What is Structured Settlement:
Structured settlement is the name of periodic payment of a lump sum amount. If there is a dispute of any kind between two parties and and that dispute has been settled through paying an amount to the claimer, but the defender is unable to pay the amount in lump sum. Then a structured settlement works. Although their case is under trial in a court a structured settlement works, instead of prolonging the case for weeks and months. What a structured settlement, actually is?
A structured settlement is a negotiated financial or insurance arrangement through which a claimant agrees to resolve a personal injury tort claim by receiving part or all of a settlement
in the form of periodic payments on an agreed schedule, rather than as a lump sum. As part of the negotiations, a structured settlement may be offered by the defendant or requested by the plaintiff. Ultimately both parties must agree on the terms of settlement. A settlement may allow the parties to a lawsuit to reduce legal and other costs by avoiding trial. Structured settlements have become part of the statutory tort law of several common law countries including Australia, Canada, England and the United States.
Structured settlements were first utilized in Canada as part of the settlement of claims made on behalf of children affected by Thalidomide (In the 1950s and the early 1960s, thalidomide was used to treat morning sickness during pregnancy. But it was found to cause severe birth defects. Now, decades later, thalidomide is being used to treat a skin condition and cancer. It’s being investigated as a treatment for many other disorders). Structured settlements are now often used in product liability and pharmaceutical injury cases (such as litigation involving birth defects from Thalidomide).
Structured settlements may include income tax and spendthrift provisions. Often the periodic payments will be funded through the purchase of one or more annuities, that generate the future payments. Structured settlement payments are sometimes called periodical payments, and when incorporated into a trial judgment may be called a “structured judgment”.
structured Settlement in United States:
Structured settlements became more popular in the United States during the 1970s as an alternative to lump sum settlements. The increased popularity was due to several rulings by the U.S. Internal Revenue Service (IRS), an increase in personal injury awards, and higher interest rates. The IRS rulings stated that if certain requirements were met, claimants would owe no Federal income tax on the amounts received. Higher interest rates result in lower present values, hence lower cost of funding of future periodic payments.
In the United States, structured settlement laws and regulations have been enacted at both the federal and state levels. Federal structured settlement laws include various provisions of the Internal Revenue Code. State structured settlement laws include structured settlement protection statutes and periodic payment of judgment statutes. Forty-seven of the states have structured settlement protection acts created using a model promulgated by the National Conference of Insurance Legislators (“NCOIL”). Of the 47 states, 37 are based in whole or in part on the NCOIL model act. Medicaid and Medicare laws and regulations affect structured settlements. A structured settlement may be used in conjunction with settlement planning tools that help preserve a claimant’s Medicare benefits. A Structured Medicare Set Aside Arrangement (MSA) will generally cost less than a non-structured MSA because of amortization of the future cash flow over the claimant’s life expectancy, as opposed to funding all the payments otherwise due in the future in a single, non-discounted sum today.
Structured settlements have been endorsed by many of the nation’s largest disability rights organizations, including the American Association of People with Disabilities. and for a time there was a Congressional Structured Settlement Caucus.
The typical structured settlement arises and is structured as follows: An injured party (the claimant) comes to a negotiated settlement of a tort suit with the defendant (or its insurance carrier) pursuant to a settlement agreement that provides as consideration, in exchange for the claimant’s securing the dismissal of the lawsuit, an agreement by the defendant (or, more commonly, its insurer) to make a series of periodic payments.
If any of the periodic payments are life-contingent (i.e. the obligation to make a payment is contingent on someone continuing to be alive), then the claimant (or whoever is determined to be the measuring life) is named as the annuitant or measuring life under the annuity. In some instances the purchasing company may purchase a life insurance policy as a hedge in case of death in a settlement transfer.
The defendant, or the property/casualty insurance company, generally assigns its periodic payment obligation to a third party by way of a qualified assignment (“assigned case”). An assignment is said to be “qualified” if it satisfies the criteria set forth in Internal Revenue Code Section 130. Qualification of the assignment is important to assignment companies because without it the amount they receive to induce them to accept periodic payment obligations would be considered income for federal income tax purposes. If an assignment qualifies under Section 130, however, the amount received is excluded from the income of the assignment company. This provision of the tax code was enacted to encourage assigned cases; without it, assignment companies would owe federal income taxes but would typically have no source from which to make the payments.
The qualified assignment company receives money from the defendant or property/casualty insurer, and in turn purchases a “qualified funding asset” to finance the assigned periodic payment obligation. Pursuant to IRC 130(d) a “qualified funding asset” may be an annuity or an obligation of the United States government.
In an assigned case, the defendant or property/casualty company does not wish to retain the long-term periodic payment obligation on its books. Accordingly, the defendant or property/casualty insurer transfers the obligation, through a legal device called a qualified assignment, to a third party. The third party, called an assignment company, will require the defendant or property/casualty company to pay it an amount sufficient to enable it to buy an annuity that will fund its newly accepted periodic payment obligation. If the claimant consents to the transfer of the periodic payment obligation (either in the settlement agreement or, failing that, in a special form of qualified assignment known as a qualified assignment and release), the defendant and/or its property/casualty company has no further liability to make the periodic payments. This method of substituting the obligor is desirable for defendants or property/casualty companies that do not want to retain the periodic payment obligation on their books. A qualified assignment is also advantageous for the claimant as it will not have to rely on the continued credit of the defendant or property/casualty company as a general creditor. Typically, an assignment company is an affiliate of the life insurance company from which the annuity is purchased.
