What is a Structured Settlement?

Structured settlements can be done in a few simple steps. Structured settlements are simple. The parties responsible for the wrong might agree to the settlement or be forced to do so if they lose the case.

A lump sum settlement may be available for those who have not paid enough. A structured settlement annuity can be used for larger amounts.

The at-fault party will pay the money towards an annuity. This is a financial product that promises regular payments from an insurance company.

The agreement details the payments that the victim of wrongdoing will receive in compensation for the damage done. Because a single payout is easily spent, spreading the money over a longer time period will provide financial security.

PRO TIP

Structured settlements are regular payments that are tax-free to the plaintiff in civil litigation. Structured settlements provide financial security for the injured party over the long-term.

The History of Structured Settlements in America

Although the U.S. has a rich history of structured settlements it wasn’t always so. These payments were first adopted in Canada in 1960, when thalidomide was used to treat birth defects in thousands. Instead of receiving a single payment from the pharmaceutical company at fault, the claimants required a series of payments over a longer time period to cover future medical expenses.

In the 1970s, similar cases were arose in the U.S. and structured settlements were issued for the first time. The IRS Revenue Ruling 99220 issued in 1979 gave tax benefits to the recipient. It stated that “The taxpayer had no right with respect to the amount that was invested” and that the ruling found that the taxpayer didn’t have any economic or constructive receipts.

Settlement payments made to an injured party were not included in their gross income and they did not have to pay tax on the money received. The same applies to estate payments.

After the 1982 Periodic Settlement Act of 1982 was passed by the U.S. Congress, structured settlements became more popular in the 1980s. This act was the federal government’s agreement with the IRS ruling. It also extended restrictions to state governments that prohibited them from taxing structured income from personal injuries cases.

The National Structured Settlements Trade Association was established in 1985 to promote and preserve structured settlements for injury claimants through advocacy and education.

The Small Business Job Protection Act 1996 placed limitations on personal damage cases that could be eligible for tax benefits a decade later. This act allows only personal physical injuries and physical sickness to be excluded from payments. Punitive damages payments are no longer exempt from tax.

Structured settlements are still a reliable source of financial security. Over 30,000 beneficiaries receive an estimated $10 million in annual payments. It’s now common for claimants to select whether they prefer periodic payments or a lump-sum payout.

The Key Takeaways

• A stream of tax-free payments is what structured settlements are. Settlement payments are made to victims of injuries or damages and provide financial security.
• The insurance company that issued the annuity guarantees structured settlement payments. They are not subject to market fluctuations like stock, bond and mutual fund changes.
• A structured settlement is better than a lump sum. There are many pros and cons to this option. Although spreading out the payments can help reduce temptation, once a structured settlement is finalized, there are no renegotiations.