Structured settlement

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 sum. Structured settlements were first utilized in Canadaafter a settlement for children affected by Thalidomide.^[1] Structured settlements are widely used in product liability or injury cases (such as the birth defects from Thalidomide). A structured settlement can be implemented to reduce legal and other costs by avoiding trial.^[2] Structured settlement cases became more popular in the United States during the 1970s as an alternative to lump sum settlements.^[3] 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.^[4] Higher interest rates result in lower present values, 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.^[5] Often the periodic payment will be created through the purchase of one or moreannuities, 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."

Definitions[edit]

Congress adopted special tax rules in Public Law 97-473, the Periodic Payment Settlement Tax Act of 1982 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.