html

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