A structured
settlement is a financial or insurance arrangement whereby a claimant agrees
to resolve a personal injury tort claim by receiving periodic payments
on an agreed schedule rather than as a lump sump Structured
settlements were first utilized in Canada after a settlement for children
affected by thalidomide. Structured settlements are widely used
in product liability or injury cases . A structured settlement can be implemented to
reduce legal and other costs by avoiding trial.Structured settlement cases 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 IRS, an increase in Personal Injury awards, and higher interest rates. The IRS rulings changed
policies such that if certain requirements were met then claimants could have
federal income tax waived. Higher interest rates result in lower presents value hence annuity premiums, for deferred payments versus a lump
sum.
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 may include income tax and spendthrift requirements as well
as benefits and are considered to be an asset backed security Often the periodic payment will be
created through the purchase of one or more annuitis, which guarantee the future
payments. Structured settlement payments are sometimes called periodic payments
and when incorporated into a trial judgment is called a “periodic payment
judgment."
The
United States has enacted structured settlement laws and regulations at both
the federal and state levels. Federal structured settlement laws include
sections of the (federal) 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 Legislations ("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. To preserve a claimant’s Medicare and Medicaid
benefits, structured settlement payments may be incorporated into “Medicare Set
Aside Arrangements” “Special Needs Trusts."
Structured
settlements have been endorsed by many of the nation's largest disability
rights organizations, including the American Association of People with
Disabilities and
the National Organization on Disability.
Definitions
Congress
adopted special tax rules in Public Law 97-473, the Periodic
Payment Settlement to encourage the use of
structured settlements to provide long-term financial security to seriously
injured victims and their families. These structured settlement rules, as
codified in sections 104(a)(2) and 130 of the Internal Revenue Code of 1986, 26
U.S.C. 104(a)(2) and 130, have been in place working effectively since then. In
the Taxpayer Relief Act of 1997, Congress extended the structured settlements
to worker’s compensation to cover physical injuries suffered in the workplace.
A “structured settlement” under the tax code's terms is an
"arrangement" that meets the following requirements:
The
structured settlement tax rules enacted by Congress lay down a bright line path
for a structured settlement. Once the plaintiff and defense have settled the
tort claim in exchange for periodic payments to be made by the defendant, the
full amount of the periodic payments constitutes tax-free damages to the
victim. The defendant then may assign its periodic payment obligation to a
structured settlement assignment company (typically a single purpose affiliate
of a life insurer) that funds its assumed obligation with an annuity purchased
from its affiliated life insurer. The rules also permit the assignee to fund
its periodic payment obligation under the structured settlement via U.S.
Treasury obligations. However, this U.S. Treasury obligation approach is used
much less frequently because of lower returns and the relative inflexibility of
payment schedules available under Treasury obligations. In this way, the
defense can close its books on the liability, and the claimant can receive the
long-term financial security of an annuity issued by a financially strong life
insurance company.
To
qualify for special tax treatment, a structured settlement must meet the
following requirements:
·
A structured settlement must be
established by:
·
A suit or agreement for periodic
payment of damages excludable from gross income under Internal Revenue Code
Section 104(a)(2) );
or
·
An agreement for the periodic
payment of compensation under any workers’ compensation law excludable under
Internal Revenue Code Section 104(a)(1) ;
and
·
The periodic payments must be of the
character described in subparagraphs (A) and (B) of Internal Revenue Code
Section 130(c)(2) and must be payable by a person who:
·
Is a party to the suit or agreement
or to a workers' compensation claim; or
·
By a person who has assumed the
liability for such periodic payments under a qualified assignment in accordance
with Internal Revenue Code Section 130
Legal structure
The
typical structured settlement arises and is structured as follows: An injured
party (the claimant) settles a tort suit with the defendant (or its insurance carrier)
pursuant to a settlement agreement that provides that, in exchange for the
claimant's securing the dismissal of the lawsuit, the defendant (or, more
commonly, its insurer) agrees to make a series of periodic payments over time. The
defendant, or the property/casualty insurance company, thus finds itself with a
long-term payment obligation to the claimant. To fund this obligation, the
property/casualty insurer generally takes one of two typical approaches: It
either purchases an annuity from a life insurance company
(an arrangement called a "buy and hold" case) or it assigns (or, more
properly, delegates) its periodic payment obligation to a third party
("assigned case") which 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 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. 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.
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.
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.
Financing
The
nature of structured settlements requires people to wait to obtain funding.
However, there are options to cash out or obtain a cash advance on one's
structured settlement. Various Legal Financing companies can offer to buy part or all of one's
structured settlement (or other fixed annuity payments) in return for a lump
sum cash upfront. Basically, such companies allow one to switch, for example, a
structured settlement payment of over 20 years to one (lesser-valued) payment
now. Such financing can be used to pay for a house, send a child to college, or
pay off one's debts. Such financing will need the approval of a judge and the
insurance company.Citaion Needed In 2012, a
Tennessee Chancery Court issued an order denying a payee's transfer of workers'
compensation settlement payments under a structured settlement agreement. Judge
William E. Lantrip held that (i) workers' compensation payments are not within
the definition of "structured settlement " under the Tennessee
Structured Settlement Protection Act, Tenn. Code. Ann. §47-18-2601
A
purchaser of a structured settlement is an individual or company who buys a
pre-existing structured settlement. Such settlements might include payouts for
lottery winnings or annuities. For example, a court ordered structured
settlement pays $5,000 a year for twenty years. The recipient doesn't want to
wait for twenty years to receive their money so they approach a purchaser. The
purchaser offers them $50,000 cash. The seller receives less money than they
would if they waited twenty years, but they receive the money immediately.
Appears In
In
April 2009, financial writer and TV personality Suze Orman wrote
that structured settlements "provide ongoing income and reduce the risk of
blowing a lump sum through poor financial choices." She added that
financial security can be improved "if you use the structured payouts
wisely."
J.G Wentworth is the largest buyer of structured settlements in the
US. The company is best known for the "Opera" and "Opera on a
Bus" commercials that appeared in early 2010 on most cable channels in the
continental United States. J.G.
Wentworth's commercials are often considered to be over the top and many
parodies have been born from it ever since.
