What is a Structured Settlement and How Do They Work?

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Key Takeaways

  • Structured settlements are a stream of tax-free payments issued to an injured victim. The settlement payments are intended to pay for damages or injuries, providing financial security over time.
  • Structured settlement payments are guaranteed by the insurance company that issued the annuity. They do not fluctuate with market changes like stocks, bonds and mutual funds.
  • There are more pros than cons for choosing to receive a structured settlement over a lump sum. Spreading out payments over time can reduce temptation, but once the terms of a structured settlement are finalized, there’s little you can do to renegotiate.

What Is a Structured Settlement?

structured settlements are simple. many civil lawsuits result in person or some party paying money to another to right a faulty. Those creditworthy for the wrong may agree to the colony on their own, or they may be forced to pay the money when they lose the case in court .
Pro Tip
A structured liquidation is a regular stream of tax-exempt payments granted to the plaintiff in a civil lawsuit. Structured settlements are meant to provide long-run fiscal security system to the hurt party .
If the measure of money is small enough, the wronged party may have the choice to receive a hunk sum colony. For larger sums, however, a structured settlement annuity may be arranged .
In this case, the at-fault party puts the money toward an annuity, which is a fiscal product that guarantees regular payments over time from an indemnity company .
The agreement details the series of payments the person who was wronged will receive as compensation for the damage done to them. Spreading the money over a longer period of clock offers a better future undertake of fiscal security because a individual payout can be spent promptly .

History of Structured Settlements in the U.S.

The U.S. has a full-bodied history of structure settlements, but that wasn ’ thymine constantly true. modern borrowing of these payments can be traced back to Canada in the 1960s when a medicine called thalidomide caused birth defects in thousands of children. Rather than receive a erstwhile requital from the at-fault pharmaceutical company, the claimants needed a serial of payments over a longer timespan to cover future checkup bills .
integrated settlements were beginning issued in the U.S. in the 1970s when similar cases arose. In that ten, the IRS Revenue Ruling 79-220 that was issued in 1979 provided tax benefits for the recipient, citing, “ The taxpayer ’ s lone right with esteem to the sum invested was to receive the monthly payments, and the predominate concluded that the taxpayer did not have actual or constructive receipt or economic benefit of the total invested. ”
colony payments to the injured party did not count towards their gross income, and thus they were not required to pay taxes on any money received. Likewise, after the recipient passed off, payments to the estate continue to be excluded from taxation .
structure settlements gained popularity in the 1980s after the U.S. Congress passed the Periodic Payment Settlement Act of 1982. The act served as the federal government ’ s buy-in with the IRS rule and extended restrictions to the express governments, barring them from taxing structured settlement income from personal injury cases .
By 1985, the National Structured Settlements Trade Association formed to preserve and promote integrated settlements to injury claimants through education and advocacy .
Over a decade subsequently, the Small Business Job Protection Act of 1996 rig limitations on the types of personal damage cases eligible to receive the tax benefits. As a leave of this act, only damages from “ personal physical injuries or forcible sickness ” can exclude payments from crying income. Payments from punitive damages were no longer eligible for tax exclusions .
today, structured settlements remain a trust reference of fiscal security, with an calculate $ 10 billion annual payments issued to over 30,000 recipients. immediately, it ’ randomness become commonplace for the claimants to choose a preference for periodic payments, a erstwhile lump-sum payout, or a blend of both .
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How Do Structured Settlements Work?

legal settlements can be paid out in a erstwhile hunk sum or through a structure settlement where periodic payments are made through a fiscal product known as an annuity. The keystone differences between these liquidation options are in the areas of long-run fiscal security and taxes .
When a plaintiff receives a settlement through a erstwhile ball sum, they might spend it besides quickly, robbing them of the long-run fiscal security that future payments could provide .
furthermore, any interest and dividends earned if the lump-sum were to be invested would be topic to taxes. conversely, an annuity is meant to provide income throughout the recipient role ’ s life, and any interest and taxes earned through the annuity will grow tax-exempt .

Types of Structured Settlement Cases

There are a number of reasons why an individual may receive a structured colonization. The most park cases include :

The most common cases are:

Personal Injury
A personal injury case is a civil case where someone who’s been harmed files a lawsuit seeking money from the person believed responsible for the harm. Money in the form of a structured settlement helps recipients pay for medical expenses or other costs.
Workers’ Compensation
Most people know about workers’ compensation, which pays workers who get injured on the job while they recover. Payments can be used as wage replacement or to pay for medical treatment and other expenses during periods when injured employees are unable to work.
Medical Malpractice
In some unfortunate cases, doctors can do more harm than good. In this instance, injured patients or the families of deceased patients can sue for medical malpractice.
Wrongful Death
A structured settlement is also a common way to compensate family members who claim loved ones were victims of wrongful deaths. Families may be entitled to receive a stream of tax-free payments to replace income after a loved one’s death.

integrated settlements — or structured annuities — are both fiscal products and legal judgments. While they function slightly like individual assets, they are besides subject to building complex regulations .
How Does a Structured Settlement Work?

