What is structured settlement?
A financial arrangement or insurance claim given to the claimant who agrees to resolve the personal injury lawsuit is called a structured settlement. Payments are for a particular period to meet the financial needs of the individual rather than a lump sum. A structured settlement avoids the legal costs of a trial.
History of structured settlements
30 years ago, the NSSTA (National Structured Settlements Trade Association) created a federal tax code that recognized settlement annuities. By 1982, the Congress had enacted a law where tort victims were provided tax breaks and for the companies that awarded structured settlements. Specific tax rules such as the Periodic Payment Settlement Tax encouraged usage of structured settlements for the resolution of physical injuries and the total amount paid was tax-free. Structured settlements date back to the 1970s when insurers claimed malpractices on medical treatment on an injury. Currently, the structured settlement industry is evaluated to be about $5 billion. The Congress had created structured settlements with the concern that people who were injured if they took their money in lump sum might spend it all before meeting their future obligations.
Advantages of structured settlements
One of the biggest advantages of structured settlements is the 100% lifetime exemption of taxes from income, dividend and capital gains. Payments from annuities purchased are guaranteed to fund the structured settlement. The claimant is at no risk of losing money due to poor financial management or market risk-oriented investments. Federal and private health care plans are both eligible under structured settlements. Immediate and future obligations can be well-planned and customized with the help of trained financial consultants.
The process of structured settlements
The structured settlement is a negotiation process where the Life Insurance Carrier(s) agrees to a schedule of financial benefits to equate the Claimant's needs and will issue payment annuities or Treasury Funded Structured Settlement. The Treasury Funded Structured Settlement is an alternative called, "qualified funding asset" that is permissible under IRC 130(d).
- The Defendant also known as the Insurer or Qualified Settlement Fund Trustee will agree to pay the Claimant/Plaintiff, in exchange of claim release, all or a portion of the agreed personal injury damages.
- The Claimant/Plaintiff exchanges the release of claim with a promise by the Defendant/Insurer/QSF Trustee that they will make payments for immediate cash items such as attorney fees and liens besides future benefits payments to the claimant.
- An assignment of obligations is prepared by the Defendant/Insurer/QSF trustee to make future periodic payments to the "assignee" who assumes the obligation. With the assignee as the obligor to the future periodic payments promised to the claimant, the plaintiff agrees to the assignment. Funds are received by the assignee from the Defendant/Insurer/QSF trustee who uses them to purchase the annuity contract or the permissible alternative "qualified funding asset" up to the amount adequate to fund the obligated future periodic payments as assumed by the assignee. The assignee who owns the "qualified funding asset" can choose to make payments to the Claimant directly or to the issuer of the annuity. A segregated trust for every claimant is present in the case of the alternative "qualified funding asset".
