What Is a Structured Settlement?
A structured settlement is an arrangement in which a personal injury plaintiff agrees to receive their damages in periodic payments over time rather than as a single lump sum. The defendant (typically through an insurance company) purchases an annuity that funds the payment stream. Structures are common in large cases involving minors, catastrophic injuries, or plaintiffs who need long-term income replacement.
How Structured Settlements Work in Arizona
Under the federal Periodic Payment Settlement Tax Act of 1982 (IRC § 104(a)(2)), structured settlement payments from physical injury cases are entirely income-tax-free to the recipient—including the earnings on the annuity. This tax exemption makes structures financially attractive in large cases. Arizona does not impose additional state income tax on qualifying structured settlement payments.
If a structured settlement needs to be sold or transferred later (converting periodic payments to a lump sum), Arizona law requires court approval under the Arizona Structured Settlement Protection Act (ARS § 12-2901 et seq.) to ensure the transfer is in the recipient’s best interest.
Lump Sum vs. Structured Settlement: The Tradeoffs
- Lump sum: Full control over the money immediately. You invest, manage risk, and spend it as you choose. Requires financial discipline—PI settlement funds are finite and commonly exhausted within a few years by recipients without a plan.
- Structured settlement: Guaranteed income stream, tax-free, protected from poor investment decisions and creditors. Less flexibility. If circumstances change, you cannot easily access the capital.
Example Scenario
After a catastrophic spinal injury in a Tucson accident, James settles for $1.8 million. He is 34 years old and will need ongoing care. His attorney structures the settlement: $300,000 immediate lump sum for current medical bills and living expenses, and $1.5 million annuity paying $6,200/month tax-free for 25 years ($1,860,000 total). The tax savings versus receiving a lump sum and investing it in taxable accounts are substantial.
Frequently Asked Questions
Are structured settlement payments taxable in Arizona?
No. Structured settlement payments from a physical injury claim are excluded from federal gross income under IRC § 104(a)(2), including the interest earned on the annuity. Arizona follows federal tax treatment for PI proceeds, so the payments are also Arizona income-tax-free.
Can I sell my structured settlement payments in Arizona?
Yes, but it requires court approval. Under ARS § 12-2901 et seq., a judge must find that the transfer is in your best interest. Factoring companies that buy structured settlement payments offer significantly less than face value—typically 60–80 cents on the dollar. Selling should be a last resort.
Have questions about how to structure your settlement? Call Wood Injury Law at (623) 207-0000 for a free case review.