In the less common unassigned case, the defendant or property/casualty insurer retains the periodic payment obligation and funds it by purchasing an annuity from a life insurance company, thereby offsetting its obligation with a matching asset. The payment stream purchased under the annuity matches exactly, in timing and amounts, the periodic payments agreed to in the settlement agreement. The defendant or property/casualty company owns the annuity and names the claimant as the payee under the annuity, thereby directing the annuity issuer to send payments directly to the claimant. One of the reasons an unassigned case is less popular is that the obligation is not truly off the books, and the defendant or casualty insurer retains a contingent liability. While a default is a rare occurrence, contingent liability did come into play with the liquidation of Executive Life Insurance Company of New York. Some annuitants suffered shortfalls, and a number of obligators at the wrong end of unassigned cases made up the difference.
How do a Structured Settlements work:
The process of settling a civil case through a structured settlement involves the person who has been wronged (the plaintiff), the person or company who caused the harm (the defendant), a consultant experienced in such cases (a qualified assignee) and a life insurance company.
Awarding Structured Settlements Process
- The plaintiff sues the defendant to seek compensation for an injury, illness or death the defendant caused. Often the defendant agrees to give money to the plaintiff through a structured settlement in order to keep the lawsuit from going to trial. If the case does go to trial and the judge rules in the plaintiff’s favor, the defendant may then be forced to set up a settlement.
- The defendant and the plaintiff work with a qualified assignee to determine the terms of the structured settlement agreement — that is, how much the regular payments should be, how long they should continue for, whether they should increase or be supplemented by larger payouts at certain times, and so on. The defendant provides money for the qualified assignee to buy an annuity for the plaintiff.
- The qualified assignee purchases an annuity from a life insurance company, setting up the annuity contract to match the settlement needs. Once the terms of the annuity are set, they cannot be changed. An immediate lump sum may also be set aside to cover attorney fees or to fund a specified trust.
- The life insurance company pays the plaintiff a series of payments over time, according to the terms of the annuity contract. The annuity earns interest to protect its value from inflation, and the only way for the plaintiff to get cash from the settlement ahead of schedule is to sell the right to future payments on the secondary market.
Calculating the structured settlement amount can be a complex financial task. A financial advisor or lawyer will typically hire an economist to help calculate the value of the contract.
Pros and Cons of Structured Settlement:
- Structured settlement payments do not count as income for tax purposes, even when the structured settlement earns interest over time.
- Income from structured settlement payments also does not affect your eligibility for Medicaid, Social Security Disability benefits or other forms of aid.
- In the event of the recipient’s premature death, the contract’s designated heir can continue to receive any future guaranteed payments, tax-free.
- Payments can be scheduled for almost any length of time and can begin immediately or be deferred for as many years as requested. They can include scheduled lump-sum payouts or benefit increases in anticipation of future expenses.
- Spreading out payments over time can reduce the temptation to make large, extravagant purchases, and it guarantees future income. This is especially helpful if you have a medical condition that will require long-term care.
- Unlike stocks, bonds and mutual funds, fluctuations in financial markets do not affect structured settlements.
- The insurance company that issued the annuity guarantees payments. Even in the unlikely event that the insurance company becomes insolvent, your state’s insurance guaranty association still protects you from loss.
- A structured settlement annuity contract often yields, in total, more than a lump-sum payout would because of the interest the annuity may earn over time.
- Once the terms of a settlement are finalized, there’s little you can do to alter them if they do not meet your needs. You cannot renegotiate the terms if your financial situation or the overall economy changes.
- Funds are not immediately accessible in case of an emergency, and you don’t have the opportunity to use the full amount of the settlement for investments that carry higher rates of return.
- Tapping into your structured settlement benefits without selling payments will cost you money. You will pay surrender charges and IRS penalties if you withdraw funds before age 59½.
- Some parts of a settlement, such as attorney’s fees and punitive damages, can be taxed.
- Not all states require insurance companies to disclose their fees for establishing a structured settlement or lump-sum annuity. Without this information, you could lose a significant amount of money from your settlement through administrative fees.
Structured Settlements Annuity Contracts:
Structured settlement agreements are designed to provide periodic payments over a fixed number of years. However, the plaintiff can decide how the money is distributed and how much is provided yearly. Structured settlement benefits can be delayed until retirement, or awarded through a large lump sum payment, with complementary smaller payments over time in order to pay bills or relieve debt. Benefits can also act as an additional yearly income stream, with payments increasing or decreasing through the agreement term. These types of settlements have become more common over the years because of the advantages they offer to individuals and their families.
Structured Settlement Options
- Lump Sum Settlement Considerations
- The Flexibility of Structured Settlements
- Start and End Dates
- Payment Frequency and Amount
Thanks for support of government to the Structured Settlement:
Government Support for Structured Settlements: Thanks to the Periodic Payment Settlement Act of 1982, many annuities awarded through lawsuits are exempt from income taxes.
Government Support for Structured Settlements Options:
- Ensuring Money for the Long Term
- The Pitfalls of Lump-Sum Settlements
- Qualified Versus Unqualified Settlements
- The Tax-Free Status of Qualified Structured Settlements