What Is A Structured Settlement?

By: Lance T. Denha, Esq.

When a plaintiff settles a case for a large sum of money, sometimes the defendant, the plaintiff’s attorney, or a financial planner consulted in association with the settlement, will propose paying the settlement in installments over time rather than in a single lump sum. When a settlement is paid in this manner it is called a Structured Settlement. Often the structured settlement will be created through the purchase of one or more annuities, which guarantee the future payments.

Both sides work with a trained consultant to determine the amount of money and the needs to the plaintiff. The consultant then uses the money to purchase an annuity from a life insurance company.

The annuity is managed by a life insurance company separate from the at fault party. The money is thus protected from market fluctuations, recessions and all the other risks typically associated with investments. The plaintiff, in other words the person harmed, simply receives a scheduled series of payments for a set amount of time. It’s a solution that many people take advantage of: Nearly $6 billion in new structured settlements are issued each year, according to the National Structured Settlements Trade Association.

A structured settlement is an arrangement that provides the plaintiff with regular payments over the course of several years or for the rest of the plaintiff’s life. A structured settlement can provide for payment in pretty much any schedule the parties choose. For example, the settlement may be paid in annual installments over a number of years, or it may be paid in periodic lump sums every few years. They are especially helpful when the plaintiff suffers a serious and permanent injury known as a catastrophic injury. With a structured settlement, a defendant’s insurer typically funds an annuity policy for the plaintiff. An annuity produces a continuous stream of income over the term of the structured settlement. Below are some pros and cons of structured settlements for you to consider.

PROS

• A structured settlement may provide a plaintiff with a substantial tax benefit because personal injury settlements are considered “tax-free” under the US Tax Code. However, some exceptions apply and can make portions of a settlement taxable, such as an award of punitive damages or interest that accrues on the settlement.
• Structured settlements offer plaintiffs the certainty of payments over a fixed period of time. However, lump sum payments may be better suited for cases involving minors, as they allow for long-term investing, or those suffering from a debilitating injury that will require future medical expenses.
• Parties may tailor annuities to cover a plaintiff’s specific needs and all sorts of future demands or contingencies.
• In most states, annuities are protected by state insurance laws which guarantee that the obligations of an insurer will be covered. Although federal law doesn’t allow an insurer to formally declare “bankruptcy,” most states have a safety net for insurance companies that become insolvent.
• A lump-sum payment may be combined with a structured settlement to meet immediate expenses, such as medical bills, repayment of debts, rehabilitation costs, and the like.
• Parties can dedicate funds of a structured settlement to cover unanticipated advances in medicine so that if medical science develops a miracle cure, the plaintiff can give it a try.
• A structured settlement may help parties who are far apart in their settlement negotiations to reach an agreement acceptable to both the plaintiff and the defendant.

CONS

• Certain parts of a settlement, whether a lump sum payment or a structured settlement, can be taxed, including punitive damages, some attorney’s fees, purely emotional damages not stemming from physical injury, and more.
• A plaintiff may fear that, no matter how the settlement protects against negative economic conditions such as inflation or recession, unknown changes in the economy could make the annuity payments too small.
• In the past, some insurance companies were reluctant to disclose how much they would have to pay to buy an annuity covering the amount of the settlement. A structured settlement frequently costs insurance companies less than it would to make a lump-sum settlement. Without this information, the plaintiff’s attorney would not be able to make a complete assessment of the benefits and drawbacks of a settlement offer. Today, however, most states have some form of a disclosure law known as a “Structured Settlement Protection Act” (SSPA). These laws require insurers to be upfront about their costs

Before accepting any settlement agreement you should always discuss all available options with a tax attorney, personal injury attorney, and/or certified public accountant (CPA) to fully explore tax consequences of a verdict or settlement.