What is a Structured Settlement and How Do They Work?

Have you ever heard of structured settlements but felt intimidated by the complex jargon and legal terms? You're not alone. Structured settlements can seem like a mystery to many, but they can actually provide tremendous financial benefits to those who receive them. As a beginner's guide, this article will unlock the secrets of structured settlements and explain how they work, their benefits, and the different types available. Whether you're a plaintiff in a lawsuit, an insurance company, or simply curious about this financial tool, this guide will provide you with a comprehensive understanding of structured settlements and how they can benefit you. So, let's dive in and uncover the mystery of structured settlements!

  Insight   Apr 4, 2023   0   637  Add to Reading List
What is a Structured Settlement and How Do They Work?

Have you ever heard of structured settlements but weren't quite sure what they are and how they work? If so, you're certainly not alone. Structured settlements are a popular way to receive compensation for a variety of legal claims, but many people are still in the dark about their benefits and how they work. That's where this beginner's guide comes in. In this article, we'll break down the basics of structured settlements, including what they are, how they work, and the benefits they can offer. Whether you're a victim of personal injury, medical malpractice, or wrongful death, understanding structured settlements can help you make informed decisions about your financial future. So, let's unlock the mystery of structured settlements and discover how they can benefit you.

Structured settlementsStructured SettlementA legal settlement, funded by an annuity or another qualified funding asset, such as a government obligation. are simple. Many civil lawsuits result in someone or some company paying money to another to right a wrong. Those responsible for the wrong may agree to the settlement on their own, or they may be forced to pay the money when they lose the case in court.

Pro Tip

A structured settlement is a regular stream of tax-free payments granted to the plaintiff in a civil lawsuit. Structured settlements are meant to provide long-term financial security to the injured party. They are voluntary and agreed upon between the defendant and injured party.

If the amount of money is small enough, the wronged party may have the option to receive a lump sum settlement. For larger sums, however, a structured settlement annuityAnnuityAn insurance product that earns interest and generates periodic payments over a specified period of time, typically with the purpose of providing income in retirement. may be arranged.

In this case, the at-fault party puts the money toward an annuity, which is a financial product that guarantees regular payments over time from an insurance company.

The agreement details the series of payments the person who was wronged will receive as compensation for the harm done to them. Spreading the money over a longer period of time offers a better future guarantee of financial security because a single payout can be spent quickly.

How structured settlements work

Structured settlements are a type of financial arrangement that provides periodic payments to a person who has suffered physical injury or illness as a result of another party's negligence. Instead of receiving a lump sum payment, the injured party is paid in installments over a specified period of time. The payments are usually made on a monthly, quarterly, or annual basis, depending on the terms of the settlement.

Structured settlements are commonly used in personal injury cases, but they can also be used in other legal claims, such as medical malpractice and wrongful death. In most cases, the structured settlement is set up by an insurance company or a third-party administrator who agrees to make the periodic payments to the injured party.

The amount of the structured settlement is determined by a number of factors, including the severity of the injury, the expected future medical expenses, and the lost wages and earning potential of the injured party. The terms of the settlement are negotiated by the parties involved, and the agreement is usually approved by a court.

History of Structured Settlements in the U.S.

The U.S. has a rich history of structured settlements, but that wasn’t always true. Modern adoption of these payments can be traced back to Canada in the 1960s when a medication called thalidomide caused birth defects in thousands of children. Rather than receive a one-time payment from the at-fault pharmaceutical company, the claimants needed a series of payments over a longer timespan to cover future medical bills.

Structured settlements were first issued in the U.S. in the 1970s when similar cases arose. In that decade, the IRS Revenue Ruling 79-220 that was issued in 1979 provided tax benefits for the recipient, citing, “The taxpayer’s only right with respect to the amount invested was to receive the monthly payments, and the ruling concluded that the taxpayer did not have actual or constructive receipt or economic benefit of the amount invested.”

Settlement payments to the injured party did not count towards their gross income, and thus they were not required to pay taxes on any money received. Likewise, after the recipient passed away, payments to the estate continue to be excluded from taxation.

Structured settlements gained popularity in the 1980s after the U.S. Congress passed the Periodic Payment Settlement Act of 1982. The act served as the federal government’s buy-in with the IRS ruling and extended restrictions to the state governments, barring them from taxing structured settlement income from personal injury cases.

By 1985, the National Structured Settlements Trade Association formed to preserve and promote structured settlements to injury claimants through education and advocacy.

Over a decade later, the Small Business Job Protection Act of 1996 set limitations on the types of personal damage cases eligible to receive the tax benefits. As a result of this act, only damages from “personal physical injuries or physical sickness” can exclude payments from gross income. Payments from punitive damages were no longer eligible for tax exclusions.

Today, structured settlements remain a trusted source of financial security, with an estimated $10 billion annual payments issued to over 30,000 recipients. Now, it’s become commonplace for the claimants to choose a preference for periodic payments, a one-time lump-sum payout, or a blend of both.

Benefits of structured settlements

One of the main benefits of structured settlements is that they provide a steady stream of income to the injured party over a long period of time. This can be especially helpful for people who are unable to work due to their injuries, as it provides a reliable source of income to cover their living expenses. Additionally, structured settlements can help protect the injured party from making poor financial decisions with a large lump sum payment.

