Defer Taxation on Taxable Damage Awards or Sale of Appreciated Assets
Receiving a lump sum settlement after settling a taxable damages suit (employment discrimination, sexual harassment, age discrimination) can lead to quick dissipation of the settlement. First, the government gets its taxes since the entire amount of the settlement is taxable in the year of receipt. Any investment of the settlement proceeds has to be done on an after tax basis. Second, poor management of the funds can lead to having nothing left very quickly. A cash settlement may not result in a positive outcome for you.
A structured settlement or periodic payment plan via an annuity can result in a substantial tax savings and effective financial management of the settlement proceeds. Comparing a professionally managed periodic payment arrangement that is a pre-tax investment with a lump sum settlement illustrates the power of this solution. Having the ability to earn interest on the principal investment, accumulating interest on deferred payments and interest on the deferred taxes produces an attractive result for you. You may wish to review the revenue ruling (hyperlink) to learn more about the power of deferral of taxation of your damages.
Likewise, if you are selling highly appreciated assets you can invest the proceeds pre-tax and on a tax deferred basis. This is called a Structured Sale. A structured sale is a special type of installment sale pursuant to Internal Revenue Code Section 453. Installment sales permit sellers to defer gains on the sale of a business or real estate to the tax year in which the related sale proceeds are received. Structured sales allow the seller of an asset to pay taxes over time while having the payments guaranteed by a high credit quality alternate obligor, who accepts assignment of the buyer’s periodic payment obligation. Transactions can currently be done as small as $100,000.
In a structured sale, rather than the buyer paying the installments, the buyer pays cash, some of which is used as consideration for a third party assignment company to accept the payment obligation. The assignment company then purchases an annuity from a life insurance company with high financial ratings from A. M. Best. Case law and tax precedents have long supported substitution of obligors include Rev. Rul. 82-122 amplifying 75-457 and Wynne v. Commissioner 47 B.T.A. 731 and Cunningham v. Commissioner 44 T.C. 103. In addition, a properly handled transaction will avoid issues with constructive receipt and economic benefit. For more information on structured sales, please visit www.structuredsalesgroup.com