Wed. Jun 7th, 2023

Divorce and Structured Settlement Annuities

Structured settlement annuities are payment arrangements that make regular, scheduled payments over an agreed upon period. They can be used for many needs such as funding a child’s college education or paying off mortgage debt.

Structured settlements can be extremely helpful during divorce proceedings and offer individuals long-term peace of mind. However, structured settlements not only have their advantages, but they’re not without their drawbacks as well.


Structured settlements are financial arrangements that guarantee a steady income for an agreed-upon period of time. They can be structured in various ways to fit each client’s individual requirements.

Structured settlements offer many advantages to divorcees. Not only does it protect their assets, but also guarantees that the money will last as long as needed.

Another advantage is the protection of payments from outside creditors. This ensures that no one, not even the IRS, bankruptcy court or divorce court, can attach or invade settlement funds.

This can be beneficial in many scenarios, such as safeguarding children from predators or guaranteeing college tuition payments are made on schedule. Furthermore, it helps guarantee payments remain steady throughout a beneficiary’s lifetime.

An initial lump sum payment may be large, followed by smaller periodic payments over the life of an annuity. This strategy may be especially advantageous in cases where claimants have accumulated numerous expenses such as medical bills or mortgage payments.

If you are representing a client who has been injured in an accident, it is essential that they understand the advantages of structured settlements. These include being tax-exempt and immune from creditor attachment; plus, these payments provide lifetime income without triggering a taxable event.

Additionally, structured settlements can offer rates of return that rival other financial instruments. For instance, if someone has a high income tax bracket and invests their lump sum in traditional investments, any interest earned would be taxable regardless of how much was received from a structured settlement.

Due to these considerations, it’s essential for clients to consult an experienced attorney about their available options. A knowledgeable legal professional can explain the advantages of a structured settlement and answer any queries your client may have about its application in their particular case.

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If you plan to sell your structured settlement annuity during divorce proceedings, there are a few tax implications you should be aware of. First, if the annuity is sold before its full depletion has occurred, taxes on the sale proceeds may have to be paid; additionally, any earnings generated after selling the annuity must also be reported and taxed accordingly.

Additionally, if you wish to sell an annuity during divorce proceedings, the IRS requires that you fill out a QDRO. This form is necessary for any annuity owned through qualified retirement accounts such as IRAs and 401(k)s and can help avoid tax penalties if the annuity cannot be exempted from taxes.

Another key tax consideration to be aware of is how to divide a jointly owned annuity. Divorce courts usually permit couples to divide their annuities based on the original contract terms and protect both parties’ tax exemptions.

One way to avoid paying taxes on a jointly owned annuity is to transfer it out of the couple’s joint account and into a non-qualified annuity. Alternatively, you could sell the annuity to another individual and take advantage of a 1035 exchange.

Your structured settlement may or may not be taxed, depending on the type of damages received and the language of your settlement agreement. It’s typically wise to consult a financial or tax expert about your individual situation so you can make an informed decision that is beneficial for all involved.

Structured settlements are intended to provide regular payments over time, rather than a single lump sum payout that could be misused. This helps injured parties meet their living expenses and keeps them out of poverty.

Congress passed the Periodic Payment Settlement Act in 1982 to promote structured settlements in physical injury and wrongful death cases. Later that same year, workers’ compensation cases involving employees who were hurt on the job also received this tax-exempt benefit.

Payment options

Negotiating a divorce settlement requires being aware of the various payment options provided under structured settlement annuities. This will give the receiving spouse access to payments tailored to their specific needs, such as short term periodic payments, lifetime income streams, college funds or retirement funds in either lump sum or lifetime payments – plus many more possibilities.

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Structured settlement annuities are life insurance products that provide tax-exempt periodic payments to an injured party for a specified period of time. These payments are commonly used to settle personal injury claims but may also be utilized in cases such as product liability or wrongful death claims.

The payment schedule is tailored to meet the needs of an injured individual, and guaranteed by the insurer who issued the annuity. Because annuities don’t fluctuate with market fluctuations like stocks, bonds or mutual funds do, they offer a reliable source of financial security.

Furthermore, structured settlement annuities are exempt from the 10% tax penalty applied to withdrawals made before age 59 1/2. This can be especially beneficial for individuals who may be concerned about their future finances.

Structured settlement annuities have become more and more popular over time due to their ability to provide a lump sum of money that can be used for debt repayment, retirement planning, or any other financial objectives.

Payments can be scheduled according to your needs: monthly, quarterly, biannually or annually. They may even be set aside for larger life expenses like college tuition.

Due to their formula-based payments and ability for adjustment, annuities are less risky than traditional annuities. However, you should be aware that if you fail to make your payments on time, they will be deducted from your income.

Structured settlement annuities can be a great tool for paying child support in divorce cases, but they come with their own challenges. If the settlement amount is excessively large, it may not cover all your needs and you may feel compelled to spend it on unnecessary items. Furthermore, it may be challenging to renegotiate the terms of the annuity contract, restricting your options.


Liquidity, or the ease with which a financial asset can be converted to cash without losing its monetary value, is an important factor when assessing its worth. Liquidity also plays a significant role in deciding if an investment is worthwhile.

Liquidity of an asset or collateral depends on factors like its maturity, the speed at which it can be converted into cash and its capacity for return. Treasury bills, cheques and foreign currencies are the easiest assets to convert into money; on the other hand, securities that take longer to convert or have limited liquidity may experience losses when sold.

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High liquidity markets are those where bid and ask prices are closely aligned, making it simple for buyers and sellers to connect. This facilitates businesses, governments, and other organizations in buying or selling goods and services quickly.

Liquidity is an indicator of a company’s financial health and stability. It can be calculated by dividing either the current balance or quick ratio (excluding inventory and prepaid expenses) by current liabilities.

Companies can quickly evaluate their current assets and how much cash is necessary to cover short-term liabilities such as debt payments or employee salaries. Furthermore, this calculation helps businesses secure loans or other forms of funding.

It can also be useful in assessing the health of a company’s assets, which may be difficult to value in an uncertain economic climate. Investing in liquid assets helps ensure that businesses make necessary investments without worrying about lack of funding.

Another way to assess an asset’s liquidity is by considering its risk profile. The higher the risk, the more susceptible it will be to fluctuating with market fluctuations. Companies with significant fixed-income exposure should pay particular attention as this could result in a loss of value if investments are negatively affected by volatility in the market.

Jeffrey Augers
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By Jeffrey Augers

Jeffrey Augers is a highly skilled and experienced financial analyst with over 12 years of experience in the finance industry. He has a proven track record of delivering exceptional financial insights and recommendations to clients, empowering them to make informed decisions and achieve their financial goals. Jeffrey holds a Bachelor's degree in Finance from the University of Michigan, and an MBA from the Wharton School of Business.