Why Are Structured Settlements Desirable?

Historically, damages paid as a result of a personal injury claim or lawsuit came in the form of a single lump sum at the time of settlement or judgment. This kind of payment may place the claimant (or his family) in the position of managing a large sum of money, intended to provide for a lifetime of medical and income needs.

Security and safety are two concerns most families consider. A Structured Settlement is insulated from outside creditors. No one can attach, invade or take away these payments. Not even the I.R.S., bankruptcy court, divorce court, or any other outside creditors can attach payments from a Structured Settlement.

The danger is real that traditional investments may cause losses resulting in shortfalls in funds necessary to cover future needs of a seriously injured person. In addition, in today’s money market, returns are uncertain at best as seen by the volatility of stocks, bonds and other traditional investments.

Structured settlements were developed to create a planned and consistent level of income over time, backed by guarantees from large financial institutions.

The United States Congress favored structured settlements, such that it passed enabling Federal tax legislation, making structured settlements free of federal income tax.

How Do Structured Settlements Work?

The defendant/insurer, prior to final agreement, settles for a stream of periodic payments according to the claimant’s needs and wishes, including income, future medical requirements and future lump sum payments.

The defendant then purchases an annuity to fund the future payments, or assigns its obligation to an assignee, which funds the payments with an annuity. The claimant is named as the payee and receives payments directly from the annuity company.

Annuity contracts have been the preferred way of funding because of their flexibility for settlement design. Virtually any payment plan can be customized to meet specific needs. An annuity is a life insurance contract, which provides future payments over time at agreed upon dates in the future.

Where monthly income is required, payments can commence as soon as one month after the case settles. The annuity company will issue the first payment on the agreed upon date, and the claimant will receive a copy of the annuity policy, outlining all future payments to be made.

Where future lump sum payments have been agreed to, payment will be made on the date(s) agreed as a part of the settlement agreement.

What Are The Benefits of Structured Settlements?

The claimant receives compensation when they desire. Most individuals receive income on a monthly basis, and the structured settlement can be designed to accommodate this pattern of income. Instead of receiving a lump sum that has to be invested at risk, and managed for a fee, the recovery is paid as principal and interest over time. This provides a more desired vehicle for consistent and necessary income.
Where most investments provide non-guaranteed investment return the structured settlement pays both now and into the future, providing a guaranteed lifetime of income benefits.
With structured settlements there are no future investment fees, management fees, or commissions.
The full amount of the damage payments is tax-free. A lump sum received for physical injury would be tax-free, but the investment earned over the years on that lump sum would be taxable as ordinary income. By structuring the settlement, the claimant avoids this taxation, and can receive more compensation over time than a lump sum settlement.
Structured annuities can offer rates of return that are highly competitive with other financial instruments. (See Investment Chart attached) With a properly designed structured settlement, a claimant can avoid the risk of outliving his or her recovery by transferring the risk to a secure financial institution.

When Should A Structured Settlement Be Considered?

Structured settlements are ideally suited for cases involving the following situations:

For temporarily or permanently disabled plaintiffs
In Guardianship cases, including minors or those incapable of providing for themselves financially
In wrongful death cases where the surviving spouse and/or children require replacement of the income of the deceased spouse
For severe injury, especially those with long-term needs for medical care, living expenses, support of family, and income replacement
To increase a current standard of living with additional monthly income
To establish retirement income, or enhance an existing retirement account, 401-k, or IRA.
To meet long-term rehabilitation or permanent care facility expenses
To provide for future costs of high school or college, down payment on a home, or monthly mortgage payment
To establish a memorial fund in the name of a loved one or family member

What Are The Federal Tax Laws That Make Structured Settlements Beneficial?

In The Periodic Payment Settlement Act of 1982 (P.L No. 97-473), Congress adopted specific tax rules to encourage the use of structured settlements to resolve physical injury lawsuits.

First, Section 104(a)(2) of the Internal Revenue Code was amended to clarify that the full amount of the periodic payments constitutes damages, which are tax-free to the victim – unlike the investment earnings on a lump sum.

Second, Congress adopted Code Section 130 to provide a mechanism where injured victims could receive the stream of damage payments from a financially secure institution through the “qualified assignment” process described earlier.

Congress specified the S.130 guidelines to establish a qualified assignment:

The assignee assumes the liability from a party to the suit or agreement
The payments must be fixed and determinable
The payments cannot be accelerated, deferred, increased or decreased, or otherwise changed after the agreement is reached
The assignee’s obligation is no greater than the obligation of the assignor
The periodic payments are excludable from the recipient’s gross income under Section 104(a)(2)
The injury must be a physical injury or sickness
A qualified funding asset (an annuity or U.S. Government obligation) must be used to fund the periodic damage payments

Conclusion

A structured settlement is a proven, effective solution for the needs of personal injury victims.

Legal professionals, plaintiff attorneys, defense attorneys, and judges among others recommend the use of structured settlements because they can effectively meet a claimant’s needs for security, as well as provide more benefits over time than a single, lump sum settlement.

Structured Settlements can meet virtually any income objective, and are considered a safe, secure investment vehicle for long term stability and income.

Structured settlements provide peace of mind for those seeking to provide for their needs and those of their families both today and in the future.