What is a structured settlement?
A structured settlement (also referred to as a settlement annuity) occurs when the injured party receives multiple or periodic payments over time rather than a single lump sum at the conclusion of a personal injury case. Usually the payments are funded through the purchase of an annuity from a highly-rated life insurance company. Parties involved in handling physical injury cases know that lump-sum proceeds are tax-free to the injured party. However, what is often not considered are the tax ramifications of the investment income on those settlement proceeds, which is taxable. Additionally, receipt of a large sum can result in loss of public benefits. When benefits are properly structured, not only the principal invested, but also the investment income, are tax free to the injured party. Structuring payments can avoid loss of public benefits. Typically, future income and upfront cash for attorney fees, medical expenses and related liens are included in the package.
The term ‘structured settlement,’ according to new section 5891 of the Internal Revenue Code, means an arrangement—‘(A) which is established by—‘(i) suit or agreement for the periodic payment of damages excludable from the gross income of the recipient under section 104(a)(2), or ‘(ii) agreement for the periodic payment of compensation under any workers’ compensation law excludable from the gross income of the recipient under section 104(a)(1), and ‘(B) under which the periodic payments are—‘(i) of the character described in subparagraphs (A) and (B) of section 130 (c)(2), and ‘(ii) payable by a person who is a party to the suit or agreement or to the workers’ compensation claim or by a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with section 130.
A structured settlement is an alternative to a conventional lump-sum settlement. It is a method of settling a claim for damages in respect of personal injuries or wrongful death by the payment of periodic sums for designated periods of time. The defendant’s liability for payment of the periodic sums is funded through the purchase of an annuity contract from a life insurance company.A structured settlement is a tax-free financial package paid out over time and tailored to meet the specific needs and preferences of individual plaintiffs.The structure is a type of annuity underwritten by a life insurance company, and guaranteed by the defendant’s casualty insurance company (like ICBC).The annuity payments may be scheduled for any length of time even as long as the plaintiff’s lifetime and may consist of regular installment payments and/or future lump sums. Payments can be in fixed amounts or they can vary.Thus, a structure may provide regular monthly payments for a fixed term, or for the
Structured settlements are a unique and innovative method of compensating injury victims (“claimant/plaintiffs”) using streams of payments, exempt from gross income taxes, which are tailored to meet the claimants/plaintiff’s future medical expenses and basic living needs. Encouraged by the U.S. Congress since 1982, structured settlements are mutually agreed upon between the claimant/plaintiff and the defendant and/or the defendant’s insurer at the time of a tort settlement. Structured settlements are a proven, effective solution for the needs of the claimant/plaintiff, and are promoted by judges, attorneys, claims professionals, and the public at large. • A structured or periodic payment settlement is defined as: “Any series of payments made other than a single lump sum amount, at the time of settlement.” • It is a financial package designed for the plaintiff, and is agreed to be paid by the defendant or its insurer. It is limited only by the ingenuity of those involved. In its most fu