Structured settlements also offer tax advantages. The payments are usually tax-free to the injured party, which means they can keep more of their settlement money. However, it's important to note that if the injured party sells their structured settlement payments to a third party, they may be subject to taxes on the sale.

Another benefit of structured settlements is that they can be customized to meet the specific needs of the injured party. For example, the payments can be structured to increase over time to keep up with inflation or to decrease as the injured party's medical expenses decrease.

Structured settlements vs. lump sum payments

When a person is awarded a settlement in a legal claim, they typically have the option of receiving the money in a lump sum payment or through a structured settlement. While a lump sum payment may seem like the more attractive option at first glance, there are some significant advantages to choosing a structured settlement.

One of the biggest advantages of a structured settlement is that it provides a guaranteed stream of income over a long period of time. This can be especially helpful for people who are unable to work due to their injuries, as it provides a reliable source of income to cover their living expenses. Additionally, structured settlements can help protect the injured party from making poor financial decisions with a large lump sum payment.

Another advantage of a structured settlement is that it provides tax advantages. The payments are usually tax-free to the injured party, which means they can keep more of their settlement money. However, it's important to note that if the injured party sells their structured settlement payments to a third party, they may be subject to taxes on the sale.

Types of structured settlements

There are several types of structured settlements, each of which is designed to meet the specific needs of the injured party. The most common types of structured settlements include:

Life-Contingent Annuity

A life-contingent annuity provides payments for the lifetime of the injured party. Once the injured party passes away, the payments stop. This type of structured settlement is usually used for younger people who have suffered a catastrophic injury and will require ongoing medical care for the rest of their lives.

Guaranteed Period Annuity

A guaranteed period annuity provides payments for a specific period of time, regardless of whether the injured party is alive or not. For example, a guaranteed period annuity may provide payments for 20 years, even if the injured party passes away before the 20-year period is up.

Lump Sum Payment

In some cases, the injured party may choose to receive a lump sum payment at the end of the structured settlement term. This lump sum payment can be used to pay off any remaining debts or to invest for the future.

Structured settlement eligibility

In order to be eligible for a structured settlement, the injured party must have a legal claim against another party that has caused them physical injury or illness. This can include personal injury, medical malpractice, or wrongful death claims.

Structured settlements are typically negotiated between the injured party and the other party's insurance company or legal team. The terms of the settlement are usually approved by a court to ensure that they are fair and reasonable.

Structured settlement negotiations

Negotiating a structured settlement can be a complex process, which is why it's important to have an experienced attorney on your side. Your attorney can help you determine the appropriate amount of compensation to seek and can negotiate with the other party's insurance company or legal team to reach a fair settlement.

During the negotiation process, it's important to consider the long-term needs of the injured party. This includes not only their current medical expenses and lost wages but also their future medical expenses and potential lost earnings.

How Does a Structured Settlement Work?

Legal Structure: Assigned vs. Unassigned Cases

An assigned case is a qualified case, meaning the settlement proceeds qualify for tax benefits, and the defendant’sDefendantThe person or entity sued or accused in a court of law. payment obligation must align with Internal Revenue Code provisions. In assigned cases, a third-party assignment company collects the funds from the defendant, and then purchases the annuity from a different insurance company. That annuity will fund the periodic payments directly to the claimant. The claimant, or plaintiff, does not control the annuity contract.

Conversely, in an unassigned case, the defendant is a property and casualty insurance company that purchases the annuity from a separate life insurance company. The defendant technically owns the annuity, and they name the injured party as the payee.

Structured settlement companies

Structured settlements are typically administered by insurance companies or third-party administrators. These companies are responsible for making the periodic payments to the injured party and managing the funds that are set aside for the structured settlement.

When choosing a structured settlement company, it's important to do your research and choose a reputable company with a proven track record of success. Your attorney can help you evaluate the various companies and choose the one that's right for you.

Tax considerations for structured settlements

Structured settlements offer several tax advantages, but it's important to understand the tax implications before making any decisions. In most cases, the payments received from a structured settlement are tax-free to the injured party. However, if the injured party sells their structured settlement payments to a third party, they may be subject to taxes on the sale.

Additionally, if the structured settlement includes payments for lost wages or lost earning potential, those payments may be subject to taxes.

Structured settlement myths debunked

There are several myths and misconceptions surrounding structured settlements. One of the most common myths is that structured settlements are only for people who are unable to manage their money. In reality, structured settlements can be a smart financial decision for anyone who wants to ensure a steady stream of income over a long period of time.

Another myth is that structured settlements are inflexible and cannot be customized to meet the needs of the injured party. In reality, structured settlements can be tailored to meet the specific needs of the injured party, including adjusting the payment schedule or increasing payments over time.

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Conclusion

Structured settlements are a powerful tool for individuals who have suffered physical injury or illness as a result of another party's negligence. By providing a steady stream of income over a long period of time, structured settlements can help protect the injured party from making poor financial decisions and ensure that they have the financial resources they need to cover their living expenses and medical care. If you have been injured and are considering a legal claim, be sure to talk to your attorney about the benefits of a structured settlement and how it can help you achieve financial security for the future.