Legal Structure: Assigned vs. Unassigned Cases

An impute case is a qualify case, meaning the colonization proceeds qualify for tax benefits, and the defendant ’ randomness payment obligation must align with Internal Revenue Code provisions. In delegate cases, a third-party assignment party collects the funds from the defendant, and then purchases the annuity from a different insurance company. That annuity will fund the periodic payments directly to the claimant. The claimant, or plaintiff, does not control the annuity shrink .
conversely, in an unassigned case, the defendant is a property and casualty policy company that purchases the annuity from a classify biography indemnity company. The defendant technically owns the annuity, and they name the hurt party as the payee .

Learn about the process of being awarded a structured settlement annuity as well as the legal protections and advantages on the following pages:

Structured Settlement Payout Options
Compare and contrast the different ways to accept a cash settlement from a lawsuit.
Government Support for Structured Settlements
Learn about how the government uses the tax code to promote their use.
Structured Settlements for Minors
Read about why this type of settlement is typically used in cases involving children.

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Payout Options for Structured Settlements

If you elect to receive your lawsuit payout through a structured settlement, you can determine whether to begin to receive the funds immediately or at a late date. immediate payments can be beneficial if you require checkup care, for example, or have lost your beginning of income. You may decide to postpone the payments until a former time, such as after you retire. During the waiting period, the annuity will grow as it earns sake .
You can besides determine whether the annuity should be paid for the remainder of your life, no matter how long that may be, or for a stipulate number of years, equally well as the schedule for receiving payments and the payment amounts and adjustments .
often, plaintiffs will need money for a assortment of expenses before they receive their liquidation. If you find your expenses mounting as you await your first structured settlement requital or initial ball summarize, you may want to consider pre-settlement financing options to tide you over .

Structured Settlement Pros and Cons

integrated annuities are ideally suited for many different types of cases. Although these scheduled payments offer several advantages, it is significant to understand the benefits along with the risks when deciding on any fiscal investing .

Pros of Structured Settlements

  • Payments are tax-free.
  • In the event of the recipient’s death, the beneficiary can continue to receive tax-free payments.
  • Payments can be scheduled for almost any length of time and can begin immediately or be deferred for as many years as requested. They can include future lump-sum payouts or benefit increases.
  • Spreading out payments over time can reduce the temptation to make large, extravagant purchases and guarantees future income. This is especially helpful if the recipient has a medical condition that will require long-term care.
  • Unlike stocks, bonds and mutual funds, structured settlements do not fluctuate with market changes. Payments are guaranteed by the insurance company that issued the annuity.
  • A structured settlement often yields, in total, more than a lump-sum payout would because of the interest your annuity may earn over time.


Cons of Structured Settlements

  • Once terms are finalized, there’s little you can do to alter them if they do not meet your needs. You cannot renegotiate the terms if your financial situation or the overall economy changes.
  • Funds are not immediately accessible in case of an emergency, and the recipient cannot place a lump-sum payout in other investments that carry higher rates of return.
  • You can sell your payments if you need immediate cash, but these payments will be sold at a discount. This means the cash amount you receive from selling the payments will be less than the amount you would have ultimately received from future payments.
  • Not all states require insurance companies to disclose their costs to establish a structured settlement or lump-sum annuity. Without this information, a recipient could lose a significant amount of money through administrative fees.

Options for Annuity Owners to Sell Payments

You should cautiously consider the terms of your annuity because they can ’ deoxythymidine monophosphate be renegotiated after the condense has been issued. That can limit your options if your fiscal situation changes due to unemployment, illness or other setbacks .
however, annuity owners may have the choice to get cash in advance of their shrink schedules. Owners may sell some or all payments to structured settlement buyers. Some buyers may inaccurately refer to these sales as “ structured liquidation loans. ” In reality, they are actually purchasing your settlement, which will efficaciously halt your regular payments. such sales must be approved by a evaluate. The character of the pronounce is to decide if the sale is in the best interest of the annuity owner.

other rules may apply depending on the details of your annuity contract and the laws of the department of state where you live. The Structured Settlement Protection Act of 2002 provides federal guidelines on such transactions .
annuity owners should carefully consider their options before selling payments. You can learn more at Selling Structured Settlement Payments, and download our free bit-by-bit Guide to Selling Your Structured settlement Payments .

Topics include:

  • The secondary annuity market
  • Key considerations and requirements
  • Selling payments for minors

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Frequently Asked Questions About Structured Settlements

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