Structured Settlements – What They Are and How They Work

When a defendant agrees to pay out a personal injury tort claim to a claimant, the claimant can agree to accept the payout over a period of time (months or years) on an agreed upon schedule. This arrangement is known as a structured settlement. Either the defendant or the plaintiff can request the structured settlement in lieu of a lump sum payment. If both parties agree to it then the details of the plan are put into a legal document which is signed by all parties and notarized. A mobile notary is often used to at the signing of the documents.

Structured settlements are often used in cases involving personal injury, pharmaceutical injury and product liability.  A person who has been severely injured is very likely to receive payment via a structured settlement as it benefits both parties. Another common situation that is often resolved with a structured settlement is a workers compensation case where lost wages and compensation for injury are best handled through this vehicle. In the case of a wrongful death, the surviving family is often paid through a structured settlement.

Structured settlements allow the parties to minimize costs including legal and court fees as well as time invested by the claimant and defendant by avoiding a lengthy trial. Structured settlements are used in many common law countries such as Canada, England, Australia and the United States.

Getting a structured settlement in place can be a complicated process but, if done by an experienced attorney or agent they will simplify it by handling all the legal aspects of the structured settlement. They may include provisions that will impact the income tax of either or both parties so it is important that they be setup properly. The funds are used to purchase an annuity from one of a few qualified insurance companies and the payments are then made by the insurance company over the life of the structured settlement.

In most cases the annuity will be managed by the insurance company. This process is kept separate from the defendant who has been determined to be at-fault.  This ensures that the funds are not affected by market fluctuations so they can be paid out regardless of the ups and downs of the market and not at the whims of the defendant. It is notable that every year almost six billion dollars are paid out through structures settlements.

Here’s How Companies Manage Structured Settlements

Often times a structured settlement is used to compensate someone for loss of wages due to injury. Because the payments are managed by a third party, namely the insurance company, the claimant who is to receive payments does not have continuing contact with the person or business that was responsible for their loss. The individual is protected by the structured settlement from the funds being counted as income thereby allowing them to collect social security, Medicare, Medicade and Disability without being impacted by the payout. The recipient will not pay income tax on the payments.

You Have The Right to Sell Your Structured Settlement Payments To A Third Party

The recipient of a structured settlement has the right to sell his or her interest to another party. This is sometimes done when the recipient decides they need a lump sum to be paid out. They can sell all of the remaining payments or a part of them while retaining a portion for the duration of the payout period. Since peoples financial situations often change this gives them the ability to access the funds at a later date if an emergency arises.  In order to protect the seller judicial approval is required to sell the structured settlement.  The judge will try to determine that the seller understands fully what the financial impact of receiving a lump sum payout will be.

Structured settlements are carefully regulated by both the federal and state governments to protect people from unscrupulous businesses that take advantage of unknowing persons. In 1982 the Periodic Payment Act was passed to help ease the process of implementing structured settlements. It also provided that no federal, state or local taxes could be assessed on the payments.