THE DETAILS OF A STRUCTURED SETTLEMENT
Here you'll find an abbreviated summary of structured settlements, how it works and its benefits.
For years, structured settlements have been widely used in personal injury settlements to compensate injury victims. In a structured settlement, an agreement is reached between the parties under which the injured person receives damages in the form of a stream of periodic payments. These payments, such as lifetime monthly income, are tailored to meet the injured party’s future medical expenses, basic living, and investment needs.
The payments may be scheduled for any length of time and are structured to meet the financial needs of the individual and their family. They may include lump sum payments to provide for future needs such as college education, and can even be compounded annually to offset the impact of inflation.
A structured settlement may be agreed to privately, as in a pre-trial settlement, or it may be required by a court order, as in a settlement or judgment involving a minor.
A structured settlement is a proven, effective solution for the financial needs of personal injury victims.
Legal professionals, plaintiff attorneys, judges and defense attorneys advocate the use of structured settlements because they can effectively meet an individual’s needs for security, and provide more benefits over time than a single, lump sum settlement.
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?
When Should A Structured Settlement Be Considered?
Structured settlements are ideally suited for cases involving the following situations:
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:
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.