Lump sum disability payoff

[kathyc2]

Clients insurance company is offering to pay her a lump sum settlement in lieu of ongoing payments. I've not run across this before, and I'm guessing there would not be a way to spread out the taxability if she decides to take it?

[Y2KEA]

What is the type of annuity and ROI the client is earning on the existing contract?

Is the "insurance company" proposing a 1235 exchange or total payout?
A 1235 may be most beneficial.
If a total payout, how much is taxable?
If a 1235 exchange, where will the funds go & what will the ROI be? Is the existing contract a guaranteed/variable rate equal to or better than the new contract? (Not likely) and what type of annuity is it going in to?
Regardless, sounds like the "insurance company" is attempting to extinguish their annuity ROI "promised" return onto the policy holder so the "insurance company" can get out of a contract the "insurance company" is losing money on.
Client needs to ask the "advisor" why the "insurance company" is offering the payout & how it will benefit client (good luck with with an honest answer).
Refusing the payout may be beneficial to the policy holder, depending on ROI, and if the "insurance company" is not in danger of going out of business.
Bottom line, based on data provided:
If a total payout, some or all will be taxable. If an exchange, non taxable until reportable distributions are made.

[kathyc2]

It's not an annuity. Client has LT disability insurance, became disabled and started receiving monthly benefits in 2014. Now the insurance company sent her a letter and is offering a one time lump benefit instead of continuing to pay monthly. Similar in my mind as to how pension companies offer a one-time lump payment to no longer be liable for future payments. However, unlike a pension, this can't be rolled over to an IRA. I'm not finding how if she takes the lump sum she can spread the taxability of it out.

[New York Enrolled Agent]

It's not an annuity. Client has LT disability insurance, became disabled and started receiving monthly benefits in 2014. Now the insurance company sent her a letter and is offering a one time lump benefit instead of continuing to pay monthly. Similar in my mind as to how pension companies offer a one-time lump payment to no longer be liable for future payments. However, unlike a pension, this can't be rolled over to an IRA. I'm not finding how if she takes the lump sum she can spread the taxability of it out.

I don't think you said who paid for the DI - I assume it was the employer.

Rev Ruling 74-603 may give some insight - without other circumstances, it would appear taxable in the year of receipt.