When you receive a large legal settlement—whether from a personal injury case, class action, or whistleblower award—it’s easy to celebrate the win. But before the check clears, it’s vital to understand how much of that money will actually stay in your hands after taxes. One powerful and often underused tool for maximizing settlement outcomes is the Structured Absence-of-Receipt Clause.
This clause can make the difference between paying tax now versus spreading it out over years—or sometimes avoiding certain taxes altogether.
Let’s break down what it is, why it works, and how it could protect your hard-earned settlement.
What Is a Structured Absence-of-Receipt Clause?
A Structured Absence-of-Receipt (SAR) Clause is a provision in a settlement agreement that stipulates the plaintiff (you) will not immediately receive the full settlement amount in cash or in control. Instead, the money is placed into a structured settlement or third-party vehicle where payments are made over time.
By doing this, you may defer tax liability or even convert taxable damages into tax-favored or tax-free streams, depending on the settlement type.
It works on a key principle in U.S. tax law: constructive receipt.
The IRS considers you to have received income when it is “made available” to you—even if you don’t physically have it.
If you never had control of the funds, and they go straight into a structured plan—such as an annuity or trust—then the IRS may agree that no constructive receipt occurred.
Why It Matters: The Tax Danger of Large Settlements
Here’s the kicker: Most types of legal settlements are taxable, except for certain personal physical injury claims. Examples of taxable settlements include:
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Emotional distress not linked to physical injury
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Employment discrimination claims
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Punitive damages
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Whistleblower rewards
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Breach of contract
Receiving these settlements in a lump sum can cause massive tax hits, including:
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Being bumped into the highest income tax bracket
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Losing deductions or credits due to high AGI
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Facing AMT (Alternative Minimum Tax) complications
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Triggering Net Investment Income Tax (NIIT)
But with a SAR clause, you might be able to spread those tax consequences over many years—or shield parts of it altogether.
Chart: Comparing Tax Impact – Lump Sum vs Structured Receipt
| Type of Receipt | Tax Year Recognized | Taxable Amount | Tax Bracket Impact |
|---|---|---|---|
| Lump Sum (No SAR) | Full in Year 1 | 100% | Often max bracket (37%) |
| Structured (With SAR) | Spread over years | Partial each year | Possibly lower brackets (24% or less) |
Real-World Example
Let’s say you win a $1.5 million whistleblower settlement.
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If you take the lump sum, you could owe over $550,000 in federal taxes immediately.
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With a SAR clause directing the funds into a structured annuity paying $150,000/year for 10 years, each year’s income could be taxed at a much lower rate—saving you potentially six figures over the life of the plan.
Legal Precedents Supporting SAR Clauses
Several court cases and IRS rulings support the legality and usefulness of SAR clauses. Some key examples include:
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Childs v. Commissioner (103 T.C. 634, aff’d 89 F.3d 856): Upheld that attorneys and clients could receive structured settlements through third parties without constructive receipt.
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IRS Private Letter Rulings (PLRs): These show the IRS often approves structures where the claimant has no access/control over funds prior to annuitization.
It’s not a loophole—it’s smart planning built on decades of tax doctrine.
Common Use Cases for SAR Clauses
SAR clauses are most beneficial in the following types of cases:
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Whistleblower Awards (False Claims Act, IRS, SEC cases)
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Employment Settlements (Discrimination, Wrongful Termination)
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Business Tort or IP Settlements
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Class Actions with Tiered Payouts
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Non-Physical Emotional Distress Cases
For each, the structure must be designed pre-settlement. Once the funds are issued directly, the IRS assumes constructive receipt and it’s too late.
Bar Graph: Who Uses SAR Clauses?
Key Benefits of Structured Absence-of-Receipt Clauses
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Tax Deferral: Delay taxes over years instead of paying all at once
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Bracket Management: Stay in lower tax brackets by spreading income
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Wealth Planning: Integrate payments with retirement, education, or real estate goals
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Creditor Protection: Third-party control may shield assets from certain creditors
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Peace of Mind: Ensures longevity of funds instead of risking mismanagement
Buyer Tips: What to Ask Your Lawyer or CPA
Before finalizing a settlement, ask these critical questions:
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Can this be structured using a third-party annuity or trust?
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Will the clause qualify under IRS constructive receipt rules?
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How will the settlement be allocated (wages vs. emotional distress vs. punitive)?
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Will the defense agree to fund a structured vehicle directly?
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Can we secure a private letter ruling if needed?
Remember: Once you accept and receive the funds directly, this tax-saving strategy vanishes.
Structured Settlement Providers: Are They All the Same?
Not quite. You’ll want to work with experienced providers who specialize in legal and tax structures. Look for:
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Proven IRS compliance track record
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Coordination with both sides of counsel
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Ability to customize annuities, trusts, or installment agreements
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Clear documentation for audit-proofing the settlement
The Bottom Line
A Structured Absence-of-Receipt Clause isn’t just a contract technicality. It’s a powerful tax-saving shield that can protect you from unexpected IRS bills after a legal victory.
Used correctly, it can increase your real-world value from a settlement by tens—or even hundreds—of thousands of dollars.
If you’re facing a high-value legal resolution, make sure this tool is part of the conversation. Smart plaintiffs plan their taxes as carefully as their lawsuits.
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