What is A Structured Settlement
What is a structured settlement
A structured settlement is a financial or insurance arrangement, including periodic payments, that a claimant accepts to resolve a personal injury tort claim or to compromise a statutory periodic payment obligation.
Structured settlements were first utilized in Canada and the United States during the 1970s as an alternative to lump sum settlements.
Structured settlements are now part of the statutory tort law of several common law countries including Australia, Canada, England and the United States.
Although some uniformity exists, each of these countries has its own definitions, rules and standards for structured settlements.
Structured settlements may include income tax and spendthrift requirements as well as benefits. Structured settlement payments are sometimes called “periodic payments.”
A structured settlement 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.
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
The United States definition of “structured settlement” for federal income taxation purposes, found in Internal Revenue Code Section 5891(c)(1) (26 U.S.C. § 5891(c)(1)), is an "arrangement" that meets the following requirements:
* A structured settlement must be established by:
o A suit or agreement for periodic payment of damages excludable from gross income under Internal Revenue Code Section 104(a)(2) (26 U.S.C. § 104(a)(2));
or
o An agreement for the periodic payment of compensation under any workers’ compensation law excludable under Internal Revenue Code Section 104(a)(1) (26 U.S.C. § 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) (26 U.S.C. § 130(c)(2))) and must be payable by a person who:
o Is a party to the suit or agreement or to a workers' compensation claim;
or
o By a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with Internal Revenue Code Section 130 (26 U.S.C. § 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 insurer, a 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 which in turn purchases an annuity (which arrangement is called an "assigned case").
In an unassigned case, the 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 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 an assigned case, the property/casualty company does not wish to retain the long-term periodic payment obligation on its books. Accordingly, the 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 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 property/casualty companies that do not want to retain the periodic payment obligation on their books. 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 [3]. 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.
Can I use structured settlements as collateral for a loan?
Generally, the answer is no. The laws regarding structural settlements are designed to protect you from abuse, and the ability to use structured settlements as collateral would void that intended purpose.
The payments however, can be claimed as a form of income so that if you want to buy a house, the payments represent the same financial ability that a take home paycheck of the same amount would provide.
Once in place, can structured settlements be traded back for a lump sum settlement?
No. You are given special tax treatment with regard to structured settlements' proceeds, and you cannot then take that in a lump sum fashion and invest it again.
Do I get interest on structured settlements?
No. The interest is a part of your structured settlement agreement and is therefore, tax-free. You do not then get interest on top of that. This however, is not to say that if you get your regular structured settlement payment and don’t spend all of it, that you cannot invest that remainder into another account and draw interest from that.
That interest however, would be taxable.
I see ads for turning my cash payments into a lump sum. Is that like renegotiating the structured settlement?
On the surface, they may sound the same, but they are not. Structured settlements may not be paid out in any different fashion than initially agreed upon.
What these ads talk about is selling the payments to them. They would receive the payments just as you would have over time.
What they do for you is to buy them for a far lesser amount than the gross proceeds than you would get over time. Remember though that they are taking certain risks that are attached to inflation, and they also need to make money in the transaction.
Consequently, the amount that they give you will be substantially less than the face value of the structured settlement. Structured settlement buyouts ads sound like they are giving something nice. But this is real business and you most certainly lose money long-term in exchange for getting it sooner.
Depending upon the term of structured settlements and the company making the offer, you may lose 50% of the total amount to be paid to you over the long run. If you need to go this route, don’t settle for the first deal that comes your way.
Talk to as many companies as you can find and let them know that you are checking many deals. They are not all the same.
You should also seek the advice of your attorney before signing anything or taking any payment from anyone. Structured settlements can have many different requirements and are subject to different laws.
Before you enter into any agreement regarding your structured settlement, you want to make sure that you don’t put yourself in legal trouble or find that there are things that you are agreeing to that are not in your best interests.
A Structured Settlement is essentially an agreement under which an insurance company agrees to pay an individual a predetermined amount of cash for a fixed length of time if the individual meets an accident.
The documents generated in a structured settlement include an agreement, a qualified assignment, an annuity application, a court order if a claim is made by a minor, and an annuity policy.
Payments for a structured settlement annuity can be made for the duration of the life of the claimant. The amount paid can comprise of equal installments, installments of varying amounts, and lump sums.
The payments from a Structured Settlement Annuity are free from income-tax and are guaranteed by contract. Since a structured settlement annuity is meant for long-term financial security, it is important to get an assurance of the credentials of the annuity provider.
The periodicity of payment is entered into the settlement agreement. Factors that individuals can consider in deciding upon the date of commencement of payment, duration, and periodicity include monthly expenses, present age, extent of hazard in occupation, and retirement plans.
In order to ensure that the payments remain tax-free, the structure of payments should not be altered once it has been agreed upon by both parties. In the case of a qualified assignment, the insurance company making the payment can transfer its obligation for payments to a third party.
There are issues that one should understand before opting for a structured settlement agreement. If payments are made to an estate, they are free from income tax but subject to estate tax. Purchasing a structured annuity can affect the availability of ready money with an individual.
State and federal laws govern the closing of a structured settlement. The closing process usually gets completed in 3-6 months.
Federal laws stipulate that a court order be obtained by either the customer or the funding company that is purchasing the payment stream so that there are no tax liabilities.
The manner in which the court order is obtained is regulated by various “Structured Settlement Protection Acts”, which are in force in 36 states in the United States.
A disclosure statement is made available to a customer 3 to 14 days before he receives the transfer agreement.
The disclosure statement mentions the amounts to be paid to the customer and their due dates; the IRS Discounted Present Value of the amount at that given point in time; the Gross Advance Amount and the Annual Discount Rate; disclosures desired by the state; and a list of the fees and commissions incurred.
It is advisable to avail attorney advice before going in for a. In fact, in some states, it is a precondition to acquiring a structured settlement annuity. However, depending upon the laws being used for the transaction, customers do have the option of waiving legal representation in the Transfer Agreement or obtain an Estoppel letter from their attorney.
The funding company commences payment to an individual after acknowledging the assignment and receiving a court order. The payments start 30-45 days after the receipt of the court order.