Structured Settlements

Structured Settlements Overview
The ensuing scenario assumes a physical injury claim is being settled prior to any court issuing a judgment on a disputed matter.  Assume the parties are interested in, and will include, a structured settlement in the consideration paid in exchange for the release from the Plaintiff/Claimant.

The Parties
When a claim is being negotiated and is expected to include the structuring of an obligation over time through the purchase of a structured settlement annuity, a unique professional is contacted to “broker” the process. A structured settlement broker can be used by either or both parties to the claim.

Structured Settlement Annuity
A structured settlement annuity is governed by certain Internal Revenue Codes (IRC) that allow preferential tax treatment to the victims of physical injury. IRC Section 104(a)(1) of the Code provides that gross income does not include amounts received under workman’s compensation acts as compensation for personal injuries or sickness. IRC Section 104(a)(2) excludes from income any amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness.

Another revenue code controlling the placement of a structured settlement annuity is IRC Section 130 which guides the parties as to the rules and restrictions for assigning an obligation for periodic payments from the original obligor, the Defendant, to a new obligor, the Assignment Company.

To ensure these tax exclusions are available to settlement recipients and that those tax treatments remain in place for the duration of the annuity, strict procedural guidelines exist. The structured settlement broker is educated in these restrictions and can navigate through the appropriate placement of the annuity and assist in drafting the settlement documents to ensure the appropriate language is included to secure that the advantageous taxation remains intact.

The Structured Settlement Broker
A structured settlement broker gives the settling parties access to the life insurance companies offering the sale and administration of structured settlement annuities. Each broker is licensed in the states in which they solicit business and are appointed with the life insurance companies to offer their annuity products in the marketplace. A broker offers expertise in planning a financial profile to account for the future needs of an injured person or loss of a family member. They complete continuing education training to ensure their insurance licenses are current and also attend training through industry trade associations and seminars regarding industry news and updates.

The Documents
Essentially, there are three main documents controlling the events surrounding the settlement:  The Settlement Agreement and Release, the Qualified Assignment and the Court Order.  All three documents control a relationship between the parties and must contain accurate settlement information.  Any inconsistency could jeopardize the placement of a structured settlement and therefore the preferential tax treatment of the Plaintiff/Claimant.  Below are a description of each and the role they play in the settlement.

Settlement Agreement

This document controls the relationship between the Plaintiff/Claimant and the Defendant.  The Settlement essentially involves the offer of some sort of “consideration” (usually in the form of up front cash and periodic payments) from the Defendant and the offer of a “release” of all liability now and in the future for the stated injury on behalf of the Plaintiff/Claimant.

When this “consideration” involves a structured settlement annuity, certain provisions are required to be incorporated into the release.  These provisions outline the amount and timing of the payments, state the payments are paid pursuant to a claim under IRC Section 104(a)(1) or (2) and that an assignment of the future payment obligation will be made pursuant to IRC Section 130.  The broker provides the required provisions and also responds to any requests for amendment of the language to ensure the tax-free status of the payments to the Claimant.

Court Order

All settlements involving incompetents, whether due to minority or disability, MUST have the Court’s approval whether consideration is paid in Trust, cash or through the use of a structured settlement.  Subject to state jurisdiction, payments cannot be paid directly to a minor and therefore require a court appointed fiduciary guardian to receive the periodic payments until the Claimant attains age of majority.

Qualified Assignment Agreement

This document controls the relationship between the Defendant and the Assignment Company that will assume the obligation to pay the future periodic payments.  Upon execution of this document, the Defendant is fully released of all obligations to pay the periodic payments and the Plaintiff/Claimant ultimately recognizes the Assignment Company as the sole obligor for those payments.