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Structured Settlements
Structured settlements pay out over time as a stream of tax-free payments, rather than as one lump sum. You can “cash in” your future structured settlement payments by selling them to a factoring company at a discount if you need immediate cash. Most structured settlements stem from personal injury, wrongful death or workers’ compensation lawsuits. Structured settlements are agreed upon between a lawsuit’s injured party and the defendant.
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SELL YOUR FUTURE PAYMENTS
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 someone or some company paying money to another to right a wrong. Those responsible for the wrong may agree to the settlement on their own, or they may be forced to pay the money when they lose the case in court.
PRO TIP
A structured settlement is a regular stream of tax-free payments granted to the plaintiff in a civil lawsuit. Structured settlements are meant to provide long-term financial security to the injured party. They are voluntary and agreed upon between the defendant and injured party.
If the amount of money is small enough, the wronged party may have the option to receive a lump sum settlement. 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 financial product that guarantees regular payments over time from an insurance company.
The agreement details the series of payments the person who was wronged will receive as compensation for the harm done to them. Spreading the money over a longer period of time offers a better future guarantee of financial security because a single payout can be spent quickly.
What is a structured settlement annuity?
What is a structured settlement annuity? - Featuring Juliette Fairley
Business and finance journalist Juliette Fairley defines a structured settlement annuity.
History of Structured Settlements in the U.S.
The U.S. has a rich history of structured settlements, but that wasn’t always true. Modern adoption of these payments can be traced back to Canada in the 1960s when a medication called thalidomide caused birth defects in thousands of children. Rather than receive a one-time payment from the at-fault pharmaceutical company, the claimants needed a series of payments over a longer timespan to cover future medical bills.
Structured settlements were first issued in the U.S. in the 1970s when similar cases arose. In that decade, the IRS Revenue Ruling 79-220 that was issued in 1979 provided tax benefits for the recipient, citing, “The taxpayer’s only right with respect to the amount invested was to receive the monthly payments, and the ruling concluded that the taxpayer did not have actual or constructive receipt or economic benefit of the amount invested.”
Settlement 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 away, payments to the estate continue to be excluded from taxation.
Structured 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 ruling and extended restrictions to the state 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 structured settlements to injury claimants through education and advocacy.
Over a decade later, the Small Business Job Protection Act of 1996 set limitations on the types of personal damage cases eligible to receive the tax benefits. As a result of this act, only damages from “personal physical injuries or physical sickness” can exclude payments from gross income. Payments from punitive damages were no longer eligible for tax exclusions.
Today, structured settlements remain a trusted source of financial security, with an estimated $10 billion annual payments issued to over 30,000 recipients. Now, it’s become commonplace for the claimants to choose a preference for periodic payments, a one-time lump-sum payout, or a blend of both.
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