What Is a Structured Settlement?
A structured settlement is an arrangement in which a personal injury plaintiff receives their damages as a series of periodic tax-free payments over time, funded through an annuity purchased by the defendant’s insurer. Structured settlements are common in catastrophic injury cases, cases involving minors, and situations where long-term income replacement is the primary need.
Tax Treatment Under Federal and New Mexico Law
Under IRC § 104(a)(2), structured settlement payments from a physical injury case are excluded from federal gross income—including all the growth earned by the underlying annuity. New Mexico follows the federal tax treatment, so the payments are also state-income-tax-free. This tax advantage can add up to hundreds of thousands of dollars over the life of a long-term structure and is the primary financial argument for structuring large settlements.
If a structured settlement needs to be sold or transferred to receive cash sooner, the New Mexico Structured Settlement Protection Act governs the process and requires court approval to ensure the transfer is in the recipient’s interest.
Lump Sum vs. Structured Settlement: The Tradeoffs
- Lump sum: Full control immediately. You invest and manage it. Requires financial discipline—PI funds are finite and frequently exhausted prematurely.
- Structured settlement: Guaranteed tax-free income stream. Protected from creditors in many cases. Less flexibility if circumstances change. Cannot easily access the underlying capital.
Example Scenario
Sofia, 29, loses the use of her left hand in a machine accident in Clovis and settles for $1.2 million. She chooses a hybrid: $200,000 immediately for medical bills and home modifications, and $1 million structured as $3,800/month for 30 years (total $1,368,000), all tax-free. The structure provides more total income than investing a lump sum in taxable accounts at a comparable return.
Frequently Asked Questions
Are structured settlement payments taxable in New Mexico?
No. Structured settlement payments from a physical injury case are excluded from federal gross income under IRC § 104(a)(2), and New Mexico follows federal tax treatment. The annuity growth is also tax-free, which is the primary financial advantage of structuring large PI awards.
Can I sell future structured settlement payments in New Mexico?
Yes, but court approval is required under New Mexico’s Structured Settlement Protection Act. Factoring companies that purchase structured payments offer 60–80 cents on the dollar. Selling should be a last resort—the tax-free nature and guaranteed income stream are more valuable than the discount rate factoring companies offer.
Have questions about structuring your New Mexico settlement? Call El Gringo Law at (505) 207-5000 for a free case review.
